I find it strange that someone like Elon Musk has to do something as gimmicky.
He is crowdfunding his latest venture, The Boring Company selling Hats!
Over 30,000 hats sold!
— Elon Musk (@elonmusk) December 11, 2017
Technology has been disrupting every facet of our lives.
What will our future look like, how will it change and what are the things that we can do to embrace this change.
Whether you are building a business or just going about with your job you will be affected by these changes.
How will we transact in the future?
How will our food be produced in the future? Is what we do with food today sustainable?
If every house has solar cells, do we even need power plants?
Some of the things that this video series published by Quartz makes you ponder. I would really encourage you to take one hour out and watch all of the videos.
If the embed below does not work just click here.
You must have heard the term gut instinct; for the past few years science has spent all of its effort rubbishing it!
Well, gut instinct is real!
The brain is the organ that consumes the most amount of energy in your body. Almost 20% of all energy consumed is by the brain. The gut is responsible for digesting your food and sending the energy towards various organs.
This is apparently why you feel sleepy after a huge meal. All the energy is diverted to the stomach and the gut.
Now when your brain enters stressful situations, it has a veto. It can force the gut to transfer all of the energy towards the brain and gut always obliges.
When the gut feels the ingredients of a stressful situation developing, it tells your brain – “This is not good!!!”.
We call this gut instinct.
In life the things that you do depend on the degree of certainty.
A few days back Salma mailed this image and asked me which company seems to have the best revenue split.
The instinctive answer was to say – Microsoft. They seem to the most diversified. They are not dependent on any one stream of revenue for their survival. Facebook seems the most skewed; If anything was to disrupt advertising altogether, their business would be in turmoil.
Yesterday, I was reading Zero to One by Peter Theil and he made a very pertinent point in there. If you had the opportunity to do something that you knew would not fail, would you put all of your efforts behind it or would you diversify and pursue multiple opportunities. Most successes are a result of determined people acting with belief and putting all of their efforts behind it to make it a success.
He defined the category of people as:
Now using this categorisation when you look at the above graphs, the one thing that becomes clear is Facebook is Definitely Optimistic – They are certain about their plans and they think they know what is about to come and are ready for it.
At the same time Microsoft is a clear example of confusion. Given that it is an American company I would say that they are Indefinitely Optimistic. The graph is a clear representation of the fact that they do not know which segment is going to be their cash cow. They are doing everything and hoping something will go on to become big. At the same time they lack the conviction to say which one and focus more on it. If you make a graph for Microsoft of the early 2000’s, I am sure it would not resemble this. Windows and Office were the flag bearers for Microsoft and they put all of their efforts behind it.
Google and Amazon still have a high skew towards one of their revenue channels because they are Definite about it. Apple looks diversified but a large portion of their services revenue is all thanks to the iPhone that their users use every day. If you look at it from that perspective in all the three cases almost three quarters of their revenue comes from one thing that they do very well.
As a startup it is even more important not to diversify into too many revenue streams since it is very hard to be great at too many things. Be great at one thing and expand that revenue stream as rapidly as you can. You may undertake support activities but a majority of your income will come out of one or two things you do really well. This is also referred to as Pareto Principle – 80% of the effect comes from 20% of the cause. In business 80% of the income comes from 20% of the clients
Would you put all the wood behind one sharp arrow or many blunt ones?
Humans are considered rational beings. Every once in a while greed and exuberance trumps rationale we end up with a Bubble. Bitcoin is a bubble and it will fall precipitously. Here’s why…
Value of any product is arrived at through a process that matches demand and supply. If there is a lot of demand for a product and few people offering it, the price go up. There is a greater perceived value for it since the supply is limited – Everyone who wants it, cannot have it. The vice versa is also true. But as with most things in life there are certain exceptions to this rule
High-end luxury products have an aspirational value and hence the higher the price the higher the demand tends to be. These are called Veblen goods. There are also Giffin goods where this effect is seen with inferior goods.
Either way, in all of these cases price is a consequence of consumption.
There is another case where prices can be made to rise artificially, through hoarding and creating artificial scarcity. The hoarder buys large quantity of a good and waits for the price to rise high enough before beginning to sell it slowly to the actual consumer at an elevated price.
Markets play an essential role is matching demand and supply, which results in price discovery. Markets are the price discovery platform that most of us depend on. We have markets for everything, stocks, currency, commodity, bonds, etc. Most of these trades take place through instruments that are representative of the same. Stock is a company is represented by shares – Stock here represents the assets of a company and the ownership is attributed through shares. There are similar trading instruments for everything that is traded.
The place where this trade is managed, which I referred to an a market earlier, is known as an Exchange. An exchange is where trades are executed and the instruments change hands between the buyer and the seller. The job of an exchange is to provide a framework, to regulate and enable the trade to take place.
Let us say you have a Rs. 10/- currency note. You take this note and buy tea from a tea stall. He in turn takes the note and pays for the fuel bill. He in turns takes the note and pays the school fees for his child. The note has been used for several transactions but we do not know where it originated from and how many hands it changed. If this note were an online token we could track it all the way through.
If there are a set number of tokens in circulation and each of the token can be tracked, there is no way that any fake token can be introduced without changing the total number of token in the system. Furthermore if an anomaly is found, it can be quickly tracked back to its origin.
A Blockchain is a chain of records which are called Blocks. Each block represents one transaction and hence the entire history of an single instrument can be tracked from beginning to the end. A blockchain is what makes it possible for us to track every token. Research on blockchain began in 1991 but the distributed blockchain, which is the basis of all modern blockchain was invented in 2008. The distributed blockchain kept the block of records on every computer that is a part of the system. This redundancy is the secret sauce that make blockchain a phenomenal technology.
This makes it near impossible to fake any transaction because that fake transaction. It is not enough to enter a fake transaction in your own block, the same transaction needs to exist in every copy that is part of the system. Each copy is protected by public key encryption on each user’s system (If you wish to know how encryption works). If any anomaly is found, it can be quickly localized and eliminated.
Bitcoin is one of the implementations of blockchain as a currency. Bitcoin tokens can be mined by solving mathematical problems, but the total supply of bitcoin available is limited by the algorithm. The more bitcoins get mined, the harder it becomes to mine further. The mathematical problems are solved using the computer but the problems take longer and longer to solve as times goes on.
Now, once you have these Bitcoins, you need a way to transact, for which bitcoin wallets exist, where these coins get stored. The wallet is your copy of the blockchain.
Some people thought, “Hey! Why not trade bitcoin?” and they created Bitcoin exchanged. Just like a stock exchange, Bitcoin is bought and sold on Bitcoin exchanges. There are several across the world and they execute bitcoin sale and purchase.
Individuals and companies have been mining bitcoins since it was introduced. Today this mining has assumed industrial scale with more and more people getting interested and mining becoming harder and harder. There are entire server farms that are being committed to mining bitcoins and in all likelihood these are being hoarded for a future date when it would likely be sold.
The value of anything is down to consumers finally adopting the product and using it. This is where demand invariably arrives out of. Whether it is businesses or individuals, utilisation is the key. Keeping something does not create value unless it is an antique. Bitcoin is definitely not an antique.
The graph aboves shows the confirmed Bitcoin transactions per day. At its lowermost it is about 130,000 and at its peak its at about 365,000. It averages out at about 275,000 per day.
Let me just add some perspective. Visa processes about 24,000 transactions per second. So in about 12 seconds Visa does the entire days worth of transactions on Bitcoin!
Although this is not a straight comparison since Visa is a method of exchanging money while Bitcoin itself is a store of value. The market capitalisation of Visa as a company stands at USD 230 Billion while that of Bitcoin stands at USD about 70 Billion dollars. A third of the value of Visa??
Comparing it with gold, which is a store of value unlike Visa which is a transaction mechanism akin to Blockchain; Comex which is a commodity exchange based out Chicago (one of many across the world) does about 289,000 gold contracts per day. The number across the world would probably be in the millions, not to mention the transactions that take place through stores, banks and other means.
There are about 16,500,000 Bitcoins available today. Out of this only about 640,000 is exchanged everyday.
I think the value ascribed to bitcoin given its abysmally small circulation is purely due to the hoarding that many are engaging in. Most of the people just buy bitcoin for the purposes of speculation.
People buy bitcoin and then they keep it.
Since nobody is selling (Would you, if you know what you have is doubling in value every 6 months?) – Prices rise.
People hear prices are rising – They clamor to buy
Demand rises – Price rises
Some of the early hoarders keep releasing small amounts of it
The above graph illustrates how this works. For price to rise, the demand has to be high; this demand should be powered by consumption and not hoarding.
My take on this is that the price rise of Bitcoin is fake. It is powered by speculators who are willing to pay more and more in the hope that prices would keep rising. The limit on the supply is additionally helpful in driving the prices up and keeping them there.
There are plenty of cautionary tales of bubbles but for me the one that most closely matches this is – The Tulip Mania.
Tulips by themselves had no great value.
Tulip was a unique flower and was used for royal gifting. The prices of tulips shot up suddenly on speculative purchase of tulip futures. There were, many who made money during the upsurge. After a couple of years of frenzied buying, the demand for buying newer and newer contracts seemed absent. There was no inherent value in it. Panic set in and ultimately it suddenly collapsed in Feb 1637. Within 3 months all of the value was wiped out, because there was none to begin with!
The same is true of Bitcoin today. Its not like Bitcoin is the preferred currency for transaction or that people are switching to transacting through bitcoin at unforeseen pace. A crazy number of speculators are buying into it for the sake of speculation. There is no inherent value and one day in the not so distant future people will realise it.
Most entrepreneurs start with a problem statement. They wish to make money by solving the problem that people are facing. Building a product can be a long, challenging and expensive task. Nobody wants to be undertaking the effort with no certainty of whether or not the product would be accepted by the market. In order to mitigate this risk, an minimum viable product (MVP) is built to test the market and ascertain the demand for the solution.
I often find many startups go with a quick and dirty version to potential customers to find out what they think of the solution and if they would be interested in using it. Often the solution is pitched in the absence of a financial cost because it is very basic! When the real product hits the market, entrepreneurs find it hard to get customers to pay for the product. The discount spiral begins and continues down a slippery slope.
During one of the meetups that we were conducting, we were brainstorming some ideas with students at the Vellore Institute of Technology. In a room of 50 students, one of the students came up with the idea for an app, which would be able to show the mess menu. Since their hostel are 7 stories high, they find it inconvenient to come down to check the menu before every meal, in order to determine whether to eat at the mess or go out.
We asked the group of 50 students in the room, how many thought that the problem was worth solving; all of the hands went up. We then discussed what kind of app could be built and the features that would be required in the app. Everyone seemed to agree that the solution was great so I popped a question, “How many of you would pay Rs. 60 per year for the app?”; 2 hands went up!
There are inherently two types of test that the MVP should be able to succeed on.
Testing for behaviour
Every business is based on an insight into human behaviour. The entrepreneur exploits the behaviour to generate an income and a profit.
The first thing that the MVP is supposed to be able to do is prove that the behaviour that one is seeking to exploit does exist. If you are building an e-commerce business, the assumption is that people are ‘lazy’ enough to want to sit at home and shop for products than to visit the shop and buy the product. One of the biggest USP of e-commerce against traditional retail is ‘convenience’. The job of the MVP is to prove that people actually perceive a convenience. This is to test if the expected behaviour is shown.
Are people okay with buying goods from their computer? Are they willing to go ahead with a purchase in the absence of tactile feedback? Are they willing to pay online? Do they like the vast choice being offered?
Testing for value
The next step is to prove that the users see value in the convenience being provided. So is the user seeing enough value to pay money for the convenience being provided. If your solution cannot generate income, the path to sustainability is unclear.
Too often entrepreneurs miss out on testing for value, which arguably is the most important part of establishing an business. The purpose of any business is to create value for the customer and exchange that value for money. The value creation should be apparent for the customer.
Being able to test both of these aspects is critical to being right about the product that is being built. Therefore, an MVP must be a product that can be sold to the customer. The MVP is not a model, it is a product that performs a function in a much simplified manner.