Business Idea – Specialty Daycare

Post inspired by this article

Given that my previous post was about the advantages of catering to the whims of the rich (and their desire for “exceptional” good/services), it’s to be expected that I’ll have thought about a particular implementation of an idea that does this.

Rich people, and even some busy working professionals in the upper middle class, living in the big cities have a hard time finding affordable child care. Yes, there are those large magnet places (one colleague called Kiddie Academy the Burger King of daycares) you can just drop off your kids at, but why not aim for the best and most specialized?

What if you (I use this term loosely) start a daycare that offers something different? I suspect most rich people want to give their kids a leg up in life without creating a pressure cooker environment so early in life. So instead of a daycare that forces kids to do homework, why not one that allows them to learn and play but immersed in another language? Mandarin is the hot niche language of the age, and any educated parent knows that being a childhood learner is better than trying to learn it as an adult.

The ideal owner-operator will be a white female (whites are more comfortable with their own kind, and Asians think whites are more loving and nurturing, while women are see in general as better with people, not to mention less likely to molest/abuse a child) who speaks fluent Mandarin at the same time. Playtime, lessons, and general language of conduct will be entirely in Mandarin. Other usual child activities like puzzles, stories, and colouring books will of course be present. The service will be marketed to wealthy upscale urban couples.

The idea was inspired in part by another coworker, who specifically hired a Hispanic au-pair to babysit her child. She specifically wanted someone who could speak Spanish to the baby. Apparently, this phenomenon of getting a leg up on your peers is starting earlier and earlier in the competitive Bay Area.

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Startup Philosophy – Cater to the Whims of the Rich

Warren Buffett has always published insightful yearly shareholder letters. This year’s is no different. The key passage that stood out to me was his critique of the hedge fund industry. With the exorbitant fee model, and given the fact that even their own managers don’t invest in their own product (what’s the opposite of dogfood?), why do they still survive?

Uncle Warren explains the answer:

I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate.

The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive.

In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites” – wealthy individuals, pension funds, college endowments and the like – have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is –on an expectancy basis – clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.

Emphasis mine. That there is the key to understanding that there is money to be made in catering to the whims of the rich. I’ve always thought but never said out loud that the keys to a successful startup are one (or more) of the following:

  1. Get paid
  2. Get laid
  3. Feel special

This sets apart the *great* startup ideas from the merely good ones. Take for example Airbnb, Uber, and Coffee Meets Bagel. For the end user they offer convenience, but they also offer other incentives – matchmaking or earning money – to the participants. Contrast that to any sort of home food delivery service (which were hot startups not that long ago). Sure, they were nice incremental convenient improvements on the status quo, but they weren’t life changing. I could just as easily call up the restaurant myself for not that much difference in value.

The special sauce comes with #3. Basically the user must think there’s something mystical or unique about the service’s secret sauce that’s an improvement over everything else. Airbnb and Uber are great ways to monetize (for a decent amount of money) assets that you already have. Nothing else out there is comparable. CMB gives you the right amount of control over matches and simplifies the overwhelming dating world.

The last category can be a stand alone business idea all by itself. Just think to all the hostess cafes in Tokyo where a cute young woman caters to your every whim (except sex). That’s a huge boost to a shy nerd’s self esteem. Great niche to be in, as these guys tend to be high earning engineers! A hedge fund can basically be thought of as a hostess cafe for the wealthy. Here come all these experts to fawn over you and make you feel special. I bet that at some level the rich know that they’re going to lose money compared to an index fund, but nothing beats the thrill of having access to Ivy League educated experts at the tip of their finger. That fulfillment, and not any actual investing expertise, is essentially the business model of a hedge fund.

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Business Principle – Make Lives Easier, Simpler

Sometimes on here I’ll post interesting business ideas I have, right down to the specifics. At other times I’ll speak more on general principles guiding a successful business.

Let’s start by identifying a need. One thing I’ve always needed since I was young is a way to save interesting articles online for posterity and re-reading later on. I was a big reader and when news and blogs emerged online, I wanted to save things before they got deleted or moved behind a paywall. In other words, I was practicing something similar to scrapbooking, which was a great childhood hobby for many people in the previous generation.

Now for someone who is technical, it’s easy for me to save documents as html files or print via chrome as a pdf, create a series of folders, and organize things the way I like. It’s so quick and easy for me that it’s hard to fathom that the same is not intuitive for people who are not so technical. This represents a larger global need but not a personal need, and it’s hard to be a successful visionary creating something that you personally don’t need.

In this example, someone can start a company letting people easily pin photos or essays or articles onto their own free personable shareable scrapbook. It’s called pinterest.

The principle here is to meet a need (especially old hobbies in a changing world) and to make life easier and more convenient for all involved, but especially the non-experts.

What would be something analogous yet uninvented? In my own field of health care, there’s a need for the medically illiterate to help them manage their medicines. What about a personal pill tracker that synchronizes with your medical chart at the doctor’s office and give you timely reminders to take your medicines on your phone, as well as information about why you’re taking a certain medication and side effects or precautions to watch out for? Google is already attempting something with its own Google Health initiative, which syncs nicely with its Android devices.

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Why It’s Easier to Create a Tech Startup

Picture this. You are a new biology PhD, and you have a great idea for a new drug that will cure a disease. It will be revolutionary and improve the life of millions. You will have complete monopoly of the market and you’ll be able to charge astronomical prices. You work hard, spending years of nonstop research, jumping through FDA hoops, and all the time attracting little funding and earning little money for your efforts. Finally your efforts are rewarded and you cash out in stock after twenty long years.

The opposite story is that you are an unemployed tech worker laid off in the 2008 recession. You team up with one of your college roommates to launch a new social media platform or sharing economy app. You attract incredible venture attention, get to siphon off six figures for yourself in income, and even though the product isn’t profitable, you have enough “eyeballs” to get bought out by a big company like Google or Facebook.

This isn’t too far from reality. The first story is roughly that of Gilead Sciences, a pharmaceutical company behind sofosbuvir, a revolutionary treatment for hepatitis C. Though the company was founded way back in 1987, it took them until 1992 to go public, and they only got $86.25 million in IPO proceeds. Many decades of slogging through developing later they finally got to their big moneymaker, only for it to make headlines for being too expensive, gaining FDA and legislator scrutiny.

The second is pretty much any moderately successful tech startup. YouTube probably fits the bill the best, but Uber and Airbnb are comparable as well, both of which are valued in the tens of billions.

It’s a headscratcher. Innovation in biology and medicine is tough. There’s a lot of man hours spend pursuing potential drugs, some of which don’t pan out. And then when you finally do discover something, gain FDA approval, and expect to make a reasonable profit, you are blasted by the media for price gouging. Why would any budding entrepreneur focus on bioscience, when there are faster and cheaper ways to wealth in tech? In contrast, tech is capital-light, valued highly by the market, and doesn’t take much expertise to get going.

Think about it this way. Any unemployed guy in his family’s basement can bust open a coding book, learn how to make apps, and start a company. It takes true skill and deep expertise to do the same in the biosciences. Innovations in biology arguably add more to human happiness and lifespan than a new app that remembers where you parked your car.

One is true innovation, the other is mere banality. But when it comes to making money for the lowest investment, there’s no comparison.

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Making Out Like a Bandit While Your Startup Burns

That’s what skewered shareholders are accusing of Theranos founder and CEO Elizabeth Holmes of doing.

Funny, this whole thing reminds me of that Futurama episode when Fry is convinced by a snazzy partner to launch a startup with all pizzazz and show and no actual substance. The goal of course is to angle for a buyout/cashout while eventually jilting the investors. This is really what Theranos has done.

Let’s look at the facts behind the situation:

  1. Elizabeth Holmes assembles a prestigious group of people more for their credential and connections than for actual talent and knowledge of the industry
  2. She dresses like and bills herself as the female Steve Jobs, leveraging her Stanford professor and school name
  3. The company says it has a secret technology that will disrupt and revolutionalize the lab testing industry (if this were real, the 800 lb gorillas like Medtronic, which is making continuous glucose monitors for diabetics, and Quest, which processes many lab specimens, would have jumped on it already and innovated themselves or bought the technology from Stanford)
  4. The company actually ran some specimens on Quest machines and sent the results on as their own
  5. Internal dissenters who warned and tried to whistleblow were fired, bought out, or otherwise silenced

What can we learn from this? Well, the company is likely bankrupt from shareholders and the FDA bombarding it with lawsuits. The stock is worthless. The big question that remains is whether Holmes gets to keep any of her salary and already cashed out stock, or if there’s some attempt to claw it back by shareholders. If the clawback is unsuccessful, this will set a precedent for future entrepreneurs that selling the idea is more important than having an actual product.

So go ahead and try it at home. Craft a pitch of a zany idea backed by data that makes it plausible. Hype it up, attract investors, grow the userbase (easy to do in tech) or hire enough big name people to generate enough buzz, and then cash out or sell out.

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Newsflash: Clickbait Beats Real News

So much for making an honest buck the old fashioned way. Teenagers in Macedonia have cashed in on the Trump craze by creating sensationalist but false news articles and then sharing them virally on social media. By all accounts, this was a lucrative arrangement, with some top performers grossing $10,000 per month from AdSense revenue.

From the perspective of the educated elite, it can be disheartening that people are dumber than before, so much so that they believe what they read. For these people, the more outrageous the news, the more clicks and donations are generated. Real news by contrast just doesn’t have the same appeal.

However, on this site here we are politically agnostic. So what’s the take home message from the success of fake news? Sensationalism sells (by generating clicks and eyeballs, and get shared virally due to the outrage they generate). In contrast, bland and boring rarely gets one very far. You know what else sells? Sex. Just take a look at the average Yahoo news article. A cursory glance at the sidebar shows the following ads:

  • She Hid the Truth Until This Photo Appeared (black/white photo of a half naked actress)
  • She Didn’t Notice And The Fans Began to Cheer (photo of skimpy female sports player on the ground)
  • McKayla Maroney is Completely Unrecognizeable Today (photo of young gymnast smiling)
  • United Airlines Furious After Crew Revealed This (flattering angle shot of smiling flight attendant, emphasizing her smile, figures, and tights)
  • Jim Cramer: Homeowners Must Move Fast On Rebate (photo of a shrugging Jim Cramer)
  • It May Be the End of Social Security (RIP tombstone of Social Security)
  • Federal “Mortgage Payback” Goes Into Effect Today (businessman in a suit)

The overriding theme is: how to make easy money, pictures of skimpy women, and threats of easy money being taken away. Empirically, this is what the audience is interested in. Does this erode trust in institutions and authority? Are businesses promoting bad behaviour by appealing to base instincts, or are they simply catering to their customers? You decide.

Regardless of your opinion on the ethics of this type of advertising, the conclusion that we may draw here is that targeted sensationalist messaging can really enhance revenue. As the successful fake news sites can attest, this can be a self-contained business idea in itself. For example, if you’re unscrupulous, you can start a website (for very low cost) aimed at exposing the truth behind prescription drugs and how natural remedies are so much better. Then write fake news articles with studies showing how ___ vitamin beats a common prescription drug for ___ common diagnosis. You can throw in there a few snippets or quotes from prestigious doctors. Then add another article about how there is a mainstream medical conspiracy trying to cover up these cheap cures. Then advertise with sensationalist message on Yahoo (so desperate for revenue they are that they can’t afford to cut off clickbait, unlike Google and Facebook).

Shifting gears, if we want to be a bit more ethical, we can still adopt this style of marketing but still maintain our integrity by posting well-researched articles grounded in reality. Look at the most successful personal finance bloggers and travel bloggers out there today:

  • Young Adventuress – young attractive female living life of leisure
  • Mr Money Mustache – outrageous claims of financial independence early
  • Legal Nomads – young attractive female living life of leisure
  • Nomadic Matt – I live a leisurely life of travel at a young age, and you can too

All of them employ clickbait tactics in some aspect. The female bloggers may not realize it, but the fact that they are young attractive females contributes significantly to their readership.

The technique is yours. Whether you use it for good or ill is up to you.

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Compromising Values for Profit

If you want to stay true to your morals and values, stay small. That’s the lesson from Nate Silver’s successful FiveThirtyEight blog/platform for election predictions.

There may also be a second major issue with FiveThirtyEight, which we will describe as one of economy. We start this part of the discussion by noting that every one of us who is writing about politics this year benefits from a horse race. “Things are the same as they were yesterday” is not a story. “Clinton extends her lead” and “Trump makes up ground on Clinton” are. Similarly, we also benefit from finding things that are new and different to talk about. Sen. Bernie Sanders (I-VT) and his rallies tended to get relatively little media coverage; not because of any particular bias against him, but because they were all the same. You can only write, “10,000 young, mostly white people show up to cheer Sanders” so many times. Hillary Clinton, evenhanded and cautious as she is, also tends to give us relatively little to talk about much of the time. With Donald Trump, on the other hand, it’s several new and outrageous and previously unheard of things almost every day. Hence his dominance of the headlines.

Point is, all the political sites have a certain bias towards “dog bites man.” However, there is reason to believe the bias is unusually strong for Silver and his crew. Many political sites and prognosticators—NBC News, the Wall Street Journal, Fox News, Bloomberg Politics—are part of organizations for whom political coverage is part of their core mission. Others—Sabato’s Crystal Ball, the Harvard Political Review—are part of (and are supported by) universities. Still others—HuffPo, Breitbart, Politico, The Hill—are already stable, self-sustaining businesses. And a few—this site, Sam Wang’s Princeton Election Consortium—are side projects of academics who already have day jobs. The point is that while we all like page views and clicks, none of these sites is—as far as we know—facing an immediate existential crisis. Page views could go up or down by 50%, and most or all of the above would keep on trucking.

In short, the article accuses Nate Silver of selling out for money rather than maintain purity of form with insightful and articulate wonky coverage of elections. This is why the most profitable ads that you see on sidebars of major sites are Outbrain specials with outrageous sounding taglines like: “The cameraman kept rolling when she did this” and a picture of a half naked woman. Or how about, “You won’t believe what Donald Trump’s daughter looks like now.” Unfortunately for humanity, insightful blogs like this one and Marginal Revolution can only hope to get half the number of clicks and views, because we cater to the intelligentsia rather than to the lowest common denominator.

Unfortunately, the business mantra of know your audience and know your customer apply to online as well. Just like in the real world, sex, celebrities, and controversy are what draw customers and eyeballs. Eventually, in order to make money, businesses have to bow to reality and cater to this crowd. The alternative to retain control is to remain small and niche (and by extension less profitable), without an overlord or owner to dictate content based on productivity.

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A Profitable Protected Franchise

Surprised to know how profitable auto dealership are? So was I.

Franchise laws include prohibiting manufacturers from terminating existing dealers without “good  cause,” requiring the manufacturers to sell through franchised dealers, and protecting dealers from competition by awarding exclusive territories.

These laws favor the dealers so much that when General Motors GM, -0.22% eliminated its Oldsmobile brand it coughed up $1 billion to compensate dealers, and still couldn’t avoid becoming embroiled in lawsuits. Adding to the dealers’ advantage, some states make it illegal to circumvent the dealers by selling cars online.

Dealers are profitable even when manufacturers are floundering because the dealers make money on servicing old cars and selling used ones. One reason servicing cars is so lucrative is because dealers mark up parts by as much as 80%. For example, a dealer may charge $1,800 for a turbocharger that costs around $1,000. So the dealer pockets $800 before adding labor expenses.

Yeah, there’s a reason Warren Buffett wants to get into this business. When you generate a big proportion of state sales tax revenue, you have incredible leverage to get your favoured bills through to protect your business, at the expense of the average man. How can the rest of us avoid paying tax to this cartel? Move to a place with better public transportation and never drive again.

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New Media vs Old Media

Just read this article about ESPN and how it’s contributing to a drag on Disney’s bottom line. Funny thing is that for the last decade, it was a major profit guzzler while Disney’s other divisions were dragging it down. But now, due to cord cutting and gradual aging of people used to paying for cable, ESPN is finding that even live sports can’t hold the attention of the masses. Their viewership is declining relentlessly.

What should you do when there are fundamental technological changes destroying your customer base? Adapt and disrupt yourself before someone or something else dose. What specifically can the cable giants do? Move their operations online, where more and more consumers are. Rely on advertising or charge minimal paywalls (like HBO) for gated access to premium content. Hulu is a viable medium for archived episodes, while Youtube can stream live shows. Accept lower profits for higher market share in a dwindling industry. Are they likely to implement these changes? Doubtful. Large businesses are by nature conservative, and CEOs are more likely to be fired for rocking the boat than by riding a dying business model to the grave.

Coincidentally, another example of an industry that’s facing rapid technological change is that of computer chips. Whether it’s Intel, AMD, or Nvidia, they’re finding that fewer people have need to upgrade their computer and buy faster chips. We’re so far from being bottlenecked by the CPU today, while we get much more bang for the buck by upgrading the RAM, hard drive to SSD, or broadband internet speed. So what are these chip makers to do when people are slowing the upgrade cycle and some opting out by relying on mobile devices? They go on a quest to find a new must have product or technology that requires more computing power. Gaming was historically the big driver over the last few years, but the next big advance that everyone is betting on is virtual reality.

Herein is an opportunity for up and coming developers or aspiring entrepreneurs. Just like the mobile revolution unleashed a market for gaming apps, so can talented programmers plan for creating worlds in VR. One need that I’ve identified – creating a simulation program for surgery trainees to practice doing surgery, with all the unanticipated complications along the way. It will take a major team of programmers, visual designers, and surgeons to create, but it has the potential to revolutionize how surgery training is done.

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