Warren Buffet Principles Apply to Technology

Warren Buffet enlightened us to the fact that the stock market is governed by fear and greed. But then he said people should actually be fearful when the market is greedy and greedy when the market is fearful. Similar opposing forces apply to the software industry. Technology is driven by reality and hype. People should look for hype when everyone is based in reality. During a boom, companies should come to reality quickly if they want to survive the bust.

Some very lucky people were at technology startups around 1995. Companies going public prior to 1995 were forced into a strict reality of profitability. The general rule of thumb was several quarters of profits before you IPO. Then Netscape went public in 1995 with no profits and based on the hope, or should I say the hype, of the emerging Web. Look what they started by offering hype above reality. Their success changed the game for what was required by companies to create value in the market.

Imagine what may have happened to you if you believed in hype back then. Development of Hotmail started around 1994 and Microsoft bought it for $400 million in 1997. The product was just email in a browser which is something most developers could create in a weekend with PHP and the mail API. Broadcast.com was started in 1992 as online radio. In 1998, it went IPO and a year later was bought for $5.7 billion. The founders of Netscape, Hotmail and Broadcast.com were looking for the next great thing when most of the industry was stuck in reality.

Then the boom hit.

Everyone came flocking to the Internet and companies were starting all over the place. Idealab!, an Internet incubator, was working on creating a company a month. A company a month! How could that possibly lead to success? It takes years to build a great company. Yet, in 1999, 457 companies went public and a quarter of those doubled in the first day. If you define success by a liquidity event, then clearly success was to be had by many.

One of the most discussed business models was the land grab, a.k.a. the Amazon.com model. Don’t worry about profits or debt, just get as many eyes on your site as possible and stake your claim. Amazon incurred what felt like mountains of debt, and in the end out spent their competitors to success, though I don’t mean to trivialize the other aspects of their impressive execution. While some companies succeeded in this great California gold rush, like eBay and Amazon, many more did not. Why?

The bottom fell out.

In 2001, the stock market took a nose dive and the money dried up. A mere 76 companies went IPO that year. Most of the companies started during the boom went out of business or were gobbled up at bargain basement prices. What happened?

Companies were so focused on the hype and the land grab that they ignored one of the fundamental realities of business. When you don’t have any money, the doors close. Watch the movie Startup.com if you want to see this played out in real life.

Notables like WebVan, eToys, and Beyond.com floundered because they were caught up in the hype and expected the investor community to keep funding them. Had they paid attention to the reality of running a business that must pay expenses and do marketing to get customers, they could have weathered the storm and been the last man standing in a wide open field. Talk about a land grab. When hype implodes, the companies who come to their senses first will have the best chance of surviving.

History is repeating itself right now. The Web 2.0 movement emerged from the dust of the previous fire. The economy rebounded and money started flowing. Look at how many new companies are riding this wave, and as an aside, what’s up with those names???

Facebook is worth billions. MySpace sold for $580 million in 2005. YouTube sold for $1.65 billion in 2006. While many of us were just trying to stay employed, and others were switching back to their former careers, the savvy entrepreneurs remained dedicated to innovation and chance. Being at Google in 1999-2003, forgeddaboutit!

The movement was still hitting stride when some very notable investors in the valley revealed this presentation to the industry earlier this year. OK, to be fair, the economy was already in a funk. But yet again, those companies who were living on hype suddenly found themselves needing to preserve every dollar hoping they can reach cash flow positive before the lights go out. How many of these companies do you think will be around in a year or two?

What does this tell us?

If you believe Warren Buffet, then soon will be the time for hype again as everyone has just been forced back into the reality of trying to get through the crunch. Companies that have identified successful markets or products may run out of cash leaving a door wide open. Investors are preserving cash in case they need it to protect investments they have already made. How long do you think they’ll do that before they start looking for the next MySpace or Facebook?

Even more important, the companies that survive this contraction will be forced to become well-run businesses that effectively manage their bottom line. That in turn makes them attractive to investors provided the hockey stick growth is possible in their market. The money will flow again, that much is sure, if you believe Warren Buffet.

My advice to you is to let the market thin out for a year or so. Spend the time working in a stable job while you enhance your skills and brainstorm ideas. Then, when you have your next idea, a feeling you should definitely validate with all the smart people you trust, get started so that you will have a solid offering when money becomes more available again. That’s what I’ll be doing. I predict by 2010, the seed money will be flowing again. The best founders will not forget the lessons of economic down turn and opposing forces.

If you don’t think there are still great ideas out there, let me say that I still can’t check my voice mail when walking in my front door by just saying “What’s new?” I still don’t know how energy efficient my house is from reading a meter on my wall. I still haven’t worked on the product for my sister that I uncover in this post. And don’t even get me started about how many small businesses are still using desktop software.

Important Principles of Interface Design and Usability

When we design products with our clients, we seem to spend a lot of time talking about usability and intuition along with user interface aesthetics. You might be surprised at how many people focus primarily on look of their product and less on what the user is doing on the site.

My favorite example of usability gone bad is Amazon.com. Try finding your wish list or creating a new one. Try adding something to your shopping cart and then wanting to continue shopping in the same area you were at before. The only thing that says them is the usability of product search. But even then, the link to log in doesn’t even say log in. There’s simply too much focus on what they want me to do and not on what I am trying to do.

Take a look at these 3 legal Web sites quickly (10 seconds or less): Site 1, Site 2, Site 3. Waiting… Now, ask yourself, what do you remember? Don’t forget, you knew going in that they were Web sites having to do with law. I found one of these in particular that was clear and effective at communicating what was the focus of the site (do you know which one?). We often ask clients to send us links to sites they like to get a feel for their aesthetic values and design priorities. In the case of the law Web sites, the client walked in the door with one of these as an example of what they liked.

Web sites seem to be moving away from the crowded page like you might find on Amazon.com and moving toward the simple concept of “let’s get started.” This is a great trend. It worked pretty well for Google, if you compare Google to other early search engine sites.

Product interfaces should help the user answer 3 simple questions to be effective:

  1. Do I know what to do?
  2. Do I know what is going to happen when I do it?
  3. Do I like what I am looking at?

If your users are able to answer these 3 questions with a “Yes”, then you’ve done a great job. Let’s look at some examples.

Question 1: Do I know what to do?

If you compare www.avvo.com to www.nolo.com, you will see the difference between a site where the user knows what to do and a site where the user does not. Although, I think both of these sites could use a more informative name. Avvo has a search box in a prime location. The title says “Find lawyer”. I have no doubt than when I enter the name or location and click the button, I will get a list of lawyers.

Question 2: Do I know what is going to happen when I do it?

Have you ever really looked at the buttons on the Google home page under the text input field? You probably have not since hitting Enter works fine. Take a look and then ask yourself what does “I’m Feeling Lucky” mean. If you are not sure, click the button with an empty search field and you get a nice little explanation, “The “I’m Feeling LuckyTM” button automatically takes you to the first web page returned for your query.” How about naming the button something like “See first page” or “View first page found?”

Keep in mind that your users are generally trying to achieve something when using your product. They will feel more productive if they are focussed on that goal rather than clicking around to just see what happens. Use clear text for buttons that explains what will happen. Use text under icons to explain what the feature does just in case the user does not recognize the image.

Here is something you can try. Print your site, hand the copy to a friend who knows nothing about it, and ask them what the buttons do. You just may be surprised at what your friend is able infer from the image. We recommend of course that you fix anything they didn’t understand.

Question 3: Do I like what I am looking at?

Aesthetics still do matter. Function is more important. But after that, people tend to use products and Web sites that are pleasing to them in some way. I know that this is common sense. Surprisingly, from my own personal observation, companies that are really good at the first two points tend to fall down on the third. Which brings me back to our new partnership! Our teams work with clients to create intuitive work flows. And our friends at Luma are here to make sure the interface “pops”.

In addition to asking ourselves these questions, we also have some good tips to help with usability. Here are two of our best suggestions.

A great deal of research has been done with eye tracking to understand how people evaluate Web pages. Take a look at the blog by Eye Tools, Inc. The heat maps are very interesting. Another study to look at is done by the Poynter Institute in Florida. Click this link and scroll down to the section At the core: Homepage layout. We quote this information often when discussing design approaches with clients.

Eye tracking tells you where the user is most likely to look first. We suggest to clients that they put the primary focus of the page where users look first. You also use this to then determine where to put navigation, additional links, related information, etc.

We also own and reference several books by Edward R. Tufte. I recommend buying as many of these as you can, but be prepared for ideas that are part aesthetics and part design with hints of philosophy and history in between. What impressed me most was the power of data when presented in a way such that the images draw the conclusions. I am sure you will walk away with your own insights after perusing a few of his books.