New venture outsourcing blog

In San Diego, CA, where Inventure Global is based, things are getting really bad in the housing market - and there are signs that we’ve still got a ways to go!

Things are so bad the Fed and Treasury are in full emergency mode to stop the bleeding.  The steps they’ve taken so far are clearly necessary, but they haven’t yet addressed the issue head on about how to fix the problem in the future.

The banks are looking at their books and wondering how they can possibly avoid this fiasco in the future.  Take a look at the following charts from J.P. Morgan Chase which shows the difference in loans that brokers vs. J.P. Morgan’s employees originated (the boxed area).  The 2007 YTD column shows clearly that 31% of all loans the brokers’ originated had a loan to value (LTV) of over 90%!  That’s quite a departure from the 4% or even 10% historically normal levels that were originated internally by the bank.

This is just one more piece of evidence that the brokers’ interests are not properly aligned with the bank’s.  Default rates on mortgages paint just as damning a picture for banks not being on the same team as their investors.  Given all the turmoil - is there a way to get everyone on the same side & restore order to our mortgage finance system?  In a perfect world this wouldn’t require too much new expensive regulation or new departments to watch over the industry - because that’ll cost us all more later.

The mortgage industry pays brokers to originate loans - which makes perfect sense and provides a valuable service to both the mortgage industry & borrowers when done well.  I think most of the problem is in how they’re paid.

These payments are large up-front dollar amounts paid upon the closing of the loan.  They don’t get paid any residuals on the loan at all - so once they get this check they’ve made their money and that’s it.  This is where the trouble starts.  Once the guy who’s responsibility to close the deal doesn’t care whether the borrower can afford the loan, it’s only a matter of time before there’s going to be a problem.  The truth is, that we already have a model for this.  It’s how health insurance brokers are paid. 

Pay them every month

My proposal is to change the definition of a conforming loan to include a condition that the originator is paid a percentage of the loan’s monthly payment.  Perhaps a modestly larger up front payment in order to help jumpstart a person’s career in the business - but the vast majority of a broker’s income should be paid each time the borrower’s check clears every month.  That way, the broker is incentivized to only originate high quality loans.  If the broker thinks you can’t afford the loan, it’s not in his best interest to push you into it, it’s not worth the trouble for only a couple months of tiny fractional payments.  The broker would be much better off readjusting your expectations and getting you in something you can afford.  Perfect.

No new costs 

The really good news is that the operational infrastructure already exists: this is how the investors are paid, it’s how some of the bond insurers are paid, and it’s how taxes are paid.  One more check to cut to the broker should be a pretty easy adjustment in the system - which means it won’t introduce significant additional cost.

Someone’s always vested on both sides

Additionally, it creates an adversarial environment between existing brokers & new brokers during a refinance.  If you want to refinance your mortgage and speak to a new broker about it, they may try to trick you into a new loan that’s not in your best interest.  When this happens today, that’s the end of it, it’s you versus the broker.  In a world where your previous broker’s paycheck depends on you staying in your current loan things are a bit different.  Now you have to industry professionals fighting over your business.  This is good news because they should both be better informed & equipped to slog it out on your behalf, increasing the likelihood that you’re going to get a truer picture of the situation.  Now you can choose which one really is the better option.  In fact, in order to change other kinds of insurance (e.g. life, disability, or long term care) you have to send in a Replacement Notice to your existing insurance provider - which they then send along to the broker to go fight for your business.

Require it for “conforming” loans

Why make it part of the definition of being conforming?  Because conforming loans are the ones that Freddie Mac & Fannie Mae buy.  They’re the ones that our government and our tax dollars help subsidize.  These institutions drive what’s “normal” in the mortgage industry because they’re the ultimate clearinghouse for the massive amounts of capital required to keep the mortgage securities market liquid.  By altering the definition of a conforming loan we can “recommend” that the market coordinate in a way that helps everyone out, without requiring too much more supervision or regulatory burden to the system.  Other banks can pay brokers in alternative ways - but they just won’t have access to the large pools of money subsidized by our tax dollars.  It’s up to the bank if they want to make that tradeoff on each mortgage product they underwrite.  In the long run, I would hope that this model would become the norm because it really is in everyone’s best interest, but in the short run the banks & brokers could gradually move over to the new system.

Hopefully I haven’t overlooked anything critical and when the emergencies slow down we’ll see some policy changes in this direction.

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I had a great discussion with some colleagues of mine which ended up on the economy.

The economy is shaping up to take quite a beating - however the way in which it affects each industry and market is quite skewed. Automotive manufacturers are taking a serious hit, but the healthcare industry is doing quite well actually. If this rough economy is doing your business a favor - then you may be in a unique position to do nothing and capitalize fully from this. However, the more interesting question is what the rest of us should do.

All business “successes” deal a direct and severe blow to someone else's industry. Two cases in point: Due to Apple's iPod, Sony doesn’t sell a lot of Walkmans anymore, and Henry Ford was public enemy #1 for the horse & carriage industries. This is the entrepreneur's “creative destruction” at its harshest, albeit most poignant, contribution to our economy. The entrepreneur is finding a latent need in people’s lives and innovating a better solution than the world knew before.

Given the wide scope of personal and business economic hardships in sight, I believe the case can be made that the glass is half full. The key insight here is to ask yourself the most basic economic question, “… and then what?” I’ll leave you with two concrete examples to spur some thinking.

Take gas as a classic case in point – so people are driving less - that’s fine… what are they doing more of instead? Talking on the phone? Work around the house?

Next up is credit. The credit markets are tightening for everyone, yet ironically interest rates are low right now. Perhaps you can determine that some segment of your customers are super creditworthy yet don’t have access to other credit sources for a few (bad) reasons. Can you offer them “financing” by removing your upfront fee & increasing the monthly fee at above market interest rates to increase your profitability and improve their cash flow? If you have cash on hand – your competition may have trouble keeping up with you!

What are three new possible opportunities that today’s economy is offering you?

I’m going to do some thinking about this myself and report back…

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I was introduced to the CEO of Analog Analytics, Ken Kalb, through a mutual friend, Neil Senturia, late last year.  Ken had a great idea for a new company - he wanted to bring the improved accountability & optimization of online analytics to offline advertising.  What was even better, is that he already knew how to do it!

The value proposition is simple:

• Build and deliver a better ad with greater returns
• Measure the ad performance in real time
• Measure the mix of media spend to improve overall advertising returns

How it works

1. The advertiser creates a call-to-action in their ad to text a short-code or call a toll-free number.  For example: “Text COFFEE to 123456 and receive a free cup!”
2. Consumers who hear or see the ad (depending on whether it’s radio, TV, newspaper, magazine, etc.) respond by calling the toll free number or sending the SMS message.
3. Analog Analytics tracks, sorts, and presents the information to the advertiser in real time through an analytics dashboard (think something like Google Analytics).

Do people respond to SMS ads?

According to a September 2007 m:metrics report, the response rates to SMS ads in Europe are between 6%-9% depending on the country.  The response rates in the US are higher, 12%, but our penetration is only 17% vs. 35%-75% in Europe.  This shows that while the US market is still developing, even with significantly higher penetration rates, the response rates are still probably going to be at least 6%.

The people

One of the great things about working with startups is the people you get to interact with.  In addition to Ken, we’ve been working very closely with Tom Buscher and Scott Willson.  Tom worked with Ken at a previous company doing telephone stuff, so he knew just how to get the backend infrastructure up & running in no time flat.  Scott is a “Coder, bike racer, husband, father” who has a great command of both user interfaces and Rails.  Both guys are really smart and it’s been great working with them; we’ve learned a lot from them both.

The future

The product looks great and it’s continuing to get better and better every day.  We’re very excited about being able to help the Analog Analytics team implement the first version of the software behind this fantastic new company.  If you do a lot of advertising, you should definitely check out what they’re up to, look at their report samples, & let them know you’re interested in increasing your return on ad spend!

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Dan Bingham wrote me an email today, presumably in response to Why outsourcing to India works, that began:

I thought you might be interested in the results of a study Deloitte released yesterday which basically found that outsourcing vendors and customers are rushing into outsourcing relationships focused primarily on cost, and because of this the relationships are being structured in a way that prevents them from obtaining additional value from the relationship in other areas, resulting in a great deal of frustration on both sides.

The Deloitte Consulting Outsourcing Report 2008 surveyed over 300 businesses and IT executives who used Deloitte’s outsourcing services.  These businesses were of course not startups, but it raised an interesting issue that does appear when new ventures try to outsource as well:

How do the outsourcing company and provider get on the same team?

The traditional answer here is a legal one: the contract.  You specify in excruciating detail exactly what you expect to get, what you expect to pay, and when you expect to receive it.  You should also probably pay someone a hefty consulting fee to write you just such a contract by the way!

Contracts are important, I don’t want to minimize them, they are definitely a key item of last resort when settling disputes.  In fact, a lot (most) of the value of most contracts is just the exercise of forcing both parties to go through the motions of being very specific about what they want.

However, they tend to be very much prescriptive and thus cannot accomplish much in terms of really cementing a productive relationship. 

Imagine an employee agreement which specified exactly how much work the employee would do, by when, and for how much.  How effective do you think this would be?

Some of most recent innovations in pay packages are going in the other direction: commissions, profit sharing, stock based compensation, ESOPs, 401(k).  All of these promote shared incentives.  Even union contracts generally do not specify output requirements to the same level of specificity you’ll find in most outsourcing contracts.

Is it reasonable that the way you negotiate and manage employees and groups of employees is not the same way you expect to manage outsourcing partners?  Probably not.

Ironically, we’re lucky here at Inventure Global.  Our relationship with startups has helped us avoid this for the most part.  Anyone who joins a startup, including outsourcing partners, have to be willing to be a real part of the team.  This turns out to be a much better solution.  Creating shared goals, cultivating a shared vision, and having shared values creates shared success.  There’s not as much downside protection than a contract has, but the upside has much more potential.  For a startup it’s all about upside, the opportunity is what everyone is playing for.  Other businesses have something to learn from this, they should consider weighing the opportunity of shared success over the costs of disappointing results.

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I’ve recently had the pleasure on serving on a panel of judges evaluating business plans. This time the presenters were all social enterprises - business ventures with a double bottom line (societal and financial returns). Their ‘products’ ranged from new web portals to architectural goods and often subsidized or supported important causes like vocational training, reduction of disease, or caring for the environment.
Below are some of the common questions and feedback the presenters received:

-Who, exactly, in your customer?

-How much money are you asking for?

-What would you use this capital for?

-How does this money turn your enterprise into something lasting/sustainable?

-Who is missing on your team?

-Are you charging the right amount for your product/service (would customers pay more? do competitors charge less?)

-Who are your competitors?

-What keeps others from doing this / what is your intellectual property?

-Would it make sense to scale back operations to build a stronger business?

-How would you scale this business: geographically? number of offerings? franchise?

-How hard is it for someone else to do this?

-What is keeping you from getting started: funding? team? R&D?

-Have you talked to customers? What do you know about your customers?

-What is the minimum amount of funding you need to prove your concept or make your first sale?

-Who are potential partners?

-So what part of the supply chain / distribution network do you fit into?

-Are you selling to businesses or consumers?

-What is your exit strategy / plan for sustainability / way to repay investors?

-Are you looking for a loan, a grant, an investment for equity, or a set of donations?

-What are your next steps / milestones?

-How do you measure success? How do you know if what you are doing is making a difference?

Send us an e-mail or leave a comment with questions you’ve heard as you have pitched your venture.

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Starting up is hard work.  But is Edison’s 99% perspiration enough to grow and sustain your venture?

Our own tireless entrepreneur Chris Harris examines this at:

Inspiration Versus Perspiration

Wil Schroter’s Blog on the Go Big Network

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Our involvement in the Venture Capital / Investment community is hardly a secret on this blog - our group partners with pre- and post-funding companies to help with excellent execution.

The folks at InsideCRM have compiled a list of The 20 Worst VC Investments of All Time, their commentary is insightful and an interesting look into the side of the industry that rarely makes headlines. Of course, high risk / high reward investing means that some companies will succeed spectacularly, some will yield small profits, small losses, or break even, and some will hemorrhage money. The difference between spending wisely on necessary parts of your business model and squandering a institutional money becomes obvious in these examples:

Think Ikea not Aeron if it doesn’t increase your sales:

“Webvan’s “major purchases included $1 billion for warehouses, enterprise servers and more than 100 Aeron chairs.”

Know your customer:

“…advertisers didn’t see the appeal of the low-pay demographic AllAdvantage offered. This company represents $135 million in venture capital down the drain.”

Raise enough to start making money:

“…promising solution simply didn’t have the cash to hang on until the software could be launched.”

More facts and insight at InsideCRM, thanks to them for a great entry!

* the cliche about 20/20 hindsight seems to apply particularly well - retrospectively these are bad investments, at the time of funding they obviously seemed like wise, profitable endeavors to many smart people. In my opinion, this emphasizes the importance of a relentless focus on execution while you meet milestones - or getting the partners and team to be able to!

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Shawn Purtell at ROI Revolution has a great thread on combining google analytics and google website optimization.  This is a really important step as we don’t consider hte website optimizer to be powerful enough for most people on it’s own.  Additionally, he updated his tip in June by showing how you can read the data within the new google analytics interface. It’s great that Shawn is keeping this thread current - but I’ve got one minor point of clarification. I don’t think the integration is exactly the same.  Using the new analytics I would highly recommend people not exclude their “combination” URL parameter using the exclude list within the google analytics campaign setup.  Otherwise the different combinations won’t appear in the reports.One good option now is to leave it as a visible parameter, which is totally reasonable.  The down side is that you’ll be splitting all of your traffic to your pages over these various combinations so historical comparisons will be harder.

The other option is to store the parameter as a “user defined variable” within the google analytics results.  Unfortunately, you only get one.  Shawn has cautioned, appropriately, that he likes to us his user defined variable for other things - so be sure you don’t need it if you use this option.

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Our firm does comprehensive online marketing and web sales acceleration for small businesses. Our approach is unique in a number of ways, but chiefly in that we use very advanced statistical methodology and that we focus on very clear business goals (increasing online revenue, selling more product, increasing the number of newsletter readers, etc). I thought it would be useful to share some questions we receive about this work:

How is this different than SEO/PPC/what XYZ is offering?

Search Engine Optimization is one piece of a good online strategy. After all, what good is a high Google page rank if it doesn’t lead to more sales or your profitable growth?

Why do you run experiments on my site?

Because your site is (hopefully) unique. Your customers, what they are looking for, and what they respond to are worth knowing. Inventure believes very strongly that running quick, efficient experiments provides evidence of what your visitors and customers do. Smart designers and developers (including our own) can only speculate on what will work to improve your results based on experience. Real insight into your web business enables real improvements and, most of all, real results!

Is this a short- or long-term effort?

Both. Inventure aims for both short term and long term results. In the short term you should see an increase in web traffic from your paid advertising campaigns, as time passes you’ll spend less on this and see more visitors arrive from all over the internet! Of course, all of this happens in parallel with a series of experiments and improvements on your website. The end result is more qualified visitors, more sales, and a more profitable website.

Do your services pay for themselves?

Yes. Business fundamentals apply on the web as well - a good products or services will attract and retain customers. By outsourcing your marketing efforts you can unleash your website and set new sales records!

There is some more information here.

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By turning a problem’s definition on it’s head - the reCAPTCHA team at CMU has done a remarkable job of innovating a solution to two problems at once.

You know the jumbled up words you have to type in to a website if you forget your password or post a comment on some blogs?  Those are called CAPTCHAs.  Their designed to try to determine that you’re in fact human.  These are very common - there are more than 60 million CAPTCHAs being answered every day!  Here are some great examples from Greg Mori’s research on breaking CAPTCHAs!

(A really hard one)

  (A much easier one - Mori’s program, EZ-Gimpy, can beat 90% of ones like this)

The folks at CMU asked the question in reverse.  What problems are so hard for computers - that even at state of the art we’d rather have a person solve them?  The reCAPTCHA team thought that Optical Character Recognition (OCR) problems were the answer.

OCR is far from perfect - and the Internet Archive is scanning tons of books - some of which have degraded looking text.  Here’s a great example from their website:

So how can these be fixed?

The idea is two have a program generate a known random word and convolute it to make it hard for a computer to read.  Simultaneously, it selects one of these pre-OCR’d words at random (from the top line) that it’s having difficulty OCR’ing.  Then, the human is asked to correctly type in both words.  If the response is correct for the known word, then it’s assumed that the response was done by a person, and records the person’s answer to the second (unknown) word!

Now, people aren’t perfect either.  So in reality there are a lot of complexities here.  To name a few: more than one person is shown a particular group of characters to verify that they agree on what the correct answer is, the order of the known vs. unknown words are randomly chosen, the degradedness of the word images chosen is optimized to be most beneficial for both security & effectively leveraging the human work for OCR.

The project is called reCAPTCHA and you can learn more about reCAPTCHA by going to the project page itself.  Great job guys!!

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