An interesting thought from Keith Rabois on Quora:

To be truly successful on the Internet, you need to build something that becomes one of seven sites that a large swath of users will regularly use

I think this is a great way to evaluate companies one is thinking of joining, building or investing in.

Initially I wasn’t sure on the significance of seven, so I did some googling. Turns out that seven (plus or minus two) is a “magical number” in psychology initially cited in a paper by George Miller of Princeton University. Sometimes known as Miller’s Law, it argues that the number of objects an average human can hold in working memory is 7 ± 2.

While I haven’t used Rescue Time in a while, I’d be curious to look at its data set to see how regularly individuals’ top seven sites change and what are the key prompts: changes in lifestyle? Fads? New technologies? Job related? I imagine for most people there are 2-3 websites that will rarely change (ex: your preferred search engine, likely Google), but as you move to sites 5-7 I’d be interested to know more about turnover.

More than reading blogs, I love watching videos of entrepreneurs as they discuss their specific strategies and business models. Overall, I find video to be much more candid and revealing. This interview between Michael Arrington, Eventbrite co-founders, Kevin & Julia Hartz and Sequoia Partner, Roelof Botha was my favorite of 2009

Years back a professor drew me a diagram of what he called the most powerful model in all of business:

Tonight while I was thinking about business models, the web, some friends ideas and workstreamer I pretty much decided he was dead right. Anytime you can add structure to the unstructured you’ve got yourself a sweet opportunity.

I recently got to speak with the COO of Lore Systems, Laurie Freeman [Disclosure: Lore is a sponsor of this blog and I can't recommend them enough!] My questions for Laurie had to do with what value outsourced IT providers can offer in our down economy.

“The Savings Potential of Outsourcing”

According to Laurie, the largest line item (and hence biggest cost suck) in a budget is normally staffing costs. This is particularly evident in the technology and startups space where leading venture firms like Sequoia are forcing portfolio companies make large staffing reductions as a first line of defense. Lore has found that SMB’s typically staff an average of 2-4 full-time IT folks, often at an annual cost of ~$500k. What’s more, many IT employees are often underutilized to the tune of 50-60% or even lower. Such underutilization of IT staff can be related to available infrastructure, the staff not being fully competent or trained-up on requirements (often IT staff have been moved to IT from other areas), or resulting from a lack of understanding and communication between non-tech savvy management and IT. In any of these cases, Lore can make a large and immediate impact to a client’s bottom line by simply raising the utilization rate to 100%, and relying on Lore expert staff to perform the work of 2-4 non-expert and salaried staff at a fraction of the cost.

A typical scenario for Lore is to begin working with a client in the process of removing 2-3 of its full-time IT staff. In most cases Lore assumes 40-60 hours per week of managed services (remember that staff utilization rates will go from 50% under internal management, to 100% with Lore). The on boarding process is seamless and typically the number of hours assumed at the beginning by Lore, goes down (not up) as Lore helps set up automated internal systems and processes. Companies are typically shocked by the difference in efficiency, cost savings and professionalism they get by working with Lore.

More frequently Lore is also performing individual audits and IT assessments, helping potential clients identify and quantify the value of a shift from in-house to outsourced staff. Because Lore’s domain expertise and vast experience, they are able to quickly make assessments and identify inefficiencies in current systems and processes. Sometimes simply ‘knowing’ is half the battle. Laurie described one client who’s IT staff simply was not aware of the latest technologies available. Lore was able to come in and completely overhaul the IT network infrastructure using VM Ware virtualization tools.  The Client achieved a 40% reduction in its power consumption and consolidated their existing 60 servers down to 9.  Depending on requirements, server consolidation can be even more dramatic.  Given the high costs of power, the necessity for thinking green and a need for greater corporate responsibility, Lore’s offerings and services are sure to resonate in board rooms large and small.

As always, if your company is considering an outsourced IT provider, Lore would love to talk with you.

Laurie can be reached by email at: lfreeman@lore.net

Lore is also looking to hire talented engineers and sales persons. For more information on opportunities please visit Lore’s website.

From the Kauffman Foundation:

Given all the attention paid to business plans as precursor to business start-ups, you would think that there would be strong evidence that such plans lead to better business outcomes. Somewhat surprisingly, the linkages aren’t quite so clear.

New research sponsored by the US Small Business Administration (SBA) finds that the formality of business plans does not seem to have a significant impact in what entrepreneurs do before and after starting a business.

[That said] plans do affect the timing of various activities if the planning occurs before a venture is started. With a plan in hand, new entrepreneurs are more likely to complete critical activities, such as market research or developing financial projections, earlier in the start-up process. (see study here)

So, do business plans matter? The answer is yes and no.

First, the process of business planning has shifted. Business planning used to be about market research and financial modeling. Now, the most interesting elements of business plans are the distribution models and customer discovery. Market research is no longer cumbersome; one can easily find relevant data online or use other advanced techniques to begin immediately testing the validity of a concept. Financial modeling was always a guessing game, but with web 2.0 and the more recent death of advertising as a viable monetization model, financial modeling is even less important. It is far better to get traffic and focus on converting a highly engaged subset to paying customers.

Second, the importance of a business plan in the funding process has greatly diminished. Investors are understandably much more interested in seeing a product than in reading about it conceptually. Thus, an entrepreneur’s efforts are better spent wire framing and building prototypes than in finding citations and editing dense paragraphs of text. There are also documented studies showing a discrepancy between what venture capitalists say they want from entrepreneurs and what venture firms actually use as evaluation criteria.

Third, the physical structure of the ‘business plan’ has changed. Even if you do get an investor who is cool to simply ‘read’ about your idea, the last thing they want is a business plan 50 pages deep. Instead, focus on boiling the idea down into a one-page executive summary and a ‘twit pitch‘ that you can personally present well. Also, be sure to create several PowerPoint decks that can be quickly updated and customized based on your audience.

Overall, the big change is how much easier it is for entrepreneurs to begin creating and testing concepts. The internet gives everyone the ability to start selling a product or a service to customers with zero cost. Whereas traditional business planning forced one to consider the feasibility of an idea among a theoretical customer base, the web allows many companies to bypass this boring (and often irrelevant) analysis and jump right into building and testing. As a result, investors have shifted their focus away from hard copy business plans and Ivy League résumés; instead, they focus on actual products tested among real-world customers, with little regard to the founder’s educational pedigree. In addition, there is finally general consensus that you just can’t predict the future. As Mark Andressen points out, initial business plans don’t matter much because they are very much subject to change. I have written several posts explaining how entrepreneurs need to focus on validation (both for themselves and their ideas) to get outside investment; business planning is only one small aspect of this process. More specifically, I agree with Dharmesh Shah of MIT who encourages entrepreneurs to write blogs, over business plans.

What has not changed, however, is the objective of traditional business plans. The real goal of any business plan process is to force entrepreneurs to put pen to paper and critically evaluate their concepts. The business plan is a framework that gives structure to unstructured thinking and helps guide an idea into actionable steps that metrics can be put against. The business plan is also a unifier around the team: a document that should emphasize the team’s ability to execute against it and not vice versa.

I will be presenting on business plans at the Johns Hopkins Entrepreneurship Conference on March 21st at the SAIS campus in downtown Washington, DC.

Update: Fred Wilson ironically has a new post up today (10 hours after I published this) titled, “Free vs. Paid.” It directly addresses my thoughts below...

Two years ago Fred Wilson Jared Lukin coined the term “freemiumâ€� to describe a new type of business model prevalent across web 2.0 products. The idea of freemium is offering a base of features for free and then up-selling additional premium features. Freemium isn’t scaling on a mass-level and these are my thoughts on why that is.

Theoretically, freemium makes great business sense as it allows two things:

1) Offering stuff for free creates the lowest possible barrier to adoption meaning that a product can quickly gain mass adoption while also establishing its value proposition to individual users

2) Ultimately as this value proposition is solidified, the true goal of freemium emerges: using “free” as a catalyst to entice/convert users into paying accounts

The problem with freemium is that while the model makes sense from the standpoint of sellers, buyers (the users) see freemium as something more akin to to “pay-lite;� an unintuitive concept. Sellers must offer enough free features so that users get enough value to become regular customers (and hopefully tell friends to join as well). As competitors emerge, they kill one another off in a Darwinian manner as each competitor offers more free stuff than the other guy until there is nothing premium left to up-sell.

Even without competitors, freemium still has big problems. Consumers are trained to act in black and white terms: we buy or we don’t buy. Because freemium products offer services for free that are ‘good enough,’ this new idea of hybrid consumerism — that we actually need ‘premium features’ (i.e. the status quo ISN’T ACTUALLY good enough) — is contrary to what we are accustomed. The idea of paying for something we already get for free is counter intuitive. Not only is it counter intuitive, but it’s a question we normally revisit once a month as we are informed that our monthly subscription charge has been drawn down. Remember the inflection point between free and paying is an enormous gap. Under freemium sellers delay that buying decision while also improving the free offering over time. It simply doesn’t make sense to most people why they’d ever need to pay.

When you are given something for free, it’s difficult to understand why you can’t obtain more for it for that same great price. And when you can’t get more for the same price, it’s natural for us to seek alternatives or create work-arounds. It is human nature that if you’re given an inch, you assume you can take a mile. Psychologically it is difficult to remain loyal when you’re given a sense of power (getting stuff for free) and then having that power stripped away. Any college student understands this concept as related to open bars. We’ll drink our faces off while it’s free; top shelf all the way! But as soon as it becomes a cash bar, we’ll downgrade to $3 beers, or leave the bar entirely.

I believe it will still be years before the consumer adapts to this new psychology of online buying en mass. In the meanwhile, we’ll need to develop different models and strategies that are less direct departures from the traditional pschology underpinning consumer behavior.

Back in July, a small article slipped onto my radar. Hamfatter, a UK-based indie band appeared on a television show where inventors pitch their business plans to 5 multi-millionaire entrepreneurs in an attempt to convince them to invest in their projects. After pitching (playing a single song) one of the investors, Peter Jones (background in mobile telecommunications, television, media) offered a 75k pound advance for the recording of their next album in exchange for 30% of all future revenue. [Video of the negotiations is below].

One of my good friends is very active in the music industry. She’s a lawyer by trade and a total evangelist for emerging talent in the indie music scene. After many talks, it’s clear to me that the music industry is broken. While everyone focuses on the sexy issues like artists’ rights (intellectual property) and distribution (illegal downloads), one of the most broken aspects is the lack of process and information for emerging artists.

When you think about it, the issues encountered by a startup indie band are remarkably similar to those faced by any web startup: funding, distribution and execution.

Trends are similar too. The barriers to entry for musicians looking to produce content, connect with other aspiring artists and build companies has never been better. At the same time consumers have been empowered to find and discover new music using the web and social-recommendation services like Last.fm. Consumers also have much better access via improved content delivery platforms, audio quality and video.

So what is the problem? Isn’t there a better way here?

Over the years music has remained institutionalized. Information and ultimately power is controlled by the just a few major industry players. While web 2.0′s technology renaissance has empowered fledgling bands with more tools to create and more access to audience the necessary structure and processes haven’t followed suit. There is no clear path or model for translating these new tools into meaningful ways to advance a new band. What Radiohead pulled off, was made possible only by its past successes.

What music needs is an incubation model like Y-Combinator. It needs a Venture Hacks. Music has yet to undergo a similar democratization of information made possible in web/tech by transparent venture bloggers and sites like TheFunded. Where is the TheFunded for record deal terms?

Incubating emerging music talent seems to me just one of several industries that has the potential to undergo change similar to what we’ve seen in the web startup space. I believe we should be applying the most successful of those models to industries desperate for a similar revolution to take place.

[youtube]http://www.youtube.com/watch?v=dqb9JkcsGmI[/youtube]

I’m sure such an announcement is imminent within the next year or two. Sure Google has Adwords and Adsense, but that’s nothing compared to what they’ll be ultimately be able to do. Anyone who has played around with the Trends feature in Google Reader knows what I’m talking about. As an RSS reader, Google Reader has an enormous portion of the market – and it’s growing. For example, at last check 38% of Andy Beard’s traffic was via Google Reader. For LeveragingIdeas it’s more like 55%.

As blogs become a more credible and socially accepted means of journalism, traffics to the big hit blogs as well as those with niche content (and this audiences will continue to rise). Here are just a few examples of what Google Ad Network would knows about me…consider what you as a media buyer might be willing to pay for such knowledge:

Google knows what blogs I read, but it also knows….

• What keywords I personally ‘tag’ blogs with. For example, I tag blogs with particular desires and insights such as ‘competition’ or ‘gift ideas’
• Google knows what blogs and posts are REALLY the most viral. It knows when particular items are shared, emailed
• Eventually Google could recognize when I include a given blog post’s hyperlink in an email sent through Gmail. Plus, it could scan the email’s content for keywords…and recipients
• Google knows the frequency of how often I read particular types of information as well as the consumption patterns that could ultimately lead me to transactions. Hmm…I don’t recall ever buying something online before 12pm…
• Thanks to the ‘share’ feature, Google increasingly knows who the real influencers are in a given social graph

What else does Google know?

Several months ago an amateur commercial originally created by a student for the iPod touch was picked up by Apple and run in major television spots. I think we are in an age where amateur content is frequently superior (at least in ideation) to stuff professionally produced. In his brilliant Ted Talk from 2007, JJ Abrams (Creator of Lost and Cloverfield) talks about the democratization of media. Specifically, Abrams suggests that whereas he used to tell aspiring writers to “go write� now thanks to advances in technology he can tell aspiring directors to “go make movies.� According to Abrams, innovations in technology have leveled the playing field to such an extent that consumers can access equipment rivaling that of the directing elite for affordable prices.

All this got me thinking that it would extremely cool if someone put together a video voting site that was specific to branded commercials. Users could upload UGC videos of commercials they produced on behalf of brands. Whopper Freakout is a great example of what can be accomplished with video. The hope would be that brands, a la Apple, pick up the rights to some of the commercials. From a crowd sourcing perspective, a brand would already have good idea of of a commercial’s potential viral success since the community would be voting on the commercials. Brands might even upload concept videos and allow users to “make suggestionsâ€� for improvements

Has anyone done something like this yet? Thoughts?

Darren Herman has a nice post asking someone to help him start a new website featuring RSS headlines tailored to individual subscribers. Darren’s post reminded me of an idea I had last week…

One industry that clearly falls under the long tail effect is the magazine industry. While many magazines make some of their content free available online, for the most part I have stopped subscribing to print magazines because there are few I read cover to cover. Nevertheless, magazines are still proliferating and some B-list mags, like blogs, occasionally have great articles I would love to read. The problem is – I never hear about them.

My Idea.

I would love to create a website where magazine publishers submit all their article and image content, tagged, into a big database. Users then pay a monthly subscription to “subscribeâ€� to tags that interest them. Then at anytime, a user can log into their account and access that month’s articles tagged with the keywords they subscribe to. Articles could come from any magazine source. Personally, since my interests are so varied, I might subscribe to keywords such as: mountaineering, entrepreneurship, red sox, venture capital, starbucks, and brooklyn heights.

Such a website would be great because users would be exposed to a ton of fresh, tailored content from sources they otherwise might have known about. While one could argue that subscribing to Del.icio.us tags accomplishes the same thing, subscribing to a heavily tagged phrase in Del.icio.us like “social media� produces too many irrelevant links.

Monetization.

The owner of the website benefits via revenue split with the contributing magazines, plus offers advertising on the users’ homepages.

Magazine publishers benefit from a new revenue source (people who otherwise would not subscribe, are essentially now paying for individual articles). In addition, the magazine publisher extends their reach and in the process may build the subscriber base as users are increasingly exposed to new publications. Also, in order to view the article, the user might be pushed back to the source website.

Thoughts?