• Segments represent behaviors & preferences, which can potentially be monetized (and not just demographics)
• Segments should satisfy the LIDS property
  • Large
  • Identifiable
  • Distinct
  • Stable

Be allocentric:

• Why are the customers buying?
• What value do they derive from the products/services?
• What are they pain points?
• Are there any emotional aspects/appeal

Think about the competitor landscape:

• Competitors market share and profitability in that segment
• Potential barriers (by the way, there rarely are any, unless the market share and profitability of the incumbent is increasing or stable and way above the market average ROI)

Examine, analyze the data/behavior of the customers. Learn from the other successful products in the same vertical/segment (which brings us back to the first point — understand the segment really well).

Must read.

Here are some quick highlights and my take on the biases/behavioral decision making that goes into it:

Note to victims of accidents, medical malpractice, broken contracts and the like: When you sue, make a deal.

Overconfidence bias at work:

“The lesson for plaintiffs is, in the vast majority of cases, they are perceiving the defendant’s offer to be half a loaf when in fact it is an entire loaf or more,” said Randall L. Kiser, a co-author of the study and principal analyst at DecisionSet, a consulting firm that advises clients on litigation decisions.

Defendants made the wrong decision by proceeding to trial far less often, in 24 percent of cases, according to the study; plaintiffs were wrong in 61 percent of cases. In just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered.

Prospect theory — Perhaps, the defendants exhibit more risk seeking behavior (to avoid losses):

On average, getting it wrong cost plaintiffs at about $43,000; the total could be more because information on legal costs was not available in every case. For defendants, who were less often wrong about going to trial, the cost was much greater: $1.1 million.

And the classic difference between inside views v/s outside views:

The findings suggest that lawyers may not be explaining the odds to their clients — or that clients are not listening to their lawyers.

“It’s entirely possible that the attorneys are not giving adequate advice,” said Mr. Kiser, who is also a lawyer but is not practicing. “An attorney could advise a client that they have a strong defense to enforcement of a contract, but that is not the same thing as forecasting what the likely outcome at trial would be.”

…

Law schools do not teach how to handicap trials, nor do they help develop the important skill of telling a client that a case is not a winner. Clients do not like to hear such news.

Uniqueness bias (and ignorance of base rates):

“Most clients think they are completely right,” Michael Shepard, a lawyer at Heller Ehrman in San Francisco. A good lawyer has to be able to tell clients that a judge or jury might see them differently, he continued. “Part of it is judgment and part of it is diplomacy.”

And of course, expert bias is pervasive in any field:

Several lawyers were dismissive of the study, noting that the statistics mean nothing when contemplating a particular case, with its specific facts and legal issues, before a specific judge. They stressed the importance of a lawyer’s experience.

But, models do better than experts:

But the study tried to account for that possibility and found that factors like the years of experience, rank of a lawyer’s law school and the size of a law firm were less helpful in predicting the decision to go to trial. More significant was the type of case.

And incentives and frames matter:

For example, poor decisions by plaintiffs to go to trial “are associated with cases in which contingency fee arrangements are common,” according to the report. “On the defense side, high error rates are noted in cases where insurance coverage is generally unavailable.”

Framing matters:

…

psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose.

“If you approach a class of students and say, I’ll either write you a check for $200, or we can flip a coin and I will pay you nothing or $500,” most students will take the $200 rather than risk getting nothing, Mr. Asher said.

But reverse the situation, so that students have to write the check, and they will choose to flip the coin, risking a bigger loss because they hope to pay nothing at all, he continued. “They’ll take the gamble.”

It has become received wisdom on Wall Street that the Sarbanes-Oxley Act has damaged American competitiveness. It made listing in the American market less attractive to foreign companies and drove initial public offerings overseas. It raised costs for American companies without providing any significant benefit.

But do the facts support that wisdom?

No.

…

suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.

…

There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.

Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.

…

Historically, the United States made it difficult for any company, foreign or domestic, to abandon its S.E.C. registration. The logic was that investors had bought securities with the promise that they would have the protection of American securities laws, and it was unfair to remove that protection so long as a significant number of Americans still owned the shares.

The result was that a foreign company listed on the New York Stock Exchange or Nasdaq could drop its listing, but it still had to comply with American disclosure requirements and accounting rules. Critics called it the “Hotel California” rule, after the Eagles song about a place where “you can check out anytime you like, but you can never leave.”

That changed in 2007, when the S.E.C. made it easy for most foreign companies to leave, producing the exodus that the authors study. They focus on 59 companies that dropped their American registration. That number is too small to be definitive, but the study finds no evidence to support the thesis that companies that leave the United States are rewarded by investors, and some evidence to indicate that those who could benefit from an American listing are punished.

From NYTimes

From Thaler’s talk about his book - Nudge

Success is a lousy teacher. It seduces smart people into thinking they can’t lose.

– Bill Gates

1. Competition Demystified

by Bruce Greenwald

2. The Origin and Evolution of New Businesses

by Amar V. Bhide

3. Co-Opetition

by Adam M. Brandenburger, Barry J. Nalebuff

It nicely complements the approach in the competition demystified book above.

4. The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World

by Amar Bhide

Angels: Don’t Use Convertible Debt to Fund Startup Ventures

5 Reasons Convertible Debt Sucks

David Rose’s Angelsoft Blog lays out the reasons, along with some exceptions.

Here are some of the key points:

• The primary reason, of course, is economic: the angel is investing at an earlier, riskier stage and therefore should expect a higher return than the VC, who is coming in when some of the risk has been removed, and after the entrepreneur has made the company more valuable using the angel’s money. For the angel to wait until the next round to value the company results in exactly the opposite: he or she takes the early stage risk and ends up with later stage valuation: a lose/lose proposition!
• From the side of the entrepreneur, doing a convertible debt round correctly is complicated, creates a perverse incentive for the angel investor to work against the company, and ultimately doesn’t make a big difference for the entrepreneur.
  
• Most of the time, the founder is in a much better situation to negotiate favorable (or reasonable) terms with friendly angel investors with professional VCs My recommendation is to use the opportunity to negotiate favorable terms with angel investors and these will likely become precedent for future rounds.
  
• The biggest problem with convertible debt is that it aligns the interest of your angel investors with future VC investors and against you! Because the debt converts into equity at a price equal to or slightly discounted from what the VCs pay, the lower the price the more the angel investors will own. And often times, the angel investors will have the relationships and connections to VCs (and hence know them better than you do) so it is in your interest to get your angels on your side of the table.
  
  • One final comment against using convertible debt for angel rounds: Convertible debt creates misalignment between entrepreneurs and their angel bridge investors. Angels would prefer to see VCs invest at a lower valuation as the angels convert their bridge debt to equity (increasing the angels’ ownership fraction) while entrepreneurs seek VC investment at a higher valuation (maintaining more ownership for the entrepreneurs). Under these circumstances, angels may be less motivated to undertake activities that could increase valuation prior to the subsequent funding. Misalignment of entrepreneurs and investors is simply a bad practice.

Warning: Habits May Be Good for You

Somewhat similar to my earlier post on “The Checklist”

Diseases and disorders caused by dirty hands — like diarrhea — kill a child somewhere in the world about every 15 seconds, and about half those deaths could be prevented with the regular use of soap, studies indicate.

But getting people into a soap habit, it turns out, is surprisingly hard.

…

“There are fundamental public health problems, like hand washing with soap, that remain killers only because we can’t figure out how to change people’s habits,” Dr. Curtis said. “We wanted to learn from private industry how to create new behaviors that happen automatically.”

…

If you look hard enough, you’ll find that many of the products we use every day — chewing gums, skin moisturizers, disinfecting wipes, air fresheners, water purifiers, health snacks, antiperspirants, colognes, teeth whiteners, fabric softeners, vitamins — are results of manufactured habits. A century ago, few people regularly brushed their teeth multiple times a day. Today, because of canny advertising and public health campaigns, many Americans habitually give their pearly whites a cavity-preventing scrub twice a day, often with Colgate, Crest or one of the other brands advertising that no morning is complete without a minty-fresh mouth.

…

At about the same time, the company’s staff psychologists were beginning to extend their understanding of how habits are formed.

“For most of our history, we’ve sold newer and better products for habits that already existed,” said Dr. Berning, the P.& G. psychologist. “But about a decade ago, we realized we needed to create new products. So we began thinking about how to create habits for products that had never existed before.”

…

Those and other studies revealed that as much as 45 percent of what we do every day is habitual — that is, performed almost without thinking in the same location or at the same time each day, usually because of subtle cues.

For example, the urge to check e-mail or to grab a cookie is likely a habit with a specific prompt. Researchers found that most cues fall into four broad categories: a specific location or time of day, a certain series of actions, particular moods, or the company of specific people. The e-mail urge, for instance, probably occurs after you’ve finished reading a document or completed a certain kind of task. The cookie grab probably occurs when you’re walking out of the cafeteria, or feeling sluggish or blue.

…

“Habits are formed when the memory associates specific actions with specific places or moods,” said Dr. Wood, a professor of psychology and neuroscience at Duke. “If you regularly eat chips while sitting on the couch, after a while, seeing the couch will automatically prompt you to reach for the Doritos. These associations are sometimes so strong that you have to replace the couch with a wooden chair for a diet to succeed.”

…

Dozens of other companies have also redesigned advertising campaigns around habitual cues. Beer commercials, once filled with busty women in ill-fitting tops, are now more likely to feature groups of buddies, because research shows that groups of friends are one of the strongest habit cues. Candy bar companies, through commercials, have tied their products to low-energy cues, transforming what was once a dessert into a pick-me-up for cubicle dwellers.

…

Almost half of its people were accustomed to washing their hands with water after using the restroom or before eating. And local markets were filled with cheap, colorful soap bars. But only about 4 percent of Ghanaians used soap as part of their post-restroom hand-washing regime, studies showed.

“We could talk about germs until we were blue in the face, and it didn’t change behaviors,” Dr. Curtis said. So she and her colleagues asked Unilever for advice in designing survey techniques that ultimately studied hundreds of mothers and their children.

They discovered that previous health campaigns had failed because mothers often didn’t see symptoms like diarrhea as abnormal, but instead viewed them as a normal aspect of childhood.

However, the studies also revealed an interesting paradox: Ghanaians used soap when they felt that their hands were dirty — after cooking with grease, for example, or after traveling into the city. This hand-washing habit, studies showed, was prompted by feelings of disgust. And surveys also showed that parents felt deep concerns about exposing their children to anything disgusting.

SO the trick, Dr. Curtis and her colleagues realized, was to create a habit wherein people felt a sense of disgust that was cued by the toilet. That queasiness, in turn, could become a cue for soap.

A sense of bathroom disgust may seem natural, but in many places toilets are a symbol of cleanliness because they replaced pit latrines. So Dr. Curtis’s group had to create commercials that taught viewers to feel a habitual sense of unseemliness surrounding toilet use.

Their solution was ads showing mothers and children walking out of bathrooms with a glowing purple pigment on their hands that contaminated everything they touched.

The commercials, which began running in 2003, didn’t really sell soap use. Rather, they sold disgust. Soap was almost an afterthought — in one 55-second television commercial, actual soapy hand washing was shown only for 4 seconds. But the message was clear: The toilet cues worries of contamination, and that disgust, in turn, cues soap.