Sunday, September 6, 2009

An Entrepreneurial Prodigy

Rob Walker's column in today's New York Times Magazine describes a clever business called Quirky. For a $99 fee, Quirky lets users submit product ideas. The Quirky community votes on them, and the Quirky team manufactures the winning idea, after taking into account input from the community. The inventor earns a licensing fee, and community members who made valuable contributions to the design earn a small fee as well. Below is a video from Quirky's site in which Ben Kaufman, its 22-year old founder, describes how he started his first company (Quirky is his third) with $185k of seed money his parents got from re-mortgaging their house, and how his first two companies gave him the idea to start Quirky.


Anonymous said...

Always heartwarming to see a young entrepreneur try to get rich by peddling useless crap to the masses. Even more heartwarming to see an entrepreneur situate himself on top of the pyramid that promises others their useless crap will be peddled to the masses. It is our nation's collective loss that Donny Deutch's show ("The Big Idea") got cancelled before this twit could posit yet another bogus American Dream for all to model- this one riding Mom and Dad's second mortgage.

DaveinHackensack said...

You may consider the products his companies have sold to be "useless crap", but the customers who buy them clearly don't share your opinion. More generally, if we all cut our spending down to the bare necessities -- basic food, shelter, and medical care -- we'd all be a lot poorer, and probably more than half the population would be out of work.

Also, if you read the article, Kaufman's new company explicitly does not promise that any inventor's submission will get marketed: most don't. Only the ones that are considered the most marketable by the rest of the community (Kaufman's not making this decision) move forward. And as for Kaufman's company getting a vig off of every successful deal: why not? If an inventor doesn't like the terms, he can always attempt to license his product to a big company, or contract to have it manufactured himself.

Finally, this one (Quirky) is not riding "Mom and Dad's second mortgage". Mom and Dad provided the seed company for their kid's first company, which has since been successfully sold. They've been paid back and then some, I'd think.

Anonymous said...

This is something about the american economy that has always fascinated me and makes it truly unique.

While I agree with the first anonymous comment, I also have to agree with your response on "if we all cut our spending down to the bare necessities -- basic food, shelter, and medical care -- we'd all be a lot poorer, and probably more than half the population would be out of work"

This post and others like the one on 'Extreme Job Hunting' just resonate with me how gimmicky, five minutes of fame the american economy often is.

I just don't see these businesses or strategies (like those in the job hunting post) working in any other place in the world, Europe, Asia, Latin America.

This "useless crap" sustains a lot of people. Its a like a giant treadmill or 'pyramid' like anonymous1 says. But I'm sure a lot of entrepreneurs in other parts of the world would hope they could sustain pushing the banal stuff to the masses in their country.

The interesting question is if the 'buck' will eventually stop for these gimmicky-five minutes of fame businesses. That as you mention could be disastrous to 'half the population' or perhaps even more.

DaveinHackensack said...

Second Anon,

Most products and services fall outside of the bare necessities -- that doesn't mean they are all crap or "gimmicky-five minutes of fame businesses". Some are, to be sure. But others are quality products and services that enhance their customers' lives. Ultimately, the market decides which products belong in that first category of non-essentials and which belong in the second. Crappy, gimmicky products generally don't last long, particularly today when there are so many ways customers can broadcast their opinions about them over the Internet.

This presents two different paths for an entrepreneur:

1) Produce and sell gimmicky crap, but a) take a risk that it won't sell significant amounts in the first place; b) take a risk that if it does sell well initially, sales will probably die out quickly once word gets out that it's crap.

2) Produce and sell quality stuff, and take a risk that it won't sell. If it doesn't sell, you'll be out more money than they guy selling crap, because quality costs more. But if it does sell well, you will probably be able to keep selling it for a much longer time, as positive feedback generates more sales. You'll also start with tailwind when you launch your next product, because your company will have developed a reputation for producing quality stuff.

I am aiming for the second of those two tacks above. I don't want to sell anything I wouldn't find of quality and value myself. But one of the disheartening things about the 4HWW forums is that some folks seem to be explicitly aiming for the first tack.

I think our economy would be better off if more entrepreneurs took the second tack, partly because popular, quality products and support higher margins, and if the margins are high enough, you can afford to pay good wages to local workers to build the products.

That's how Sweden, Germany, Japan, etc. can afford to pay high wages to their local workers while still profitably exporting their products. High quality, high margin products can support high wage manufacturing jobs. The first two ventures I'm launching are going to be subscription based websites, but I have a couple of ideas for tangible products as well, and when I get around to them, I will look into the possibility of building them in the U.S. It may cost more to do that, but if the products are of high enough quality, I can charge more for them.

JK said...

"But one of the disheartening things about the 4HWW forums is that some folks seem to be explicitly aiming for the first tack."

Is that any big suprise, given Ferris's big example being BrainQUICKEN?

I for one have no problem embracing the power of the gimmick. Yeah, I've sold out. Oh well. If any gimmick I come up with ever makes me a million dollars, I'll deal with all the pangs of regret then. If you can't beat them, join them. There's some guy who has been selling bottled Holy Water on late night infomercials (complete with emotionally stirring testimonials)to our low-IQ citizens for a couple years now. I wish I had thought of that.

DaveinHackensack said...

"Is that any big suprise, given Ferris's big example being BrainQUICKEN?"

Inuitively, BrainQUICKEN sounds like a gimmick to me too, but apparently the market has said otherwise. Ferriss sold loads of this stuff, tens of thousands of dollars per month at the wholesale level, and he did it for years. Whether it was a massive placebo effect or it actually did something, apparently, the folks who bought it were generally happy with it. Otherwise, they would have slammed it on message boards and forums related to martial arts, weight training, etc., and its sales would have dropped off after a short period.

JK said...

Whether BrainQUICKEN is a gimmick or not is almost besides the point. The point is that to a smart reader of his book --in other words someone who is more likely to take entreprenurial action-- it will seem like a gimmick. Therefore, such a person will be more likely to try to come up with a gimmick himself. 4HWW also doesn't have much to say about the quality of one's product either, which feeds this as well. I happen to think Tim is encouraging his readers to come up with gimmicks, but that is just my opinion, and it is not an opinion I hold pejoratively against Tim. I think it is fine.

As to judging his product on the market's response, all I have to say about that is that hair loss products and penile enlargement products have had impressive staying power as well. People like to feel hope, and smart people can sell it to them. It's something religion used to monopolize but our modern consumer culture has widened the playing field, allowing us to sell secular indulgences as well.

DaveinHackensack said...

The point of the book, WRT businesses, is that they be constructed as automated generators of cash flow. Tim focused more on how he worked himself out of the day-to-day operations of BrainQUICKEN than how he came up with it himself.

The same principles of automation were at work in his friend's business he described (which seemed a lot less gimmicky to me), Pro Sound Effects (incidentally, Tim's friend here took a similar tack as the one I mentioned to you once that my friend's father took, selling the hemorrhoid equipment to proctological surgeons. Both men conveniently package and sell hard-to-find, specialized products to non price-sensitive customers who are willing to pay for speed and convenience.).

Frankly, I think there is a little too much emphasis on automation in the book. After all, if Tim's business was really generating $40k in monthly sales, he could have extricated himself from it without a lot of fancy automation, simply by hiring a business manager for $40k per year or whatever -- or by selling the business, which I believe he just did this year. The hard part is building a profitable business in the first place. Creation ex Nihilo.

As for what's gimmicky and what's not, I don't believe there's always a bright line between what offers help and what offers hope. A personal example: for a few years, I took St. John's Wort for its touted benefits of improving mood, and being a sort of herbal anti-depressant. Did it work? I don't know. Was it a gimmick? I don't think so. Maybe it helped 10% and then the rest of the effect came from placebo. I don't know. I suspect something similar is the case with the BrainQUICKEN. But let's set aside the moral implications, as you suggest, and look at this purely from a business perspective.

If your product is perceived as gimmicky crap, it probably won't do very well. That appears to be the case with some of the products 4HWWers are throwing against the wall -- for example, some of the quickie e-books I've seen mentioned. Whatever the merits of Tim's supplement, his book packed in a lot of value, with plenty of links, tips, and references, and it was written by a successful guy. Some 4HWWers seem to think they can charge more than Tim charged for his book while offering a lot less info in return. I don't think that's going to be a promising strategy, from a business perspective.

JK said...

I do largely agree with what you wrote, however I want to point out that the perceived gimmicky-ness factor is dependent with the sophistication of the audience viewing the advertising.

A lot of people think Extendz seems legit and scientific. I don't. Bottled Holy Water must sell, otherwise it would have stopped advertising itself a long time ago. Maybe there is a placebo effect with that, but it doesn't make the product very beneficial. Gimmicky products have perennial staying power just like businesses with more substantial products. It's all advertising. What's that saying? A new sucker is born every minute or something like that. Well, they are also reincarnated.

Sure, you are more likely to get super-rich with a high-value product, but the benefits of selling empty bottles of scientifically unproven hope/help elixers is that you don't need to put up as much up front for R&D etc, and for entrepreneurs of average income, living mostly paycheck to paycheck, this is a huge plus. But then you also have to target the unsophisticated customer who is more likely to buy those products in the first place. How to you target them? With empty rhetoric, bright colors and cheap razzle and dazzle. If it didn't work then nobody would do it. (And political discussions would be dominated by topics like supply-side economics, trade deals with China, etc, as opposed to Palin family drama and the Obama stay-in-school speech that only a socialist could give.)

I do agree with you on this: if you are targeting an unsophisticated audience, then you will probably not be able to charge 50-250 dollars as 4HWW suggests (unless you are a true pro), since that demo is probably lower-income. 5-10 dollar impulse buys would probably generate more for those kind of products.

It would be interesting to see what the marketing for BrainQuicken looked like before Tim made a ton of money off of it, and was able to upgrade his marketing. I suspect when he started BrainQUICKEN it looked a lot more gimmicky than it does now.

It is also worth pointing out that Tim's friend already had a hugely successful business in Limewire before he started ProSoundEffects.

JK said...

*in the above comment, "5-10 dollar impulse buys" should probably read more like 15-25 dollars for most of those impulse products, but I was thinking about a few especially egregious examples of mispricing a poor-quality information product when I wrote that. Charging 50+ dollars for an ebook on a one page sales website is a bit naive.

DaveinHackensack said...

You're right that you can make money with crap or quality, if you are talented enough. And you make a good point about Tim's preferred price range. But let me give you an example that I think illustrates why it makes sense from pure business perspective to be above board.

A guy I used to work with on the sales desk of a mutual fund company had previously been a successful stock broker (which, as you know, is pretty rare). He made good money selling crap stocks, while working at a firm that specialized in that. He made good money for a year, but he burnt his book. So he rebuilt his book and did it again. And burnt the book again. And at that point, he was too burnt out himself to start from scratch and build a new client base.

Had he taken the quality approach, and tried to recommend quality stuff with lower spreads, he probably wouldn't have made as much money initially, but five or ten years down the road, he could have been making even more money, with a sustainable business.

As far as your question about how Tim marketed the supplement before it started making money, I don't know, but the current website looks kind of cheesy to me. Maybe there's better collateral at the retail store level. There was a thread about this general topic recently on the 4HWW, about the merits of "Long Copy" (i.e., what you and I would probably consider scammy looking copy).

Also, the R&D costs may be relatively low for selling elixirs, but I'd guess the legal costs are higher.

Good point about Tim's friend, btw, and I think it leads to a broader point: folks who are successful with Tim-style automated businesses are probably the same types who would be successful with more traditional start-ups. That's going to be a minority of the readers of Tim's book, as it's a minority of people in general.

BTW: what about AYSI today?

DaveinHackensack said...

I saw your comment on the Positive News thread after I posted that.

JK said...

The BrainQUICKEN site does look cheesy, but it is still far ahead of many other sites of its kind. Or maybe I've just been lurking the 4HWW forums too much. (I dont post there yet)

You make a good point with your story, but the key difference is that with an internet "Long copy" website, it doesn't take much work starting fresh online. For one, unless you are a big (financial) success to begin with, word won't get out to the extent that people will stop clicking on your ads. And if it does get to that point, it is just a matter of changing url and tweaking the pitch and format. I don't think that would be enough to burn anyone out.

Ultimately we are just throwing theory back and forth at each other here. Full disclosure, currently, inspired by 4HWW, I am setting up a site for an admittedly low-value $10 information product to test which of my internet marketing ideas work and which don't. My site will be essentially a cheesy semi-long copy website -to start- but it does look more professional than the examples I clicked on in that thread. I will use the results from that experience to advise me which of my other 5 ideas, ranging from low to high value, to implement next, since I want to optimize ROI and avoid heavy start-up costs if I can afford to (I'm not rich yet!). I think I will learn more from doing than theorizing. As with investing, profitability in business is probably determined more by knowing what works for you as an individual personality in the chaos of the real world than following some set of universal guidelines a professor teaches in class.

As far as your broader point, that is probably true to an extent, but with successful businesses I think there is a lot of luck involved also. One can just increase there odds of success by continuing to put themselves out there. Only players have a shot of winning. I know you don't like the concept of grit, however. lol. But I think --given some threshold of underlying talent/intelligence-- perseverance and willingness to learn from mistakes will take you a long way too. (At least that's what I tell myself!) I've failed at several businesses and learned something valuable each time. I don't think my past failures preclude me from eventual success, if I stay positive, which is the hard part. A lot of people come up with good ideas, but losing money on one "sure thing", or one start up after another, saps one's motivation to keep trying. Shoot, I have personally known people who became millionares online (frankly since they hit it big I don't know them anymore) yet I still have to reach deep down to motivate myself to take the risks necessary.

DaveinHackensack said...

You make some good points in that last paragraph, and generally I agree with them. Persistence is often a necessary (but insufficient) ingredient, and, if memory serves, The Millionaire Next Door surveys found that the average successful entrepreneur had failed something like 2 or 3 times before succeeding in a business venture. I don't disagree that grit helps in this context; grit (plus luck) can help you and me succeed in business. But it won't make either of us the next Isaac Newton or Darrell Green. My issue was with the knucklehead Edelheit linked to who used Newton as an example of succeeding through grit.

You definitely need to be in the game though. I've spent too much time in the past out of the game, dwelling on some setback or another. Wasted energy.

Re your site and the one I'm currently developing, we should probably take this discussion offline. Drop me an e-mail if you want. I should also have link to a demo site to show you soon.

JK said...

What is ironic is that one of the reasons I started investing was out of my frustration with entrepreneurship. I figured, why not just ride the coattails of a more successful businessman? If I find the next Bill Gates/Microsoft early enough, then he can become a billionare and make me a millionaire in the process. I found out it's not quite that simple, but that was the allure of it. And now I have come full circle and I have the itch again.

I'll drop you an email.

DaveinHackensack said...

I went through a similar thought progression about investing myself.

JK said...

I'm resurrecting this comment stream because I thought about your Darrell Green/Newton reference when I read these articles today, check out Barry Sander's son making waves in high school as a freshman. Looks like another preternatural phenom in the making, let's hope he stays injury-free.

Also check out this kid Moshe Kai Cavalin (-his name is probably weird because he is part Chinese and part Jewish) who is graduating college at 11 with an A plus average. Now studying astrophysics.

That's some grit those boys have there. Their fathers probably spent a long time teaching it to them. ;)

DaveinHackensack said...

Awesome comment. I'm stealing it for a post.

Anonymous said...

I agree to a certain extent. because it all depends what kind you want to be. do you want to be like a babysitter. or do you want to be like henry ford