Earlier this year, I wrote about Nir Eyal’s great book, Hooked, and how it can help you create a product with great retention (e.g, something habit forming). What is particularly interesting is that one of the most habit-forming endeavors is entrepreneurship and building companies. The four principles of the Hook Model—Triggers, Actions, Variable Rewards and Investment—also show why entrepreneurship is so addictive.
First, there must be a trigger. Triggers prompt you to take an action. In the case of starting a business, the trigger is seeing an opportunity. It could be waiting for a taxi that never arrives (probably the trigger for Travis Kalanick to start Uber) or going to a restaurant based on a critics review and getting a bad meal (possibly the trigger for Jeremy Stoppelman with Yelp). It is consistent at retail, you cannot find a good wine so you think about starting a wine store.
The next step in the Hook model is the action phase. The trigger, driven by internal or external cues, tells the user of what to do next. There are three ingredients required to initiate any and all behaviors:
- The user must have sufficient motivation.
- The user must have the ability to complete the desired action.
- A trigger must be present to activate the behavior.
Continue reading “Why starting companies is habit forming”
I have been intrigued for years that a huge financial sector has continued to rely on intuition while industry after industry has discovered that using analytics give you a better chance to succeed. Moreover, it is a sector that brags about the fact that it fails 99 percent of the time yet fails to embrace methods to improve those odds. I am talking about venture investing, the venture capital industry.
Moneyball and the venture community
For those who have seen the movie or read the book Moneyball, which I have written about multiple times, one of the most poignant scenes is the Oakland A’s smoke filled draft room where scouts with years of experience determine the best prospects to select based on their gut of what makes a great baseball player. When I first read about it, the parallels to how game company executives select what games to green light were incredibly apparent and I was certain you would see a similar transformation of the game industry. We did, with analytics driven social game companies putting many old school game companies out of business.
The venture capital space has uncanny parallels to the pre-Moneyball baseball industry. You have investors with years of experience sitting in Red Bull filled rooms deciding which investments to pursue based on intuition. The claim that they are investing in the management team is another way of saying they are selecting those leaders who feel like rock stars; who they think look like a star. They are basing it on measurable that they feel are important but have not proven empirically are the keys to success (just as baseball executives undervalued walks and over-valued defense).
Correlation Ventures, the Billy Beane of VC
A recent article in Forbes, “Venture By Numbers,” shows this situation is changing. Correlation Ventures started in 2011 with the philosophy to bring a quant-based approach to venture investing. Their mission was to stockpile 25 years of data on every venture deal consummated, evaluate this data with proprietary algorithms and then pick investments via pattern-matching software. Continue reading “Moneyball finally comes to VC”
Great post for any Founder or member of the Exec team of a start-up on the reality of diverging investor/entrepreneur interests. Neither side is wrong, but it’s good to understand the underlying motivations.