Learning from people who piss you off

In a post a couple of weeks ago ("How not to negotiate"), I mentioned a potential vendor who had pissed me off. As I noted in a later comment on that post, in retrospect I had handled our interaction poorly. I knew the right negotiating tack (as I've used it successfully before) and took the wrong one instead. The right response when asked by a potential vendor what your budget is is to say, as I have on previous occasions,

I prefer not to specify a budget ahead of time, so as not to prejudice your estimate.

Instead, for some reason I took the bait and made a low ball offer. In a post yesterday on her Atlantic blog ("The Naive Negotiator"), Megan McCardle explained the problem with low ball offers:

There is a zone of possible agreement (known to those who study this sort of thing as the ZOPA). You can't negotiate your way out of that zone no matter where you start. Nor does starting from a more aggressive bargaining point always mean that you will do better in the negotiation. It can often mean you do worse, because you poison the process.

My mother used to sell real estate, and you'd see this a lot with stupid buyers, particularly men using newbie agents: they'd submit an unrealistically low bid on the notion that this would force the buyer to bargain down. What it actually did was convince the buyer that it was a waste of time to negotiate with you, and/or make them angry.

Acting like an owner

We went to the Hackensack Maggiano's for a late dinner tonight. There was a half hour wait for a table, so we ate at the bar. The whole time the bartender was loudly complaining about how busy it was, about a particular customer who asked him if he had some cordial, etc. Normally when something like this happens, I say I'm going to write the restaurant and never get around to it, but tonight I grabbed one of the manager's business cards and fired off a quick e-mail to him at 11:51pm. Seven minutes later, I got this response from him:

Thanks for letting me know about this situation. I am still in the restaurant and will immediately follow up on your feedback which I appreciate.

I am so sorry that it was not a more pleasant experience. The bartender should be happy it was a busy night!

I would love to send you a gift certificate to make up for this. What is the best address to use?

Can't handle it better than that. Brinker must do a good job of incentivizing its restaurant managers to act like owners.

Andy Swan on why you're screwed

From Andy Swan's blog:

An endless fountain of ideas. I’ve lost count, but I’d guess an average of 2.5 killer businesses come forth from your brain on an annual basis. Unfortunately, they get mugged by reality and disappear into the vapor of lost dreams just as quickly as they were formed.

Obviously, there are several reasons for the canyon between your “entrepreneurial” vision and your accomplishments:

1. Geographic location — no one where you live can code or invest like the hippies in San Fran. Why fight that?
2. Debt obligations — Far be it from you to actually take your standard of living down a notch while trying to do something “revolutionary”…..meanwhile, men jump on grenades.
3. Muted enthusiasm — If your friends aren’t instantly enamored with the 6th complex idea that you describe without having built anything yet, how will anyone else “get” your brilliance?
4. Idea pirates — Obviously, your idea is so unique and valuable that everyone will steal it, take it to the hippies in San Fran and have it built and funded (but not as good) before you finish the sentence.
5. Family — Apparently you married someone that needs a lifestyle that ratchets up slowly and predictably in order to love and support you. And, ya….your infant children would be devastated if you put money into anything other than granite counter-tops and a paper thin computer with a glowing fruit on it.

The list goes on and on.

You’re screwed. All that genius and no chance to execute on it.

Poor you, born into the country that rewards, encourages and celebrates entrepreneurship more than any other in human history.

You are an old man in a lazy-boy, so damn comfortable you’re afraid to move.

Cruise-control into the coffin it is. Enjoy.

How not to negotiate

Don't ask "what's your budget?". That's a spectacularly unsubtle way of asking what's the most you can shake someone for your product or service. A potential vendor asked me that a couple of days ago, and after that inauspicious beginning to our correspondence, he doesn't have my business and I don't want to deal with him.

Say what you think your product or service is worth, and justify it. Then we can negotiate and come to a price we both think is fair. It's not just about the money. The amount I'm up on my little anti-gold bet today is probably more than what that vendor was fishing for. There are enough a-holes in the world. You can differentiate yourself by not being one.

For value investors and online entrepreneurs

A couple of new products profiled by TechCrunch may be of interest.

For value investors, particularly the ones who enjoy investing in big companies everyone already knows about: Trefis might be of interest as a GUI way of playing around with discounted cash flow estimates.

For online entrepreneurs who want a more professional way to accept payments than PayPal and don't want to deal with the hassle of setting up the gateway, payment processor, security certificate, etc. from scratch (as my developers did with ShortScreen.com): Recurly (currently in "private beta"). I didn't look at all of the comments in that thread, but a couple of commenters mentioned a competitor to Recurly that's already live, Spreedly.

"Google's Broken Hiring Process"

Ryan Tate of Silicon Valley Insider quotes Google's director of research Peter Norvig:

One of the interesting things we've found, when trying to predict how well somebody we've hired is going to perform when we evaluate them a year or two later, is one of the best indicators of success within the company was getting the worst possible score on one of your interviews. We rank people from one to four [one being the worst], and if you got a one on one of your interviews, that was a really good indicator of success.

Tate notes elsewhere in his piece that the Google interview process involves crazy questions. Tate doesn't connect the dots, but asking those sorts of questions in a job interview is essentially a way of giving a prospective employee a de facto IQ test (giving actual IQ tests to prospective employees has been legally problematic since Griggs v. Duke Power). Back to Googler Peter Norvig:

Ninety-nine percent of the people who got a one in one of their interviews we didn't hire. But the rest of them, in order for us to hire them somebody else had to be so passionate that they pounded on the table and said, "I have to hire this person because I see something in him..."

My guess at what's going on here: creativity probably increases directly with IQ up to a certain point, at which it peaks and then declines. So if you are looking for an employee who's going to come up with the next killer app or new line of business for your company, and you hire only the candidates with the highest IQs, you are probably overshooting the IQ sweet spot where you'd find the smart, creative types.

How much was Tim Ferriss really making from his supplement business?

1/20/2011 -- Update/Request: For some reason, this post is attracting a number of readers from Australia. If you have plans to be in the Perth area in the near future, would you mind dropping me a note via this form? Thanks a lot.


The figure I remember from the book was $40k per month. In this thread on the forums of Tim's Four Hour Work Week site, commenter "Kamakiri", who apparently has launched his own knock off (Game Brain) of Tim's former supplement business (BrainQUICKEN), says the facts suggest Ferriss couldn't have been generating anything close to those revenues from his supplement business. Some excerpts from Kamakiri's analysis:

Page 8 & 16 mention 40k, page 7 mentions 40% profits. No referencing of either together or in relationship with BrainQUICKEN (which he sold earlier this year). Read closely and Tim also mentions 30k, 60k, and 70k in other places.

Heck, if you were making a half a million a year at 40% profits, a normal business offer would be 10 years profits plus assets. That would value BrainQUICKEN at well over a mil and a quarter. Who in their right name would pay that for a business that Tim tells how to copy?

[...]

Bodybuilding.com has over 8,500 products. 1.2 million members with a 10% conversion rate (a gift there, should be about 2-3%) makes 120,000 purchases.

120,000 purchases /8,500 products = 14 sales for BQ off that site.

The hits to Tims's old site are easily conformable. This is the internet here people. Do the math yourself, and anyone can quickly see that BrainQUICKEN does not generate anywhere near that income.

[...]

Bodybuilder.com is pretty straightforward. Go to the site and pull the numbers off the top page. Simple math tells you he isn't making much there. Check the page views per month on BQ. Those numbers just don't add up to anywhere near 40k.

[...]

Having that many references, 30k, 40, 60, 70k... with out being more specific hurt his credibility in my opinion. It is carefully worded each and every time he mentions a figure. As it is written it is straightforward, but it does lead people to believe that Tim made 40k in income every month from BQ. Even a cursory view of easily verifiable numbers shows that this can't have come from BQ (not to mention zero spending on google ads).

[...]

I also researched the heck out of the business model in developing GameBRAIN. That is when the cracks in Tim's muse story came from. They say imitation is the sincerest form of flattery, but after imitating BQ to a certain extent, it was like an onion. Lots of good layers to dig through, only to find a few rotten ones.

At this point in our discussion, I asked if it were possible if Ferriss could have generated $40k per month in sales if that were mostly from retailers buying his product in bulk. This was Kamakiri's response:

The idea of buying in bulk from the site doesn't work because it never had that option. Besides, it is harder than hell to get retail space. An example of this is Mana Potions. Those guys do something near BQ by selling an energy drink for gamers. They have a serious team of salesmen, campaign girls, convention booths, and even a treadmill hooked up to WoW with timed runs from point to point across Azeroth (sp?). They have a tough time getting into stores, and the market for those products is tiny. Compare that to the supplement market (8,500 products on bodybuilding.com alone), and you can imagine the sales force that he would have to compete against. Retail profits are also nearly non-existent. You are looking at a few dollars in margin as opposed to the $60 or so he makes from the site.



That aside, outsourcing 10,000 bottles a month just doesn't work. 500 cases of 20 @v $4 profit a bottle. The logistics are out of the scale of anyone working less than 40 hours a week.

The Non-Starters

In a post last December ("Questioning the Conventional Wisdom about the Benefits of Microfinance and Encouraging Entrepreneurship"), I mentioned an article by Scott Shane in The American in which Shane poured cold water on U.S. policies that encourage Americans to start small businesses. In that post, I mentioned that the article wasn't available online, but prompted by a discussion on the forums of Tim Ferriss's Four Hour Work Week site, I looked for it again. It's available online now: The Start-Ups We Don’t Need -- Are we encouraging the creation of too many low-productivity businesses?.

What reminded me of Shane's article in the 4HWW forums, was the number of "me-too" businesses ("muses" in the 4HWW parlance) proposed there, e.g., high-priced e-books about how to pick up women, or how to get rich, etc. To be fair, there has been a minority of clever niche business ideas mentioned there too. For example, a teacher in the Midwest, after trying unsuccessfully to find study aid materials for a mandatory statewide algebra test, decided to create them himself for his class, and then made a business out of it, selling it statewide.

The illustration above, by Dave Plunkert, accompanied Shane's article in The American.

The Secret to Making Money Online

37 Signals again. Here's David Heinemeier Hansson, the partner who created Ruby on Rails, giving his take on how to make money online. This is from last year, but it's new to me. Maybe it's new to you too.

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.

Answering Requests, Part II

J.K. asks,

"But maybe something learned from any past attempts at entrepreneurship?"

I haven't learned anything especially revelatory, but one thing I learned is that a good idea isn't worth a whole lot if you can't sell it, and if you can't sell it, it may not even be a good idea.

The idea, in my case, was an invention to protect football players from breaking their necks. I started thinking about this after watching a defensive linemen break his neck during an NFL game. I figured that, with all the advances in protective equipment over the years, there ought to be a way to prevent this. I did some research and found a seminal study by Dr. Joseph Torg¹. Dr. Torg realized that, unlike most cervical spine injuries, football injuries were often caught film, and he used that film to analyze them. From that, he discovered the primary mechanism by which these injuries occurred, which he called axial loading. Essentially, when your head is upright, your cervical spine is slightly curved, like an inverted, elongated "c", and when you tilt your head forward at an angle of about 30 degrees, it becomes more like a segmented column. This is where it's most vulnerable to a blow to the crown of your head, which can compress and fracture your cervical vertebrae.

Equipment designed to protect football players' necks worked by restricting the range of motion of the head and neck, but did nothing to protect against axial loading. So, in consultation with an acquaintance who was an engineer, I invented a solution, an 'over-helmet' shell which would be loosely connected by springs to a regular football helmet underneath (the springs were just there to keep the over-helmet from rattling against the regular helmet), as shown in the goofy-looking CAD drawing above. This invention would permit but limit motion of a player's head and neck in all directions, within the player's natural range of motion, and it would also transfer forces incident on the over-helmet to the player's shoulders, thus sparing his cervical spine.

I thought this was a great idea, but I really had no clue what to do with it. I knew there was a significant market for it if this became standard equipment in football. From a Fermi approximation, I figured there were about a million high school football players in America, and my engineer estimated this contraption, made of fiberglass and steel, would cost about $50 to manufacture. I knew that helmets and shoulder pads each retailed for a few hundred dollars apiece. I applied for a patent on this invention, and then contacted the handful of companies that manufactured helmets and shoulder pads. No interest. What next? I heard later that these manufacturers generally are unimpressed with patent-type drawings and prefer to see working prototypes. Fortunately, there was a shop that made prototypes in my county. Unfortunately, they wanted a six figure deposit to build one, which I didn't have. So this ended up getting filed away in my Grandiose Ideas file, after I spent about $5k in patent attorney fees². And today the goofy CAD drawing smiles at me from my computer screen, as if mocking me.

I still come up with grandiose ideas today. I can't help it. But I can focus my energies on more feasible ideas, and that's what I'm trying to do now. The problem with my neck-protector idea, aside from the cost of getting one manufactured and tested, was that to get it adopted would require a revolution of sorts: you'd most likely sell everyone or no one with this; there likely wouldn't be an incremental adoption. Not an impossible task, but not one I was up to at the time.

¹That link lists Dr. Torg as an emeritus faculty member at Temple, but if memory serves, he was at Penn at the time. Coincidentally, I ended up cold calling his son a few years later, when I was a trainee at a boutique investment bank in Manhattan. His son (a Florida-based attorney) and I had a very pleasant conversation, about Dr. Torg among other subjects, and said he looked forward to hearing an investment idea from me in the future. He never did though. Most likely, he heard one for the fellow I was assigned to cold call for, a former Sbarro's manager with slicked-back hair named Vinny or Frank or something, I forget.

²Apparently, patent legal work costs a lot more these days. Recently I consulted with my attorney about getting a patent on an algorithm I'm having developed for a site. He forwarded it to his colleague who specializes in intellectual property and she gave a ball park estimate of tens of thousands of dollars in fees to get a new patent. She also said that since the algorithm would be a "business process" patent, and since the validity of these patents was going to be reviewed by the Supreme Court, it basically wasn't worth pursuing at this point.

Three Books for Entrepreneurs

From venture capitalist Fred Wilson's blog:

Books For Entrepreneurs

Last week an entrepreneur named Stephen who reads this blog regularly asked me for recommendations that budding entrepreneurs should read. I gave him a list and then forwarded it to my friends Brad Feld and Jerry Colonna who I knew would appreciate the list.

That led to this post by Brad where he lists his top three book suggestions for entrepreneurs. Go read that post. It's great.

As I was reading Brad's post, I realized that I should have shared my list with everyone, not just Stephen.

So here it is:

Kavalier and Clay

Atlas Shrugged


The Prince (Machiavelli)

any and all of shakespeare's tragedies and histories

Brad's suggestion of Zen and the Art of Motorcyle Maintenance is a great one and I'll include that in the future when asked this question.

The point of this list is that there is way more insight to be gained from stories than from business books. And these are some amazing stories.

I was surprised to see Michael Chabon's novel The Amazing Adventures of Kavalier and Clay recommended in this context, but I thought it was an impressive novel. About two thirds of the way through, Chabon throws in a brilliant twist that sends the narrative in an unexpected, and ultimately quite moving, direction for the next forty pages or so. Worth reading.

Adventures in Outsourcing.

In his book The Four Hour Work Week, Tim Ferriss extols the benefits of outsourcing and, as an example, quotes Esquire editor AJ Jacobs describing his experience working with a virtual assistant named Honey, from one of the leading Indian outsourcing firms, Brickwork:

When I open Honey's file, I have this reaction: America is f*cked. There are charts. There are section headers

[...]

If all Bangalorians are like Honey, I pity Americans about to graduate college. They're up against a hungry, polite, Excel-proficient army.

Apparently, they're not all like Honey. Here's my recent experience with this same firm. Last Thursday night, I requested a quote for a fairly simple project, the creation of a couple of spreadsheets of stock information. I got an e-mail back a few hours later, telling me they would get back to me by Sunday night with a quote. Still no word from them.

My guess is that Brickwork didn't have much bench strength, and when the inquiries came in from the readers of Ferriss's best-selling book (Brickwork's website asks if that's how you heard of them), the firm had to lower its standards in order to staff up.

Last Thursday I also contacted another Indian outsourcer Ferriss mentioned, Your Man in India. First I tried to request a quote via the "ask us" feature on the company's website, but got a server error, so I e-mailed the company instead. They referred me to their sister company, Get Friday, and someone from that company wrote back to say my request was beyond the scope of their abilities.

India is still in the running though, as I'm currently corresponding with an Indian individual about this project via Elance (in all, I received 5 proposals from India, 2 from North America, and 1 from Eastern Europe for this project).

Sometimes You're lucky to have Your Business Idea Shot Down

Four or five years ago, I thought I had an interesting business idea: private unemployment insurance. Fortunately, before I spent any time or money pursuing this idea, I was promptly talked out of it in a conversation over dinner with reader S.L., who was kind enough to act as a sounding board. As a seasoned businessman and investor, he spotted the flaw instantly: adverse selection. The people most likely to get laid off would be the ones most likely to apply for private unemployment insurance, which would wreak havoc with your loss ratios.

Yesterday's New York Times featured an article by Ron Lieber ("Good Luck Getting Private Insurance for Unemployment") about an entrepreneur who wasn't lucky enough to run his idea by S.L. before starting his own private unemployment insurance business. The article mentions that this entrepreneur, an insurance industry veteran named John Hartline, started his business in the Spring of 2008, only to have his reinsurers cut him off a year later:

Mr. Hartline said his reinsurance provider, Munich American Reassurance, forced him to stop writing new policies in April of this year.

Why? It turns out that the biggest problem with private unemployment insurance is something that industry insiders refer to as adverse selection. That is a fancy way of saying that the people who take out this sort of policy are the ones most likely to need it.

S.L. could have told him that, and saved him a lot of money and time. Sometimes the best thing a trusted mentor can do is tell us when we have a bad idea.

Update:: Cheryl was nice enough to mention a previous post, "Hedging against Job Loss", in the comment thread of the NY Times article mentioned above.

Another Update: S.L. adds this comment via e-mail:

Munich Re-Insurance Co. is one of the oldest, largest Re-insurance operations in the world.

Amazed that Munich had to wait a year before they took action. Probably after experiencing large losses.

Dean Kamen on Health Care

From an interview with the prolific inventor in Popular Mechanics (HT: Megan McCardle):

Popular Mechanics: Yet health-care costs do keep rising. Is there a point at which we simply can't afford the most advanced treatments?

Kamen: Diabetes alone, if you include all of the long-term, insidious consequences of a lifetime of diabetes, is responsible for about 30 percent of the federal reimbursement for healthcare. Taking care of the diabetic every day is a small piece of it. But what if tomorrow we could wipe out diabetes, suddenly everybody takes a pill and it cures the people that have it, and it inoculates the other people so they'll never have it? Forgetting what a great life that would give people and their families, you take care of 30 percent of what now we project as this insurmountable problem of healthcare, which they project is going to kill us.

Well, it would kill us if we look at the 30-year actuarial data based on our 19th century confidence in technology. But I'm sure in 1920 if you asked actuaries to say what percentage of our GDP are we going to spend taking care of people with polio, they'd say: "They get polio, it goes to their lungs, they sit in iron lung machines, they could live a whole lifetime with three people watching over them. We can't support them all."

But what did it cost to deal with everybody with polio? Oh, $2 apiece. We gave them the Salk vaccine. But in the 1920s Salk wasn't around yet.

I'm with Kamen on the importance of market incentives in spurring innovation in health care, but I don't know if the Polio vaccine was the best example for him to use here: Salk refused to patent it¹. Nevertheless, even if he had patented it, the cost of the vaccine could still have been far less than the cost of keeping people alive in iron lungs, so Kamen's point still stands. He could have used a better example though to support his point. Back to the interview:

PM: In other words, R&D spending now may save money later?

Kamen: If you project forward these horrific costs of treating everybody and you want to assume we are not going to respond to that by making the therapies better, simpler and cheaper and in some cases completely wiping out the [diseases], well you know what? We might actually get to that situation—if we stop investing in technology, if we stop believing that the future ought to be better than the past.

If we want to sit here and keep assuming we should be fighting, and that we should be striving to spend less of our intellectual power and our money on great achievements to come in healthcare—that we should be fighting to make it a smaller piece of our economy—I want to know what you want to make a bigger piece of our economy. What do you want to see the future look like?

I think this debate shows a fundamental lack of vision, a lack of confidence, a lack of understanding of what's possible.

Coincidentally, Tim Ferriss blogged about Kamen today, and in the comment thread I mentioned that Kamen was featured on an episode of the Sundance Channel series Iconoclasts (he was paired with Isabella Rossellini). Kamen is a fascinating character, which made this a fascinating episode to watch. Here is a brief clip from that episode.

The photo above of Dean Kamen accompanied the Popular Mechanics article.

¹If Salk's research weren't funded by the University of Pittsburgh and National Foundation for Infantile Paralysis -- if, say, he had been the founder of a start-up pharma company -- he would have had to patent the vaccine in order to recoup his and his investors' investment in the drug's development.

Your Ideas as an Asset Class

This is something I've been thinking more about recently as I've been investing in a couple of my ideas. Before the unemployment rate doubled in the last year, there was a financial pundit or two who suggested that your job could be considered an asset class (I'd provide a link here, but I already wasted ten minutes on search engines only to find articles about Kit Bond, Barry Bonds, etc.). The pundits' point, if memory serves, was to think of your job as a bond, since it pays a regular coupon (your salary) and then invest more aggressively in equities since your job is your fixed income allocation. Of course, unless you are a unionized government worker, your job is probably a lot riskier than the average bond, since those coupons can stop coming at any time.

Investing in your ideas is of course risky too, but can have high potential returns. Perhaps the rough analogue among securities would be a call option: inherent leverage on the upside if events go your way, versus the possibility your investment will expire worthless if they don't. Today I found myself in Manhattan with some free time on my hands, after a business meeting canceled, so I visited a couple of 'call options' that worked out for their investors: Sarita's Mac & Cheese, and Joe.

I'd been to Sarita's Mac & Cheese (S'MAC, for short), a few times before. Sarita and (her husband) Caesar Ekya were both engineers before quitting their jobs and starting S'Mac. You can read more about that in their bios here, but I was fortunate to hear the story from Sarita's mother once. I went to S'MAC a few times the year it opened, and back then, I'd always see Sarita and Caesar behind the counter. One time, while waiting for an order, and older Indian woman sipping coffee at a table nearby said something to me. We started talking, and she explained that she was Sarita's mother, and gave me the scoop behind the place. Today was the first time I'd been to S'MAC in several months, and business apparently has been going well: now they have an additional storefront on the same street, to handle the takeout and delivery business. Here's a short video clip from the S'MAC site of Sarita and Caesar telling their story:



The other business, Joe, I hadn't been to before, but had read about a few years ago in this New York Times article, "Forging a Coffee Chain Just a Few Links Long". The founder of Joe, Jonathan Rubinstein, was, according that article, a talent agent before starting the business. His idea was that a higher-end, local coffee place could successfully compete with Starbucks¹. I actually stopped by two Joe outposts: first, the one on East 13th Street, which was so crowded there was no place to sit, and then the one on Waverly Place in the West Village, which started to fill up after I got there. The espresso at Joe was better than Starbucks -- it had the rich, chocolate-like feel of a well-prepared Illy espresso. My palate isn't refined enough to differentiate it beyond that, but suffice it to say it was good. No WiFi at Joe though, perhaps to discourage customers from lingering too long?


¹This point was also made by letter writer to the Financial Times, as I noted in this post last December.

The Economics of Blogging

A Wall Street Journal column last week by the Democratic Political consultant Mark Penn, "America's Newest Profession: Bloggers for Hire", alleged that 452,000 Americans made their living by blogging. One professional blogger, Megan McCardle, explained on her Atlantic blog why this estimate was "addled" ("Blogging for Big Bucks"):

The estimates of professional bloggers seem wildly inflated--if you help update the company blog once a week as part of your marketing internship, you are not a paid professional blogger. And the numbers they themselves link to tell a much different tale from the article: most blogs bring in pitiful amounts of money for their owners.

This seems to follow the model of Mark Penn's book: find some bizarre number and mindlessly extrapolate it to an absurd conclusion. Yet I still don't understand why common sense did not keep him from publishing this article. Anecdotal evidence would suggest that almost all of us know many more computer programmers than professional bloggers--this is true of me even though I am a professional blogger, as are half my friends. Or he might have called some professional bloggers, who would have (sorrowfully) told him that no one is making $75K a year off of 100,000 pageviews a month, that being about how much traffic I pulled when I was starting up in 2002. Or, hell, he might have noticed that in the very BLS survey so nicely transformed into a table for his article, there is not entry for "blogger"--but that if you add up every writer, reporter, editor, PR person, technical writer, or "media and communications worker, other", there are only 499,890. Since Penn says that there are 452,000 paid bloggers, this implies that 9 out of every 10 communications workers are professional bloggers.

There may be one guy with some incredible niche--or moronic employer--making a ton of money with a modestely well-trafficked blog. But the plural of "anecdote" is not data.

Believe me, I'd love to think that blogging is a surefire path to riches and job security--but I'm afraid all most people get out of their blogs is the satisfaction of a job well done.

Coincidentally, a few days after reading Megan's post, I discovered the newest blog by Daniel Wahl, The Nearby Pen ("helps you live a happier and more productive life by sharing good art, reviewing good books, and explaining good thoughts") which included a post ("AdSense Pennies Make Dollars") that unintentionally supported Megan's point about the paucity of bloggers who make significant money from their blogs. In his post, Daniel mentioned the revenues he had generated from his three blogs over the last few months:

Not only will I not be making loads of money with Adsense, but at this stage of the game I should not expect to.

So why use Adsense? Quite simply, because--as the title suggests--pennies make dollars. Or to put it differently, a little bit of money adds up, even if little by little. And who knows, perhaps those pennies will grow faster with traffic at each site. In my view, it pays (at least a little) to learn more about how advertising on one's blog works while the blog is growing. I also think it is interesting. Here's the data for my first three months:

January...........4,291 page impressions...........$1.97 earned
February..........4,242 page impressions..........$3.62 earned
March.............4,411 page impressions..........$11.15 earned

This is no knock on Daniel -- I'm sure if I were using Google AdSense my ad revenues would be as low or lower (which is one reason why I never signed up for them) -- but it underlines Megan's point about why Mark Penn's estimates seem dubious. As for Daniel's point that pennies make dollars: sure, but time equals money, and, for most of us, there are much more remunerative uses of our time than blogging. So why do it? I mentioned one reason in my first post: to attract a few commenters I could get feedback from and bounce ideas off of. Another reason is the same reason most callers call talk radio stations, or letter writers write letters to the editor of newspapers: to express opinions. I have gotten a couple of ideas from writing this blog (or, more accurately, from observing the responses to a handful of posts), and one or two of those ideas could lead to a business opportunity down the road, so, in that sense, this blogging might end up being profitable as a form of brainstorming, but that remains to be seen.

Joel Greenblatt Makes Some Changes

Joel Greenblatt made a few changes to his Magic Formula Investing site last month. He notes one of them in his recent column:

[W]e’ve added something new. The site now has description and link to a new website FormulaTrading.com that I helped create with Blake Darcy. Blake is the founder and former CEO of DLJdirect, a pioneer in the internet brokerage field. Formula Trading is designed to make it easy for people to invest using my system. You can invest in one of two ways: either in a self directed manner (you’ll have the tools to easily select, purchase, track and sell stocks chosen by the Magic Formula system) or in a fully managed account (Formula Trading will invest it for you using the Magic Formula system). I am a significant investor in this new venture and have worked with FormulaTrading.com to ensure that it will adhere to the principles of the Magic Formula. (Either way, though, I plan to keep MagicFormulaInvesting.com a free site so that you can follow the Magic Formula system in any manner that works best for you.) This new firm hopes to open in the late spring of 2009.

It's nice to see entrepreneurship is alive and well during these difficult times.

Although he didn't mention it in that column, Greenblatt also made a few changes to the stock screener on his site: it now only lists 30 or 50 stocks for a given minimum market cap (instead of listing up to 100 stocks); it no longer lists the earnings yields and returns on invested capital for each stock; and it no longer allows you to screen for stocks with minimum market caps below $50 million. I sent a message to the site asking whether that last change was made because Greenblatt determined that his system didn't work for stocks below that market cap. If I get a response, I'll post it; if not, I'll try e-mailing Greenblatt directly, which I have had mixed success with in the past.

The photo above, of Greenblatt on his book tour, was borrowed from GuruFocus.

Questioning the Conventional Wisdom about the Benefits of Microfinance and Encouraging Entrepreneurship

In 2006, Muhammad Yunus and the bank he founded, Grameen Bank, were jointly awarded the Nobel Peace Prize for their work in essentially creating the business of micro-finance, extending small loans to poor Bangladeshis so they could start their own businesses. Micro-finance, due to the typically high interest rates charged and the communal pressure against defaulting (villagers understand that their credit would be put at risk collectively if one of them defaults) has proved quite profitable and has been implemented in various poor countries. Saturday's Financial Times featured a letter to the editor from a visiting professor of economics at the University of Juraj Dobrila Pula in Croatia, Milford Bateman, that contested the conventional wisdom about the benefits of micro-finance, "Microfinance’s ‘iron law’ – local economies reduced to poverty". Below is an excerpt from Professor Bateman's letter:

[I]n nearly 25 years of academic and consulting work in local economic development, my experience is that microfinance programmes most often spell the death of the local economy. Put simply, to the extent that local savings are intermediated through microfinance institutions, the more that country or region or locality will be left behind in a state of poverty and under-development. This is an “iron law of microfinance”. Focusing on isolated cases of microenterprise success simply does not add up to economic development. The reason microfinance is supported is overwhelmingly political/ideological – the economic rationale is simply not there.

I have recently been working as a consultant in Serbia. Here the foreign-owned commercial banks since 2001 have massively discovered microfinance. From almost zero in 2001, the commercial banks now channel 22 per cent of their total loan portfolio through highly profitable microfinance (household microloans) programmes amounting to almost 12 per cent of gross domestic product.

This has had two important results: first, a serious shortage of funds for small and medium-sized enterprises, which is deeply damaging because SMEs have by far the most sustainable growth and development potential. Second, thanks to microfinance there has been an accelerated proliferation of informal-sector microenterprises in Serbia over 2004-08, so the country is now chock-full of traders, kiosks, shops, street-traders and subsistence farms. The base of the economy is quite simply being destroyed.

[...]

The East Asian countries managed to develop brilliantly through channelling much, if not most, of their savings into serious growth-oriented sustainable business projects. This is why many east Asian countries may have started at similar GDP levels as Bangladesh in the 1970s but have since then massively outpaced Bangladesh in terms of growth and development. Economics 101 shows conclusively how critical savings are to development, but only if intermediated into growth- and productivity-enhancing projects. If it all goes into rickshaws, kiosks, 30 chicken farms, traders, and so on, then that country simply will not develop and sustainably reduce poverty.

Professor Bateman's letter to the Financial Times brought to mind an article by Scott Shane titled "The Non-Starters" in the current issue of The American. Unfortunately, that article doesn't appear to be available online [Update: it's available now], but Shane's point was somewhat similar to Bateman's, although Shane focused on business in the U.S. Shane wrote that most start-up businesses in America were economically unproductive, created relatively few jobs, and what jobs they did create tended to be lower paying and have fewer benefits than those at larger companies. The reason for this, according to Shane, was that there simply are fewer talented entrepreneurs with high levels of human capital than there are Americans who start small businesses, and that many small businesses are started by unemployed or underemployed individuals who are motivated to do so partly by government incentives (e.g., government small business loans, grants, training and other encouragement) and by the relatively low opportunity costs for them of starting a small business, due to their current employment status.

These unskilled entrepreneurs tend to have high failure rates partly because they have low levels of human capital and partly because they tend to enter over-crowded niches. Scott Shane thought that an appropriate policy response by the U.S. and state governments would be to stop encouraging everyone to become an entrepreneur, and to instead think like a venture capitalist and provide support for those entrepreneurs with more obvious potential. Professor Bateman's point about micro-finance -- that it is supported for political/ideological reasons -- would seem to apply to American policies toward entrepreneurship and small business start-ups.


The photo above, of Dr. Yunus displaying his Nobel Peace Prize, is from the Nobel Foundation's website.