Justin Mares

A few weeks ago, I took an Uber from my apartment to a friend’s place in the Mission. On the way I was making small-talk with my driver. We started talking about his recent divorce and how it’s impacting his finances and his mental health. I felt bad for the guy.

He started giving me advice. It was pretty much what you’d expect – women can’t be trusted, never get married, not worth the risk, etc. It nicely illustrated something I’ve learned over the last few years:
Pay attention to the person behind any advice.

If you’re doing anything at all, you’ll likely be inundated with advice. Well-meaning friends, family members, co-workers and mentors will al chime in with their thoughts about things you should do. A lot of this advice will come from people smarter, richer, and more successful than you. How do you weed out the good advice from the bad?

My best heuristic for taking advice is simple: look at who it’s coming from. If that person is someone you’d like to emulate – if you want to be in their shoes when you reach their age – listen to their counsel. If not, ignore it.

This can be a bit more nuanced, but the general principle is useful. My taxi driver for example: I’ll listen to his input on anything he tells me about getting around the city, cool neighborhoods or restaurants worth checking out. He knows that stuff, and I’d love to have the same knowledge of San Francisco that he does.

His track record with women though? Not even close. I don’t want to be a 40 year old, twice-divorced father of two. Forget that. Why listen to someone who’s mental model of the world has gotten them to a place you don’t want to be?

Yes, this means you miss out on some good advice. You ignore the thoughts of some very smart people, especially those your age. It doesn’t matter. There are enough smart, successful people out there living the life you want to live. Find them, and take their advice to heart.

I call this the “fat doctor” heuristic. If my doctor is fat, I’ll ignore anything he or she has to say about eating habits. I’ll take that advice from someone who’s healthy, thank you.

Apply this rule of thumb everywhere. You’ll soon find yourself seeking better advice, and ignoring bad advice you previously considered.

I just finished reading Ishmael, one of the more thought-provoking books I’ve read in months. At one point in the book, during their discussions about evolution and man’s “creation myth”, Ishmael tells the main character a story:

This story (Ishmael said) takes place half a billion years ago—an inconceivably long time ago, when this planet would be all but unrecognizable to you. Nothing at all stirred on the land, except the wind and the dust. Not a single blade of grass waved in the wind, not a single cricket chirped, not a single bird soared in the sky. All these things were tens of millions of years in the future. Even the seas were eerily still and silent, for the vertebrates too were tens of millions of years away in the future.

But of course there was an anthropologist on hand. What sort of world would it be without an anthropologist? He was, however, a very depressed and disillusioned anthropologist, for he’d been everywhere on the planet looking for someone to interview, and every tape in his knapsack was as blank as the sky. But one day as he was moping along beside the ocean he saw what seemed to be a living creature in the shallows off shore. It was nothing to brag about, just a sort of squishy blob, but it was the only prospect he’d seen in all his journeys, so he waded out to where it was bobbing in the waves.

He greeted the creature politely and was greeted in kind, and soon the two of them were good friends. The anthropologist explained as well as he could that he was a student of life-styles and customs, and begged his new friend for information of this sort, which was readily forthcoming. “And now,” he said at last, “I’d like to get on tape in your own words some of the stories you tell among yourselves.”

“Stories?” the other asked.

“You know, like your creation myth, if you have one.”

“What is a creation myth?” the creature asked.

“Oh, you know,” the anthropologist replied, “the fanciful tale you tell your children about the origins of the world.”

Well, at this, the creature drew itself up indignantly—at least as well as a squishy blob can do—and replied that his people had no such fanciful tale.

“You have no account of creation then?”

“Certainly we have an account of creation,” the other snapped. “But it is definitely not a myth.”

“Oh, certainly not,” the anthropologist said, remembering his training at last. “I’ll be terribly grateful if you share it with me.”

“Very well,” the creature said. “But I want you to understand that, like you, we are a strictly rational people, who accept nothing that is not based on observation, logic, and the scientific method.”

“Of course, of course,” the anthropologist agreed.

So at last the creature began its story. “The universe,” it said, “was born a long, long time ago, perhaps ten or fifteen billion years ago. Our own solar system—this star, this planet and all the others seem to have come into being some two or three billion years ago. For a long time, nothing whatever lived here. But then, after a billion years or so, life appeared.”

“Excuse me,” the anthropologist said. “You say that life appeared. Where did that happen, according to your myth—I mean, according to your scientific account.”

The creature seemed baffled by the question and turned a pale lavender. “Do you mean in what precise spot?”

“No. I mean, did this happen on the land or in the sea?”

“Land?” the other asked. “What is land?”

“Oh, you know,” he said, waving toward the shore, “the expanse of dirt and rocks that begins over there.”

The creature turned a deeper shade of lavender and said, “I can’t imagine what you’re gibbering about. The dirt and rocks over there are simply the lip of the vast bowl that holds the sea.”

“Oh yes,” the anthropologist said, “I see what you mean. Quite. Go on.”

“Very well,” the other said. “For many millions of centuries the life of the world was merely microorganisms floating helplessly in a chemical broth. But little by little, more complex forms appeared: single-celled creatures, slimes, algae, polyps, and so on.

“But finally,” the creature said, turning quite pink with pride as he came to the climax of his story, “but finally jellyfish appeared!”

The story parallels our culture’s “creation myth” – our story of how creation and evolution inevitably lead to modern humans. This creation myth assumes humanity is evolution’s final output; the pinnacle of a process that’s been occurring for tens of billions of years.

I think this view changes within the next 30 years.

From an evolution standpoint, our greatest achievement may be the creation of super-intelligent AI. A billion years from now, what will be more important – the development and reign of mankind (for 11,000 years of civilization), or the subsequent rise and development of a super-intelligent AI?

No technology has as much potential to change the human condition as artificial intelligence. AI is improving at an astounding rate. You have computer programs driving cars more safely than humans. You have programs that can solve CAPTCHAs, do a better job diagnosing medical conditions than trained physicians, build realistic virtual realities, fly planes autonomously (or play ping pong), and trade the stock market. What’s more, the processing power and capacity for these programs to learn is increasing every day.

Given how rapidly AI is improving, and how important it’s becoming to our economy and way of life, it’s inevitable that it continues to take a larger role in society. Almost as inevitable is the fact that we will develop a superintelligent AI that is actually smarter than human intelligence. One that can help solve some of the many complex problems our economy, governments and businesses face.

My guess is that this shift happens gradually. Smart businessmen buy a program that determines the best strategic move for a given business. Next, computer scientists at a prestigious university release software that predicts (with stunning accuracy) the effects of economic and political policies on the nation. As these programs are able to model the impact of certain policies and suggest optimal courses of action, more and more policy decisions are placed in the hands of these superintelligent programs.

AI will change a lot, but it’s biggest impact may be on the way humanity perceives itself. What will it mean when humanity is no longer the one charting our destination as a species, but instead putting decisions in the hands of superintelligent AI? What’s more, once we reach this state there is no rational reason to take back control from AI – why would you place immense decisions about economic policy in the hands of a human when a much better decision can be made by AI?

Right now, humanity is the jellyfish. Our culture believes that we’re the end result of creation and evolution – everything up to this point was guided towards the creation of our species. Within the next century we’ll be in a different position. Ultimately, I think modern humanity will be looked at the same way we now look at Homo Erectus - as an important evolutionary step in the creation of the real pinnacle of evolution: superintelligent AI.

Have you ever tried doing something you aren’t good at? Worse, have you ever really really wanted to be good at something, and yet when you tried you just couldn’t get it? Say you wanted to learn a dance, or tried to hit that high note from “I Believe in a Thing Called Love.” And yet, you just… couldn’t. Then comes the confusion, the weight of failure.

This is how I feel every week.

I think this is a good thing. If you want to learn rapidly, you have to get comfortable with failing. You need to get used to feelings of confusion, anxiety, even a little fear. This feeling of unease is natural when you’re doing something you haven’t yet mastered.

This is an opportunity. Whenever you feel inadequate, you can reframe this feeling and understand that it’s a necessary condition of learning something. It’s part of rapid learning and improvement, and is a positive sign of growth. If you feel like things are coming easily, you’re probably not stretching yourself enough.

What does all of this mean? That feeling incompetent is a necessary condition of learning quickly. 

Ira Glass, host and producer of This American Life, alludes to this in one of my all-time favorite quotes:

Nobody tells this to people who are beginners, I wish someone told me. All of us who do creative work, we get into it because we have good taste. But there is this gap. For the first couple years you make stuff, it’s just not that good. It’s trying to be good, it has potential, but it’s not. But your taste, the thing that got you into the game, is still killer. And your taste is why your work disappoints you. A lot of people never get past this phase, they quit.

Most people I know who do interesting, creative work went through years of this. We know our work doesn’t have this special thing that we want it to have. We all go through this. And if you are just starting out or you are still in this phase, you gotta know its normal and the most important thing you can do is do a lot of work. Put yourself on a deadline so that every week you will finish one story. It is only by going through a volume of work that you will close that gap, and your work will be as good as your ambitions. And I took longer to figure out how to do this than anyone I’ve ever met. It’s gonna take awhile. It’s normal to take awhile. You’ve just gotta fight your way through.

Keep fighting. Don’t quit. Learn faster than you could have ever imagined.

From this transcription of a talk by Charlie Munger:

And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.

It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one.

And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

That is a very simple concept. And to me it’s obviously right—based on experience not only from the pari-mutuel system, but everywhere else.

And yet, in investment management, practically nobody operates that way. We operate that way—I’m talking about Buffett and Munger. And we’re not alone in the world. But a huge majority of people have some other crazy construct in their heads. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they’ll come to know everything about everything all the time.

To me, that’s totally insane. The way to win is to work, work, work, work and hope to have a few insights.

How many insights do you need? Well, I’d argue: that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man—Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights.

So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of craziness with an occasional mispriced something or other. And you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.

When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

He says, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

I’ve been thinking about this a lot lately. If you take a look at my 2013 goals, I essentially did the exact opposite. I planned on doing multiple, unrelated things in areas where I didn’t have any sort of insight or advantage (starting a charity, a TV show, start another company, 5x traffic and subscribers to this blog). That was stupid.

I’m changing my goals drastically this year. I have 1 major goal I’m focusing on, and 3 habits I want to build in the areas of health, fitness and sociability. Charlie Munger’s words of wisdom were one of the main reasons I decided to take this approach in 2014. We’ll see how it pans out.

What are some of your goals for 2014? Do they cluster around 1-2 themes or areas in which you’re excited to focus? Or are they a bit all over the place (like mine were last year)? Would love to hear your thoughts via email or in the comments.

Sometime in February of 2013, I decided (inspired by my buddy Scott Britton) to write down and publish my goals for 2013. Though it was a great year in a lot of ways, I didn’t accomplish much of what I thought I wanted at the start of 2013 (original list of 2013 goals here).

Goals Completed:

• Paid off my student loans (yay!)
• Charged $100/hr for consulting work. Ended up doing more than 20 hours of it (20 was the goal) and made this a solid income stream in 2013.
• Took improv classes. They were a lot of fun, though didn’t have the social impact I thought they might. However, totally worth it – it’s like adult playtime. And a few of the people in my group were hysterical.
• Read 75 books on the year. Currently sitting at 72, but within finishing distance of 3 books right now. Will definitely complete this by December 31.
• Wrote a blog post that got 10,000 views. That would be this one – Why Real Businesses Don’t Charge $5 a month.
• Completely eliminate sugar from my diet. I did a great job with that, only eating sugar at Thanksgiving. Otherwise, I never ate or drank sugar.
• Started and ran 1-2 social groups in SF. I started a growth group for people running growth at different startups in SF, and have a good friend that I’ve been co-hosting dinners with. Will continue with both in 2014.
• Go to a music festival. This was actually one of the highlights of 2013, as I went to a bunch of awesome shows – Tiesto, Muse, Kendrick Lamar, Kaskade, Avicii, Zedd, Skream, Blink182, Porter Robinson, Goldroom and a few others. I realized that I really enjoy seeing live music, and will do more of this in 2014.
• Got a mentor in the publishing/writing space. Made a lot of progress in this area in 2013, and feel pretty well positioned to launch Traction Book (finally) in 2014.

Came Close:

• Go camping with friends. Instead of camping, I ended up doing a bunch of awesome weekend and road trips, but no camping.
• See Louis C.K. live. He never toured any of the cities I was living in, but I did see a bunch of other comedians live – Daniel Tosh and Jim Gaffigan to name a few. I’ll see him next time he’s on tour.
• Create an event at least 20 people attend. I’ve co-hosted an intimate, invite-only event for 15 people. I also realized this year I function better in smaller settings, so won’t have this goal next year.

Complete Failures:

• Sell 10k copies of Traction Book. This was just naive from the start. I had no idea how long it takes to write a book – f’ing forever. If I write a book again, I’ll definitely have a different way of approaching it (which I’ll write about in the future).
• Travel outside the country. Another year gone by and I still haven’t done this. I am planning a trip in February that should allow me to cross this off.
• Go electronics-free once per quarter. I didn’t do this, and it’s really kind of stupid that I wasn’t able to get it done. Will be doing this in January 2014.
• Be able to bench 1.5 body weight, squat 2x body weight, and deadlift 2x body weight. I worked out very sporadically during 2013 and didn’t stick with the Stronglifts program I started the year with. Not sure that I’ll ever make lifting a priority – I’ve started doing some other workout routines that I enjoy more.
• Spend $500 materially improving someone’s life. Still time to do this, but it was one of those things I never made a priority.
• Meet David Sacks. This was never a priority, and kind of a stupid one. I’ll meet him when I have something more to offer.
• Give one talk to at least 200 people. Didn’t follow up on opportunities where this could have happened. Applied to speak at the Lean Startup Conference, but wasn’t accepted.
• Try Brazilian Jiu-jitsu for a month. This one was easy to do and I blew it. Signed up for classes in January.
• Volunteer 1x/month at least. Another relatively easy one, though I have signed up as a mentor in a program starting March 2014.

Goals I Put on the Backburner:

• Reach 1000 blog subscribers. With the year I had, my priorities shifted away from blogging and more towards finishing the book, networking and working on Airbrake for much of the year. From what I’ve seen, bloggers with large audiences do a few things: blog a lot, or do worthwhile things outside of blogging that helps them build an audience. I definitely want to fall in the second camp, as writing a blog post takes me a long time. I’m confident I’ll accomplish this at some point, but it just wasn’t a focus in 2013.
• Write 3 guest posts for reputable blogs. This is in the same vein as above, blogging just wasn’t a focus in 2013.
• Create a TV show. One of my major realizations in 2013 was that my time is limited, and I want to focus my limited time and energy on really crushing 1-2 things. I still want to make a TV show, but not until I get a few other things off my plate.
• Start a charitable organization as a side project. Same as above – I worked on focusing on a few things in 2013 and really trying to nail them.
• Start a company or organization focused on improving education in some small way. Same as above.
• Create an interview series on mental models. Again, same as above.

Cool Things that Happened:

Though it may seem like a failure of a year given how many goals I failed, it was a really excellent year in so many ways. It’s been by far the most productive, financially rewarding and educational year of my life. Some awesome stuff that happened:

• I moved 3 times, from Pittsburgh to Vegas to San Francisco (where I live now). Didn’t expect this going into 2013.
• Met and built close relationships with some incredibly smart and successful people that have vastly accelerated my learning trajectory.
• Lived in Vegas. It was every bit as crazy as people imagine. One memorable night, I ended up on stage with Tiesto.
• Grew a lot in terms of being honest and vulnerable in my communications and interactions with people. This has been incredibly freeing and life-changing in a positive way.
• Ran growth at Airbrake until acquisition by Rackspace.
• Had the experience of building my own sales team and going through the hiring/firing/managing cycle for the first time.
• Feel like I’m on solid financial ground for the first time in my life, which is mentally very freeing.
• Got really into art and learned a lot about painting and art history.
• Started learning how to make my own music and have been playing around with remixing songs in the chillstep genre.

Major Realizations

This year was incredible. I learned so much about what it actually takes to run and grow a company, became a much better marketer, and went through the hiring/management experience for the first time. Looking back, the theme of the year (unintentionally) was one of learning. I learned what it takes to run and grow a startup, and learned a lot about my own skills and limitations in a professional sense.

On a personal level, I became much more  honest and vulnerable in my conversations and relationships. I also learned a lot about energy and how it works in terms of attracting others to you, and have become a much happier and more engaging person in 2013. I’ll continue to work on this in 2014, along with some other goals I’ll detail in my next post.

For anyone,  choosing what to do with your life is a stressful guessing game. With hard work and some luck comes no shortage of great opportunities. And, with opportunity, many tough choices.

By way of example, let’s take a standard tough decision: what to do after graduating college. Let’s say you have two job offers, Job A and Job B. Job A is for a position at a large firm where you’ll be doing work that doesn’t interest you, but will pay 30% more than Job B. The second job is at a smaller company where you’ll be paid less, but it will expose you to greater learning opportunities and responsibility. What do you choose?

This answer will depend on the mental models you use to weigh different factors. Whether you realize it or not, your mental models determine how you think about the world. One set of people will be optimizing for money over just about anything else – maybe they want to save up for a special purchase, or have a lot of debt to pay off. Others will focus on learning and hope that it pays off in the future.

These types of “which job” questions are relatively straightforward. The really tough questions come when choosing your work. You only have one life, and where you choose to focus your energy will determine a lot about your future – your happiness, well-being and long-term impact on the world.

The most useful framework I’ve found for making such decisions was introduced to me 2 years ago by the brilliant Nick Pinkston. Essentially, if you’re aiming for impact as opposed to personal happiness, your approach will be far different than someone who’s optimizing for personal freedom.

Nick’s framework is essentially this. If you care about moving humanity forward, focus on areas where you can have a large impact and be irreplaceable. Take a look at the matrix below for an idea of how this breaks out:

impact vs replaceability

Let’s take doctors as an example. Doctors clearly have a large impact in that they help people achieve a much higher quality of life than they would otherwise. They help the sick recover and generally keep people healthy. They do a lot of good.

However, as an individual focusing on making an impact, becoming a doctor probably isn’t the best path. Though relatively high on the impact scale, doctors are also highly replaceable. There are hundreds of thousands of them in the US, and 25,000 new doctors enter the market every year. If you choose not to become a doctor, someone will easily fill your stethoscope.

A similar dynamic exists among teachers. Hundreds of thousands of new teachers flood the market each year, leading to a glut of teachers. Though replaceable, they clearly have a tremendous impact on their students. Thus their position in the bottom right of the above matrix.

Contrast this with someone like a cancer researcher or entrepreneur like Elon Musk. Each of these people, if they succeed, will have an enormous impact on humanity. Additionally, few people are cut out for highly technical research or starting futuristic companies – each of these individuals is extremely difficult to replace. Without Elon Musk, we don’t have Tesla, SpaceX and the Hyperloop. We have a void.

On the other side are those who are difficult to replace (athletes, actors and the like) but who have a relatively low impact on humanity. Though famous and hard to replace, the existence of someone like Cameron Diaz doesn’t add to human progress. Then, you have those who’s work is both low-impact and easily replaceable. No matter what your values, you probably don’t want to be in this quadrant.

Now, I want to be clear – doing things that are not high impact and hard to replace is not wrong. Those who work in low-impact and highly replaceable jobs are not doing anything wrong – every option in the matrix is totally valid for individuals with different goals. This is just a framework I’ve found useful in giving me clarity around some major life decisions.

Choosing a career path based on the above framework can lead to a lot of misunderstandings. In college, I dated a girl who’s mental models and values were traditional – “do well in school and then get the best job you can.” Mine was a little different: I was optimizing more for learning and being around smart people as much as possible. This led to quite a few arguments: I saw skipping some class to take a meeting with someone as the correct decision. I was getting to know smart people and learning faster! She saw the opposite: to her, I was hurting my chances of getting a good job after college and jeopardizing a good career in finance (my college major).

Thinking through your mental models can be extremely useful as you think about careers and what you want to do with your life. In the end, it’s a highly personal thing – deciding what you care about and how best to get there is a process that only you can begin.

This reflection also allows you to contextualize the many things you’ll read about life choices. It changes how you react to someone espousing how they’ve quit their job to travel the world. Instead of feeling like you’re missing out, you can pause, reflect and realize that they’re operating under a different set of values. They’re optimizing for something else (variety of experiences?) than you are, and consequently have a very different path to achieve their goals.

“Thanks for visiting mom and dad!”

My parents had traveled all the way from Philadelphia to visit me in San Francisco. I was excited. They don’t travel often, so this was my chance to show them how cool the city was.

They’re also pretty conservative, so my role for the weekend would be part tour guide and part Fox News. I’d have to turn the San Francisco experience into a conservative one they wouldn’t hate.

On the first day of their trip we went to grab subs from Deli Board, one of my favorite spots in the city. This place is my kryptonite: if I ever for some reason lose all ambition and drive in my life, at least I can be somewhat happy getting fat and slamming Deli Board on the daily.

Deli Board’s only blemish is that it’s on 6th and Folsom. If you know San Francisco, you know that’s the one area in Soma where the Tenderloin broke through Market Street’s defensive line and is doing a crazy dance in the endzone. It was a risk taking my parents there, but one I was willing to chance to get to my urban lunch mecca.

**

For the most part, I love living in San Francisco. There are loads of smart people, lots of cool happenings in tech, and the weather is awesome. Seriously, those that complain should try living somewhere where you see the sun once a month during winter. Or a place where getting caught in a rainstorm means you actually get wet, not just a light film of mist on your shirt.

I’ve also gotten really lucky with my living situation and have managed to make friends quickly. All in all, I’m enjoying my time here. There are tons of cool street fairs, free concerts, and even a summer Chipotle festival. That sealed the deal for me.

Like any city, there are downsides. It’s expensive, and is the only place in the country where rent prices are partially determined by Facebook’s stock price: I actually met someone who’s rent went up several hundred dollars within weeks of Facebook’s IPO.

Plus, it has “character.” Lots of it. As my parents were about to find out.

**

Being a beautiful San Francisco day, I decided it’d be nice if we enjoyed our Deli Board outside in the park by the sub shop. First mistake.

We sit down to partake in the sub-of-the-gods. After I was halfway through, some homeless men sat down on a bench near us. My parents looked disturbed.

“Yeah, San Francisco has a bit of a homeless problem. It’s a problem in that the city basically turned out their mental institutions in the 80s and there are some drug addicts out here. It can be depressing.”

Then they started smoking crack.

For a second, I hoped this was a generational thing. My parents wouldn’t know what “crack” was, or what it looked like. It could be a health substance they were ingesting.

Nope.

They knew. They’re not idiots, just really uncomfortable watching drug addiction and homelessness hold hands on a park bench. There are few things that are more of a departure from normal suburban life than sitting next to two homeless men as they take turns roasting a crack rock.

Fine. Weird, but they can handle themselves. We’ll just finish our Deli Board and I’ll take them to Twin Peaks like we planned.

Ignoring the crackheads, we continued to eat lunch. In my peripherals I spotted another man approaching us – a man I could only hope was going to let us eat in peace. When I turned to look at him, my hopes were crushed. There’s no way my parents are coming back once they realize he’s walking right towards us. Not because he was dirty, or smelly, or smoking crack.

They weren’t coming back because he was holding a sword.

This was a new one, even for me. Apparently, Man With A Sword had gotten his bike stolen in the park just seconds before walking over, sword brandished, and asking if we’d seen anyone riding a white bike. Or the police.

“NoIhaventsorrybuddy” I spit at the person who’d just beheaded the last chance that my parents would ever visit me again. “We’ve been sitting here for 15 minutes and haven’t seen anything.”

He walked off. I quickly requested a cab and took them to Twin Peaks. $30 and one beautiful view later, I was in the clear.

They haven’t visited since.

There’s a war of opinions going on in the B2B software world, and one side is winning. The war is over one fundamental question – how should I price my product or service?

No doubt, pricing is an incredibly nuanced and complex topic. I wrote a rather simplistic piece as a thought experiment, and had redditors suggest I should go back to school and understand price elasticity. Thanks, guys.

I’ve read a lot about SaaS pricing, including some very convincing arguments against Freemium. They basically boil down to these points:

1. Free-to-paid upgrade rates are incredibly low (true)
2. Free customers are often your worst customers (also, often true)
3. Free customers suck up support and engineering time while giving nothing back (true)
4. You lose out on users that would have paid you but opted for the free plan instead (true, though hard to quantify)
5. They cost you money if they come through any paid marketing channels (ads, affiliate, etc.)

The prevailing thinking among software startups (led by people like Jason Cohen and Patrick McKenzie) is that extended free trials, or software trials with money-back guarantees are the best way to convert prospects to real, paying customers. For the most part, I agree.

However, I think there are also benefits to the Freemium model that don’t get talked about besides the fact that you’ll likely have a higher visitor -> signup conversion rate. Some other ways Freemium is useful:

Allows for risk-free testing of product features. At any sort of scale, an effective Freemium program means you have hundreds or thousands of free users. This gives you a lot of flexibility in terms of features you can test with your audience. You can build a very basic version of a new feature and see if your free users like it – all without worrying about whether or not they’ll cancel if it doesn’t work exactly as expected. You can also run cheap tests where you message or email your free users, pitch a feature and see what excites them. What features do they use and what don’t they?

Test referral programs. Having a large group of free users can be beneficial in terms of testing referral programs and getting new users. For one, an effective referral program takes a while to get right. If you’re constantly running tests to get your paying users to share your product, there’s a risk that they’ll get angry and cancel their service. Small risk, but still something people worry about.

On the other hand, having free users gives you the opportunity to test many different variations of a referral program – both because you can run more tests and because there are (presumably) more free users than paid. All else being equal, if you have an effective referral program, and 5x as many free users as paid, referrals could be an effective marketing channel that comes at the marginal cost of supporting free users. For any company with a product that requires group communication or social interaction, a referral program that utilizes a large cohort of free users can be very effective.

Test upgrade levers. Having free users also gives you the opportunity to test what makes them want to upgrade. Does a certain feature drive lots of upgrades? How about hitting a certain number of users? Or a storage limit?

Whatever it is, you can measure the main reason why most of your free users upgrade to paid. Once you have that information, you can then design your product’s onboarding process to move them in a direction where they get to a “quick win” moment sooner. For example, if most customers upgrade after hitting a certain user limit, you could design your onboarding process and create triggers that cause them to invite more users as they naturally engage more with your application.

As a side note, Freemium can also be valuable if you have a whole suite of products you can cross-sell or upsell into your audience. In this case, Freemium becomes a cheap marketing channel that comes at the cost of supporting your free users.

Have a larger audience. Assuming that having a free product tier means you’ll have more signups, adding a free product tier means that you will have a larger audience than if you went paid-only. Having access to this larger audience – and an easy way to reach them – makes other marketing activities easier. Things like partnerships, co-marketing, joint webinars and referral programs are all easier to land if you can tell a prospective partner you have several thousand customers, rather than several hundred who are paying.

This makes sense. Partnerships and other co-marketing activities take a long time and are tough to get right. What makes them attractive is access to a large pool of potential new customers. The smaller this pool, the harder it is to get interest.

A more attractive acquisition target. Earlier I mentioned that a cohort of free users can be great if you have a suite of products to upsell into a captive customer base that isn’t paying you yet. Developing a suite of products (not to mention supporting, improving and marketing them) is really hard and takes time. But guess who does it well?

Big companies.

Big companies have tons of products they’re just itching to sell into new markets. When a large company looks at your company as a potential acquirer, you can bet they’re going to price the number of users into the acquisition. They’d much rather acquire a company doing $X per year with 5000 free users than one just doing $X per year – it gives them new segments to sell into and can be a competitive advantage.

I’d love to hear your feedback in the comments. Or, sign up to get irregular emails about marketing, SaaS and startups.

For 3 years I’ve been trying to learn programming. And every year, I’ve deepened my understanding of how the web works.

Learning the basics of software development and how the web works at a high level hasn’t been easy. The best learning experience has been to dive in. I’ve learned so much in the past year working for Airbrake (a developer tools company now a part of Rackspace), talking to customers, and becoming a part of the developer tools space.

Throughout my research, I never came across a single post that’d give a non-technical person a broad base of knowledge they could then use to specialize. I’m hoping for many other non-technical people, this is that post.

How the Web Works

At a high level, the components of the web look like this:

Ok. If I had seen this 2 years ago, I wouldn’t know where to start. Let’s roll through some definitions here.

The App Layer

For complex websites the app layer encompasses your actual application: a web app, mobile app or basic WordPress blog. A website’s application is what you think probably of as the actual site. It is everything you click, see and interact with.

Let’s take Facebook. Their application includes the interface where you can see friend’s photos, upload pictures, post stuff, like other things, comment, add friends… you get the picture. The application is everything you interact with.

A website is like an iceberg. You know how 80% of an iceberg’s mass is below the water? A website (or application) is similar – most of the action occurs under the surface. How you interact with an application is determined by…

The Stack

As a tech company, your stack refers to the list of tools, languages, frameworks and databases you use to build your application. These languages can generally be separated into two buckets: front-end and back-end languages. These buckets interact to provide the overall experience of using an application.

The front-end  determines how your application looks when pulling it up via a web browser like Chrome or Firefox. A web browser does one thing: it reads and displays the front-end languages that a page is made of.

Front-end languages include HTML, which makes up the text on a page, CSS to style that text and other page elements, and JavaScript to make things on a page interactive. For example, if you hit the “Follow @jwmares” link on the upper right of this page – which you  should – clicking that link runs a JavaScript command that fetches your Twitter information from cookies in your browser and sends a command to Twitter that says “add @jwmares to the list of people I follow.”

Cool, huh?

If this still isn’t making sense it might help to get an idea of what a web browser actually does. If you’re curious what a website looks like to your browser, right-click and hit “view page source” on this (or any) webpage. You’ll see what your web browser sees – HTML tags with their layout defined by CSS stylesheets and their interactions defined by JavaScript scripts.

The back-end includes everything that happens before stuff hits your browser. It might be simple (like a program that displays the date and time) or something more complex (like Facebook, Twitter, eBay or hundreds of other applications).

Let’s take eBay for example. Everything you do (product searches, rankings, price checks and payment) all happens on the back-end.  Typical back-end components include a program (written in a back-end programming language like Python, Java, Ruby or PHP) that determines what an application can do, and a database that stores any relevant data.

In the case of eBay, you have specific programs that determine how to display products – how to rank them for specific searches, how to display the prices, how to update given people bidding on different products, and thousands of other use cases. These programs fetch necessary information from a database that stores everything a website needs to hold.

In a lot of ways, this is analogous to Excel. Think of Excel as a massive database, holding every bit of information you need regarding your product. Actually, when you’re writing functions in Excel (things like “add this column, subtract this value from this value), you’re writing programs! Web programs do the same thing – return and manipulate information that’s stored in a database – just on a much larger, more complex level.

Some common languages often used for the back-end include:

• Ruby
• Python
• PHP
• Java (which, confusingly, is totally different than JavaScript)
• Perl
• ASP.NET
• C
• C++
• Go
• Erlang
• Javascript (Node.js)

Each of these languages can accomplish roughly the same thing, though there are tradeoffs in terms of hiring, speed, performance, etc. that I won’t get into.

Common types of databases (also called data stores) are:

• PostgreSQL
• MySQL
• MongoDB
• CouchDB
• Redis
• Riak
• NoSQL
• Oracle
• Microsoft Access

Phew. That’s a big (and confusing) list. As someone trying to familiarize yourself with tech, you don’t need to understand exactly what each of these programming languages or databases do. Instead, you should be able to understand the context in which someone has expertise. For example, if Redis or MongoDB comes up, you should understand that each is a tool used to store data.

Programming frameworks are the last thing I  want to touch on. Programming frameworks are tools that make it easier to build something quickly. Think of your typical web application. Most contain common elements: an account creation process, shopping cart, etc. Frameworks help abstract away many of the more repetitive components that need to be built for a website by giving developers pre-built “gems” (or libraries) with functionality already included. For example, if you want to build a shopping cart, Spree provides a framework that makes it easy to build one.

As an analogy, think of building a house. The frame of every house is similar – wooden boards nailed together to form a basic structure. All the customization that makes a house unique goes on top of this frame – the finish in the kitchen, the layout, paint on the walls, etc. What’s remarkably consistent across houses is the frame. If you wanted to build a stable house fast, it’d save you time to use a prebuilt framework.

That’s exactly what using a web framework does. It allows you to build faster by taking advantage of prebuilt units of code. Rather than rewriting a shopping cart, you can use code from other developers who’ve built shopping carts in the past.

A complete list of frameworks for each programming language can be found here, but many of the popular ones you’ll hear about are below:

• Python – Django, Pyramid
• Ruby – Ruby on Rails, Sinatra
• PHP – CakePHP, Zend, Laravel, CodeIgnighter
• Java – Grails, Play!
• Javascript – jQuery, Backbone.js, Ember.js,

Each of these frameworks come with different software packages, known as libraries, plugins or gems (in the Rails community), that help developers accomplish specific things. For example, here’s a list of Python libraries and the different reasons developers may want to use them.

Together, these languages, databases and frameworks make up a product’s tech stack. Take a look at Instagram’s tech stack to get a general sense of how a tech stack looks to other engineers.

That was a lot to take in. The last two parts are somewhat simpler, and contain a LOT less jargon.

Platform

The platform an application runs on refers to any software platform they may be using to build their app. As you’ll see in the server section, buying or renting server hardware, managing those servers, provisioning them and scaling them can be a major time-suck. Many companies choose to instead focus on building their application, and build on top of a platform-as-a-service (also known as PaaS) like Heroku or OpenShift. Imagine if you were trying to work in Excel and had to download, install and set up a new version of Excel every time a worksheet filled up. That would take time and not help your efforts to build an amazing Excel model.

Basically, building on top of a platform like Heroku means you don’t have to worry as much about buying servers and scaling them. Instead, you can just push code to Heroku and let them deal with the inevitable provisioning, setup and scaling issues.

Not much else to say here, just that going this route is a lot easier than managing this yourself. However, it is more expensive so it may not make sense at a certain scale.

Server

Beneath the entire virtual world that is the internet lies something many don’t like to talk about. That something is actual hardware.

That’s right. Everything you see, do and interact with on the internet is a program running on top of a physical box. A server. That sits in a cooled room on a rack somewhere:

You don’t need to know a ton about servers to be honest, only that they have their own operating systems (usually Linux), and make up what people refer to as “the cloud”. If you’re using a cloud hosting provider like Rackspace, you’re paying them to manage your servers for you.

Cloud hosting is one of the major reasons it’s easier to start a web company now than it was 10 years ago. Rather than buying and setting up dozens or hundreds of your own servers, you can pay Rackspace to manage hundreds, even thousands of them for you.

How Software Actually Gets Built

First, there are different stages (known as environments) in which software gets built. There’s the dev environment where software engineers work on building new features. These are things that are being worked on but aren’t ready to go live just yet.

Developers will use tools like GitHub to manage and share versions of their code (and push code live); an IDE or text editor to write code, and a staging server to host the code they write. For managing and spinning up servers, they’ll use tools like Puppet or Chef to ensure servers are set up in a consistent way.

Once features are ready to go live, they get pushed (or deployed) to what’s known as a production environment. At this point, the code has likely run through a series of automated tests to make sure it won’t break anything once it’s live. There’s a whole subset of software development – DevOps – responsible for deploying code into a production environment, and making sure that the deploy process goes smoothly and is consistent. To get a better understanding of this process, check out an interview I did with a lead engineer at Stripe and another with Digg’s former lead architect, Joe Stump.

Why Is All This Important?

Understanding how the web works from a technical perspective – even at a high level – has been extremely valuable for me.

I’ve made bad hires because I didn’t understand the skill-sets of people I was interviewing. I’ve lost $14k (as a college student no less) because I didn’t grasp what I was hiring developers to build, or comprehend what goes into building an application. I was completely blind.

Especially if you want to start a company, learning how technology actually works is imperative. As this article mentions, non-technical founders create successful startups by having these 4 traits:

1. Technically literate
2. Product oriented
3. Have cash
4. Are well-connected

As software seeps into every sector of the economy, it’s even more important for employees of all kinds to understand tech at a basic level. Your sales, support, marketing and community hires will all be better off if they have a basic understanding of how the web works, and how their software product fits into that landscape.

Early on at Airbrake, I had to turn a non-technical account management team into one that could talk and sell to developers. This process made me realize how few people understand how software is actually built, and how hard it was to explain. Hopefully, this post provides a jumping-off point for the many of you that want to improve their technical literacy.

What parts of this do you still have questions about? What have you struggled with in the past? Leave a comment below, and I’ll respond to every one.

I’m tweaking this older post as part of Startup Edition, a community I recently joined. This week’s edition asks “how do you turn your idea into a company?”

After reading this fantastic post I started thinking about how startup will jump into an idea they’re excited about. The problem is, many of them make the leap without doing the necessary research.

I’ve seen quite a few people start a company thinking of the riches that will soon be theirs, only to realize that their idea isn’t going to work. I almost had the same thing happen, but instead went through a serious process of idea research, which I cover below. Instead 0f spending 3-4 years of my life working on something with a high likelihood of failure, I’ve been able to do some other cool stuff.

The basic idea was this. College tuition is ridiculously expensive, and different people receive different value from their educations: a computer science student from Harvard has vastly different earning/job prospects than an English major from the same school. However, these two students pay the same tuition and borrow money at the same rates, which are based on family income. In financial terms, a student with an engineering major from a top 50 university is a low risk for default, but priced as if they defaulted at the same rate as English or other majors. Thus, the idea was to give lower-interest student loans to engineering students – they’d receive a cheaper education, you’d receive a solid return from a low-risk asset.

Strong idea (I think), but I wanted to make sure that it was something that could work. I did all of this research to answer 3 simple questions:

1. Could I create something more valuable than what currently exists?

2. If yes, could I reach people to make them aware of my superior product/service?

3. Assuming things go well, could I make enough money to run an interesting business?

To answer whether or not your idea is better than the competition, you need to do some competitive research. Since most people start a company based on an idea (and not the size of the potential market), that’s where we’ll start.

Competitors

Your idea should have competition in some way, shape or form. Mine certainly did. If there’s no competition, it might be a sign that there’s no market for what you’re doing. In this step, you want to answer question 1: Can I create something more valuable than what currently exists?

The fastest way to find your competitors is to do a Google search for a relevant market keyword. For me, it was “private student loans”. Take a look at the Google AdWords that appear with your results. Any company with an ad budget (and thus an ad) means they’re likely a serious player – they have money to afford a marketing budget, and probably some idea of what it costs to buy a customer.

By clicking through each of your competitor’s Google ads, you can also see how they position themselves on their landing pages. What benefits are they selling? Are any of them claiming the same benefits you’d be bringing to the market?

This is a good sanity check – if some of these competitors do the same thing you’re planning to do, it doesn’t mean you have a bad idea. You could still out-execute, get better distribution or have a better product. After looking for competitors, I found that SoFi and Upstart were doing somewhat related things, in addition to the banks that do private student lending.

Once you know your competitors, it’s important to then get a feel for their company strategy. The way I usually do this is by looking at their jobs page. Depending on what positions they’re hiring for, you can figure out the direction they are heading over the next few months. For example, based on the campus ambassador job at SoFi, it looks like a key part of their growth plan is to have campus reps get fellow students to use SoFi. You can then think through the likelihood of that working as a channel, and if you’d be able to copy it if it worked.

I also checked out the Crunchbase for both companies, and saw that SoFi raised $77 million to roll out their lending program to other MBA programs. Based on this (and a careful reading of their company website), I figured that they are planning on giving out loans themselves, instead of just connecting alumni and students. This is a big deal, because it means that they were likely struggling to get alumni to fund students OR they realized that being a market intermediary wasn’t a profitable spot to be in. As you’ll see later, this was red flag #1 with the idea.

Although my idea wasn’t really web-driven, when doing competitive research on other web-based companies here are a few other things I look at:

• Compete to see their traffic data, and which way it’s trending
• Quantcast to get a rough feel for the demographics of their average customer
• AppData (if they have a Facebook or mobile app) to see how engaged their users are

At the end of this stage, you should know three things: who your biggest competitors are, the basics of their company strategy, and how you are (or will be) different from what they’re doing. If you think your approach has more value, time to dive a bit deeper.

Distribution

Once you’re confident in your product compared to competitors, it’s time to research how you’ll reach your potential customers. Understanding how you will acquire customers (and how your competitors do) is rarely done. This is unfortunate, because it may just be the most valuable part of your research. Having a rough idea of how much it will cost you to acquire a user informs just about every major decision you’ll make - what you’ll charge, how much you need to raise, how much of your marketing spend should be on advertising, and what marketing channels you should test.

Luckily, with all the free tools available you can get a really good idea of how your major competitors are driving customers. First, you can use Google Trends to look at the popularity of your competitors in the space. Who has been mentioned more often over the last months? What blogs/media outlets have covered them?

Doing this will give you a good idea of the blogs or media outlets that would be receptive to running a story about what you’re doing. This type of information is really important. Early on, while you’re still figuring out what you’re doing, copying competitor’s distribution channels is a good way of getting some early traction.

Next, you want to look at your competitor’s (likely) two largest sources of traffic – paid advertising and organic search. One of my favorite tools is SEMrush, which you can use to get an estimate of your competitor’s search engine traffic, organic keywords that are working for them, and where their traffic is coming from. In the case of SoFi, I was able to see that they did no advertising, and most of their search traffic came from people specifically searching for “SoFi” or related terms.

This can be really helpful in web-based businesses. For example, take a look at the SEMrush data for Dropbox:

From this, you can see that they have made SEO a focus of their strategy, and are working on expanding to other countries through paid search and organic SEO. That’s a good thing to know when figuring out how to attack the market. It means that you’ll have to do a really good job executing on SEO if you wanted to start a competitor, or choose a different vertical.

That most of Dropbox’s traffic is organic is further borne out by taking a look at Alexa‘s clickstream data. Here’s what that looks like:

This information tells you that Dropbox is doing a good job of driving traffic via Facebook, that Youtube accounts for a surprisingly large percentage of their visitors, and that they have many people searching for them in Europe. Overall, if I was looking at starting a file-sharing competitor, I would write off SEO as a channel through which I could beat Dropbox. They’ve done a great job, and it’d be extremely difficult (and take a long time) to achieve the types of rankings and traffic they have through SEO.

If I thought I could potentially do well with SEO, I’d use the following tools to dig deeper into this channel:

• Open Site Explorer to see where they get their links from.
• Sign up for a free trial of SEOmoz to see where the competitors rank for different terms, and determine how hard it would be to rank for certain keywords.
• Take the free trial of HitTail to see if there were potential opportunities to rank for certain longer-tail SEO keywords.

Lastly, I’d use the Google Keyword tool to figure out how much it’d cost me to buy search advertising, and see how much my competitors are paying for certain search terms. If it’s a lot, I now know that advertising may be a difficult way to acquire customers, and start looking at other channels.

At the end of this process, you should know a few things: how much traffic your major competitors are getting, where that traffic is generally coming from, what sites have linked to them, and an idea of whether or not SEO and PPC could work for you as acquisition channels. If not, start thinking about others - viral, partnerships, PR, etc. Starting a company with some idea of how you’ll attract customers vastly increases your chances for success.

Market

Lastly, you want to know how large your potential market is. This involves a lot of googling to answer the following questions:

Who are the major players in the space, and what is their total revenue? What is their market cap (if public)?

• Here, use the 10k’s of publicly traded companies to research total revenue, profits, expenses, and profitability history. Pay special attention to net income and expenses – where are they spending the most money? Are their profits growing or shrinking? Why?

What are people saying about the industry? What are some recent blog posts or press covering the market or its major players?

• Use Google’s search tools to see most recent blog posts or press mentions over the last month. How often is the market covered? Who covers it, and what are they saying about the market and the companies in it?

Is it a growing market? What gaps exist that I can leverage, and how entrenched are the players in the market?

• Here, look for industry reports and revenues of companies in the space. Also use Crunchbase to see if other companies raised money at increasing valuations in the past 6 months. That’s a strong indication that they’re seeing some kind of growth.

What do my potential customers care about?

• Use Delicious to see what popular articles people have tagged as memorable. What do they care enough about to save? For example, if you are thinking of doing a web analytics startup, take a look at some of Kissmetric’s most popular posts to see what people are interested in and found valuable.

At this point, I also set up Google Alerts for certain key terms in a market. For example, with our hypothetical fire-sharing competitor, I’d create alerts for the top 3 competitors and a few key terms (e.g. “file sharing” + funding) I wanted to monitor.

I’d also subscribe to a few relevant blogs that covered the space, and follow relevant players (and reporters who cover them) on Twitter. In the case of a file-sharing company, I’d follow Aaron Levie, the CEO of Box, Dropbox’s CEO Drew Houston, and a few TechCrunch reporters that you can see often cover Dropbox and the file-sharing space - Josh Constine, Sarah Perez, and Ingrid Lunden.

You can also do some basic market sizing by using Facebook ads to determine how many people are in your potential market. Noah Kagan talks about that in a great post here.

Lastly, get out of the building and talk to people. Having conversations with industry experts will expose you to problems and ideas that you can’t find on your own. Often, these people will be happy to talk to you – in my case, I even had one guy who wanted to invest after I did some of my research.

Why I Didn’t Do It

In the end, I passed on the idea for a few reasons. The largest one was the numbers didn’t make sense: starting a company that connects alumni or other institutions to engineers who need student loans is a great idea if you collect the 1-2% spread between private loans and what you could offer. If I had $50m+ I’d do this in a heartbeat. Otherwise, as a middleman, you’re only getting a small piece of the 1-2% differential between the loans you’d facilitate and the rates students could get elsewhere. You have to have a LOT of volume to make this a worthwhile business – even if you facilitated $500m in loans (about 16% of the total market), you’d still only make $5-10m annually.

So, the math didn’t make sense unless you were the one actually giving out the loans (the strategy SoFi seems to be taking). I thought about it, and given my status as a 23 year old recent grad, I didn’t want the potential success of the company hinging on whether or not I could raise $50m+ in capital to lend out to engineering students. When you account for regulatory and legal compliance issues that come with being a lender, and the idea just didn’t make sense for me to pursue at the time.

The last piece of this was a few conversations I had with people in the space. A few people I spoke with saw the opportunity, but didn’t think it could be a major business given the economics of the market. Additionally, SoFi has a mature and well-connected team of executives that I wouldn’t want to compete against in a market that will be rapidly changing over the next 5 years. If the price of college collapses, and the education bubble pops, SoFi is in a tough spot where they have to process more and more loans to reach the same volumes. Even if the cost of college drops 10%, that 10% has a big impact on the loan volume they can process.

In the end, it’s an idea I could have raised money for. I had a few people who said they were willing to invest, and a marketing plan that I’m confident would have worked. However, thanks to intensive market research lasting 2 months, I think I saved myself years working on an idea that likely wouldn’t have paid off.

I’d love your thoughts on this post. What ideas are you looking at? What concerns do you have before jumping in to start something?