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[Assistant] Okay, so we're gonna take a break, how about we come back at 10 minutes to 12, I mean 10 minutes to 11. Are there any, before we go to break, are there any questions in the group? I know we're covering a lot. I'll try to slow down after the break. But I wanted to get off to a good start. So now you know the difference between management, you know, management and leadership.


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[Assistant] Uhm, and we've talked about the relevant leadership model. This is a good basis in which to go forward. Yes?


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[Assistant] I would suggest that Malcolm Gladwell, first of all, is a journalist. He's not a rigorous social scientist.


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[Assistant] So you have to be very careful in this stuff because some of it is not particularly accurate. This book is very, very interesting, outliers, about how you have to, it's about timing, it's about hitting the right windows. You know, Bill Gates, Bill Joy, Steve Jobs are all born in the same window


[User] Please transcribe this text

[Assistant] By the way, Gary Kildare was not born, he was born much earlier.


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[Assistant] But, and then they get a lot of practice and they anticipate when a market's coming up and they hit the market at the right time with a lot of skill.


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[Assistant] You have to have a certain level of intelligence, but do you have the right skills? Did you anticipate the opportunity? And did you take advantage of the window when it opened?


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[Assistant] Malcolm Gladwell is a good book. I don't think it's as fundamental as these. The point, you can get a Malcolm, get the Malcolm Gladwell book on tape and listen to it when you're in the car. Alright, we'll be back at ten minutes till eleven.


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[Assistant] They sure made a bad decision, huh? They made a bad decision, huh?


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[Assistant] What caches are the demons after? Need to take out Fisk's men and figure out what they're guarding. Whatever it is, I don't want it in Fisk's or the demon's hands. Snipers everywhere. Might need to deal with them first.


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[Assistant] Man, I'm beat. Time to head home and get some sleep.


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[Assistant] Until now we've been looking at prosthetics from the wrong perspective. Why restore people to what they were when we can make them better? Okay, I think that should do it.


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[Assistant] It was a good joke, Parker. Just a bit of an overreaction on my part.


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[Assistant] Decided to start a business. We both had visions of changing the world just in different ways.


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[Assistant] You were at Oscorp when it started? I'm half the reason it's called Oscorp. In grad school everyone called us the O's.


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[Assistant] Anyway, lawyers got involved. I chose to leave in exchange for a settlement. But that money didn't last very long. I've relied on grants ever since. If this project doesn't work...


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[Assistant] Be sure to run a diagnostic on the control unit. Could be a short.


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[Assistant] By yourself. Sure you can handle it? Apparently not, judging by today's debacle.


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[Assistant] How do entrepreneurial ventures evolve? It's very rapid and there's generally a pattern to this that I want to kind of go through with you. And if you try to ignore that pattern, you will get yourself in trouble. Okay? So it's dramatic.


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[Assistant] So what makes entrepreneurial ventures so successful? Why are entrepreneurial so successful?


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[Assistant] Large companies are at a huge disadvantage relative to entrepreneurial ventures. What gives them their competitive advantage? Thomas?


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[Assistant] Right, big companies have bureaucracy. They have, uhm, they have a lot of, uh, overhead that they just can't get through. They don't, they're not, they can't move as quickly. Yes, they're gone.


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[Assistant] So, so innovator's dilemma. I can't, I don't want to cannibalize my, my existing products. You know, by the way, that might be my best product. And the most powerful person in the company is overseeing our best product. And you've got this new product that's going to cannibalize, you know, his products. Well, if Gizal is the general manager of that group, he is going to destroy you.


[User] Please transcribe this text

[Assistant] And he has all the political capital in the organization because he's paying the bills right now. Exactly. Yes, Ian.


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[Assistant] Maybe they do for other reasons, but uh, shouldn't I, that's a bad example.


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[Assistant] But when you're working in a startup, Jeffrey, did they pull all-nighters?


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[Assistant] There is a passion in a small company that you can't find. Why is that?


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[Assistant] They have the feeling that they are working for themselves. Exactly. It's mine. It's mine. I'm not working for the man, right? This is mine. This is, there's a tremendous amount of pride. So what makes small companies successful is alignment. Everybody's out for the same thing and it's aligned with the customer.


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[Assistant] Because if I don't make the customer happy, I don't make payroll next Friday.


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[Assistant] It's really very, very simple. There's no buffer here. It's very straight forward.


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[Assistant] It's ours. We have a passion about it. We're changing the world. We're doing something that no one's ever done before. So let's talk about the alignment. Let's bring it. First of all, in a small company,


[User] Please transcribe this text

[Assistant] More so be for that very reason that if we don't have happy customers, we don't make payroll. The customer's interests are extraordinarily well represented.


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[Assistant] Going to the point that if I have legacy products that are already kind of going, I can kind of wait that out and say, I know best, just wait on this. But here, I have to respond very quickly to the customers.


[User] Please transcribe this text

[Assistant] The company and the employee's interests are extremely well aligned because they are one and the same. You pro-, you most likely don't have an absentee owner. Yes?


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[Assistant] If I'm in a pre-development stage, I only have a certain amount of time, right? I can't not get revenue, right?


[User] Please transcribe this text

[Assistant] If someone gives me money, first of all, I have to produce results for them. And I have to show that I am going to start getting revenue at some point. So there's this enormous


[User] Please transcribe this text

[Assistant] Urgency to get a product that a customer will want.


[User] Please transcribe this text

[Assistant] And so this drive is very, very much. At IBM, we'd say, well, we're going to announce a new


[User] Please transcribe this text

[Assistant] Product, a new office systems product, printer. There wasn't that kind of urgency to be quite honest.


[User] Please transcribe this text

[Assistant] And if it was, it was manufactured in a lot of ways. But here, if I'm in pre-revenue stage, I can't go on without a salary eating ramen noodles forever, right?


[User] Please transcribe this text

[Assistant] So in a pre-revenue stage, there still is this urgency even though you're not paying it. The second point you had is


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[Assistant] How do I do it in a situation where my customer is not paying me?


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[Assistant] Actually, if you're Facebook or you're Twitter.


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[Assistant] The value of your company is measured by the eyeballs that you're getting. Do I have customers that are very happy with my product?


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[Assistant] Then I'm going to be able to monetize that at some point is the assumption. So I'm going to be able to get someone to do that. So those are, that's how you would think about it.


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[Assistant] Okay, so the, the employees' interests are well, the owner and the company are the, because they're the same, there's little buffer to confuse things. Everyone's really clear as what's going on.


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[Assistant] We need to get this product out and we need to get these customers happy. Otherwise, there is no company. Yes, Mike.


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[Assistant] And I'm trying to develop a product or I'm trying to run a company and the sales people keep coming back and telling me


[User] Please transcribe this text

[Assistant] No, that's not the right product. This is the product we need on Monday, and on Tuesday say no, no, no, this is the product we need, and on Wednesday say this is the product we need.


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[Assistant] My answer to that would be, I would say with probably 80% confidence, your problem is that you have not defined who your target customer is. Your, your sales people are doing what sales people, okay.


[User] Please transcribe this text

[Assistant] And if they're good sales people, they're doing it very, very well. They're going out and selling stuff. And you haven't told them who they should be selling to, right? And you don't know what the product is yet.


[User] Please transcribe this text

[Assistant] So they're going out and they're selling to Sudhir, who's, and then the next person, Antonia, and he's selling to her. These could be two totally different, large company, biotech industry, small company, web-based company.


[User] Please transcribe this text

[Assistant] And so you don't have the marketing discipline, I mean the product marketing discipline, and so your sales people are just coming back and trying to sell products. Sales people are not paid to think strategically. They're paid to think tactically, to sell something.


[User] Please transcribe this text

[Assistant] Their identity is tied up in, did I sell something today? And that's good. That's, you want someone in your organization that does that.


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[Assistant] So you have to figure out who your target customer is, what are we trying to do, and then build that discipline.


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[Assistant] So, so you, what you do in that situation is you, you work towards, uh, you have to force them to prioritize. What we did in our companies, we'd say, you have a hundred chips. Put them where you want them. You know?


[User] Please transcribe this text

[Assistant] And we'd force them to prioritize what they want at the top, and we'll say, we're going to come up with minimal viable product, what's called MVP.


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[Assistant] You tell us what you want in that Minimal Vibe product, you have a hundred points.


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[Assistant] You know, this is what we want. And then the internal people said, okay, uhm, then we'll develop it ourselves. You know, we can do that. You don't need to hire Bloomberg to do that. And then Bloomberg essentially said, okay, why don't you go ask them when they're going to be able to get it done.


[User] Please transcribe this text

[Assistant] And then when you put a product in front of the customer, if you're at the bank, then all of a sudden you're seeing this product, you're saying, wow.


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[Assistant] These guys are moving quickly, and now you as a startup are starting to get leveraged.


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[Assistant] Now you can only do that so much until they start paying for it, right? But you would, that's a strategy that I would approach in that.


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[Assistant] No, but the point is, that was sarcasm for those of you who couldn't tell. Uhm, the, the, no, no, but I just want to emphasize the point is,


[User] Please transcribe this text

[Assistant] You have to be very careful, because when you hire salespeople, they are very powerful weapons, and uhm, and they will go sell stuff.


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[Assistant] And you don't want to hire salespeople until you've defined what your product is. Because they're going to go sell stuff.


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[Assistant] The best time to add salespeople, there's this missionary kind of BD, business developments.


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[Assistant] And that's when you kind of, and then once you've got your product and you've got, they've got it, and now you're starting to know your product, you've hit your product spec, you're no longer oscillating, they're starting, it's clear, this product will work.


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[Assistant] Now you hire coin operated salespeople who will then go sell what's on the fruit stand. They will sell the apple that's on the fruit stand and they will sell it like crazy. And that's extremely valuable to your organization.


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[Assistant] But if you bring it at the wrong time, as Matt just said, it can cause tremendous confusion in your organization. Start up. Okay, Jeff?


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[Assistant] A salesperson is not a salesperson is not a salesperson. And there's the kind of.


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[Assistant] You know, I'm gonna sell the product that's on the chart, uh, on the, and then you have this kind of person who works well with development but can still have sales skills, then you have the person who's really just developing the product that's pure BD. And, and


[User] Please transcribe this text

[Assistant] You know, your BD person also has to be able to extract money from customers.


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[Assistant] Because one, you need money, and two, you need customers who are going to commit to it. Otherwise, they'll say what Michael did, I want everything.


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[Assistant] That's not fit. To get commitment from them, you want to get them to put money up. To say that I like something doesn't mean anything to me. To say that I am willing to pay for it and here's a letter of intent is a much, much, much higher level of commitment.


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[Assistant] But that's still not that they've paid for it. When they pay for it, that's yet another level of commitment.


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[Assistant] So you need a BD person, a sales person, that get, extracts money, performs wallidectomies, uh, with customers.


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[Assistant] That's, that's very very important because you're getting the customer's commitment then, not just the money.


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[Assistant] And then you'll know what they really want. Okay, so all these things are great. What's the problem with startups? What's the problem with startups now?


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[Assistant] They have all these great things. What's the problem? Yes? Lack of resources.


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[Assistant] But the other thing is, do you have a company? Or as we talked about, is it a faith-based cult?


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[Assistant] And I'm buying a product. First of all, are they gonna be around? Second of all, I'm really buying this product because Jeff's a good developer, but is Jeff gonna be there? And if Jeff leaves, I'm actually betting not on a company, but on individuals. And are those individuals going to be around?


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[Assistant] So they don't have the sustainability, you know, they don't have the sustainability that larger companies have. They haven't got a mature product that's consistent quality. They have issues of can they grow if we need it, if we really like this and we want to get a bunch of them and roll this out. And they really haven't built up a track record. So we're really buying into person. Now this is a problem because, you know, what's it all about for startups?


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[Assistant] It's pretty simple. You need to grow. You need to grow. If you don't grow...


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[Assistant] You're not going to survive. If you don't get that top line going, you can't save yourself. If you're Lou Gerstner and you move into IBM, you can reduce costs and you can still make, make, you know, do quite well.


[User] Please transcribe this text

[Assistant] But when you're a startup, you have to drive the top line. So you have to create growth. So.


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[Assistant] How do you do that and keep moving forward? Well, let me just say that it's not that, you know, in this origin of species or evolution of species, Darwin talks about, it's not the strongest that survives, it's not the most intelligent, it's the one that adapts to change. And when you look at


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[Assistant] Businesses, you'll see that as well. It's not the best product today. It's the one that adapts over time and gets there.


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[Assistant] So let's just talk about some different ideas about how startups evolve.


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[Assistant] And here you have what, this is by Churchill and Lewis, and I still think of, first you have the existence. When you start a company, you are fighting, you are fighting to just get into the world, right? You're trying to create this thing that doesn't, it didn't exist before.


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[Assistant] So, if that's you, you're doing stuff and you're managing everything very, very carefully. You can't just say, I have this strategy and think it's going to happen.


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[Assistant] You have to create the first step to have it go through.


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[Assistant] And the strategic planning, frankly, doesn't exist. You're just getting it out. There's no processes. You just have to get your product out.


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[Assistant] You know, you saw that at Startup Central this summer with Kirin Group. They're just trying to get their product out the door.


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[Assistant] They're not sitting there building Michael Porter's Five Forces. You're just saying, what's the dang product? Let's get it out and let's get it in front of customers.


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[Assistant] And everything is perfectly aligned because the owners are the employees and the customers are what's driving you. There's perfect alignment.


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[Assistant] Uhm, but the problem is you don't exist yet. But then you exist, and now you're fighting for survival. So now you're like, alright, strategic planning consists of cash forecasts.


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[Assistant] Do we have enough cash? Okay, when's it coming in? When are we gonna get it? That's it. We have...


[User] Please transcribe this text

[Assistant] Alright, so now we're doing this. We've got a customer, here's exactly what we're gonna do. We're gonna, I'm gonna start to delegate stuff out with very well defined tasks. You're micromanaging now. Before you were doing to get it off the ground,


[User] Please transcribe this text

[Assistant] Now you're still doing, but you're micromanaging others to try to get that, and you're trying to start to grow the company.


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[Assistant] And you make all the decisions. This is not a period of, well, let's, let's, you know, let's sample things and, you know, let's have company meetings and go through all that. You have to make decisions relatively quickly.


[User] Please transcribe this text

[Assistant] And that doesn't mean in an autocratic way, but it means that the owner or owners make the decisions very, and you're still, alignment exists very well at this point.


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[Assistant] You know, the customers, the employees, now as we, as we start to grow,


[User] Please transcribe this text

[Assistant] You need to grow, you gotta step back, and now you're starting to become managing through other people. Alright? So you're, but you're still managing all aspects of the business because while you've survived, you're still at that nascent stage where it's just a young child. You know, maybe not in kindergarten yet. And things could go wrong. And so,


[User] Please transcribe this text

[Assistant] You start to move to another level of strategic planning but you're very heavily involved and you're starting to...


[User] Please transcribe this text

[Assistant] You're starting to have something to lose. You know, it was easy at the beginning. You had nothing to lose. So you didn't have to worry about that. But now you're starting to build up some assets in the company and you have to think a little bit more about strategic planning.


[User] Please transcribe this text

[Assistant] And you have to, and now you have some lift off the ground and you can think what's coming in the future.


[User] Please transcribe this text

[Assistant] So now you're starting to grow and you're starting to think, how am I going to grow? I'm going to raise money.


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[Assistant] And now alignment is starting to not be as perfect as it was before. But you need to do this. This isn't bad. This is the evolution that you'll go through. Now you could at this point disengage, alright?


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[Assistant] And you could move on. There's some people who are serial kind of founders of company and they just get out after and say, oh, it's become management and I'm not interested. Well, let me tell you.


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[Assistant] Uhm, you all are eh, you know, eh, MBAs, you can go further than this and you should go further than this.


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[Assistant] And a lot of the value capture is, is, is after the stage.


[User] Please transcribe this text

[Assistant] If you leave here, you might get x. But if you stay and get to take off, you'll get 10x, 20x, 100x. And you've been trained to do this.


[User] Please transcribe this text

[Assistant] So you should be able to do this. So now as it takes off, you need to get a team of growth managers that you're working through them. You're managing them and you're also leading them and you're instilling in them the values, the culture, the vision and, but you're still the keeper of the flame. You, your leadership team is. And now you're starting to do strategic planning.


[User] Please transcribe this text

[Assistant] Now you're starting to think ahead, you have that ability to do that, you've probably raised money. But as we raise money, the alignment is now getting up. Because now we have people who own stock in the company that aren't in the company.


[User] Please transcribe this text

[Assistant] So you can see this evolution is really kind of, it's definitely changed. And by the way, you start to get systems and bureaucracy. And this is why people say it's very unusual that entrepreneurs stay through this. That they don't like these processes and the like. Pira?


[User] Please transcribe this text

[Assistant] There's a disruptive competitor that moves into the market, or your, the two ways that I've seen this happen is, one, a competitor moves in with a technology that's totally disruptive to you, and it just obsoletes what you're doing.


[User] Please transcribe this text

[Assistant] Or the other thing is your customer base can just blow up. I set myself up for the financial services industry and then boom. Guess what?


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[Assistant] You've hit the reset button and it's very hard to go to Cura's Point.


[User] Please transcribe this text

[Assistant] You are now going to here and you're back to there. The problem is is that


[User] Please transcribe this text

[Assistant] Credit where credit's due. Akamai has kind of restarted, but usually you have an equity structure that's all screwed up.


[User] Please transcribe this text

[Assistant] Uhm, and that's a problem because you don't have alignment. Remember, the power at this stage, when the challenge, when the challenges are so high, is we have extreme alignment.


[User] Please transcribe this text

[Assistant] But if I've already taken an investor's money and I've given up 40% of the company and we're now back to that early crazy stage where we're trying to figure stuff out.


[User] Please transcribe this text

[Assistant] And we're having board meetings and processes and all that kind of stuff. It's very hard. I know that's not the answer you wanted to hear. You wanted to hear some magic answer. It's very, very hard. Have any of you ever been in a situation like that? Where the market just blew up?


[User] Please transcribe this text

[Assistant] Hopefully never. It's a difficult trick. Matt, did you want to add to that?


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[Assistant] I would say it requires extraordinary leadership because when people hear the word compression, it's kind of like, it's no longer as exciting as it once was.


[User] Please transcribe this text

[Assistant] Okay, so, so, I, you know, as you think about this and you see some of the, this I thought was very helpful as I thought about it. You're going through this and your management style has to progress as you move forward. You know.


[User] Please transcribe this text

[Assistant] What made you successful at stage one and stage two is going to kill you. If you continue to be a micromanager as you try to grow the company, it just isn't going to work. It isn't going to work.


[User] Please transcribe this text

[Assistant] And I can tell you mine, when I first started my first company, I started with this type of management style, cause I was at, I was at IBM. I was trained to do this. And I applied it to companies like that, it just didn't work. You know?


[User] Please transcribe this text

[Assistant] When you're in a high tech business, you have to understand crossing the chasm, uh, model, but,


[User] Please transcribe this text

[Assistant] Also think about this not just from a product marketing standpoint. When you think about it from a standpoint of the


[User] Please transcribe this text

[Assistant] Your company and your leadership styles, here you are talking to people who are very technology savvy, and here you are talking to people who are extremely vision oriented.


[User] Please transcribe this text

[Assistant] And here you're getting out and you're talking to people who are much more ROI focused.


[User] Please transcribe this text

[Assistant] How do you address that situation as a leadership skill? Here you can sell vision. Here you can sell vision.


[User] Please transcribe this text

[Assistant] You know, here you can sell relationships even. Here you can't do that. Your management skill, I mean your leadership capability in the company has to be different. And how are you going to transition from


[User] Please transcribe this text

[Assistant] He was not the right person and we had made the mistake of calling him the vice president of sales. Well, guess what? I had to go in and there were only two options. I had to either


[User] Please transcribe this text

[Assistant] Get, take him out of the company or downgrade his title. So there's two lessons there is one.


[User] Please transcribe this text

[Assistant] It helped in a sense because he was able to achieve his job and he was highly motivated, but he wasn't the right fit later. So how do you address those scaling issues? Uhm, and you have to do it based on, you know, not an abstract model like this, uhm, simply


[User] Please transcribe this text

[Assistant] Uhm, that can be something to help you, but you have to build your business based on what your customers want. And that's the ultimate determiner. So, this model helps a lot.


[User] Please transcribe this text

[Assistant] Howard, uh, when we talked about this once, he said, here are the five phases.


[User] Please transcribe this text

[Assistant] First of all, you have the planning. You have the honeymoon period. Anything's possible. There's no stress. There's no accountability.


[User] Please transcribe this text

[Assistant] We're just gonna, we're just out there building products, having fun, whatever. And it's, you're kinda in the lab. And then all of a sudden, we start to sell to customers, and we're aligned with customers. So uhm, it's exciting in a different way now.


[User] Please transcribe this text

[Assistant] But the possibilities are not as wide open. We're now focusing on a few customers. But it's very, very exciting because customers are buying it. The dogs are starting to eat our dog food.


[User] Please transcribe this text

[Assistant] And it's very, very exciting. But the stress is high because it's now specific. It's not, there's not infinite possibilities.


[User] Please transcribe this text

[Assistant] But now all of a sudden, uhm, they start using it in production systems, the pilot is over, they said they like it, and now they're gonna put it into production to help them ship product on Friday. Whoa.


[User] Please transcribe this text

[Assistant] No longer are you putting features in. Quality assurance is what matters. You can sell a lot of stuff. The excitement now is your finances will start coming in. But you gotta get the stuff done quickly.


[User] Please transcribe this text

[Assistant] And the stress actually is starting to go up significantly now.


[User] Please transcribe this text

[Assistant] Production finally starts, the deadlines are there, if your product doesn't work, if you don't make shipments, your customers revenues will be affected by it.


[User] Please transcribe this text

[Assistant] The stress now is much, much higher. And then, as what happens with every startup, something goes wrong. Guaranteed, 100% something will go wrong. And this is when


[User] Please transcribe this text

[Assistant] You have to respond, this is the crisis and the stress is very high. And that's when your leadership will be challenged. That's when you have to step up and you'll have to address the issue. So, likewise, I, you know, this is what, what, what, how, how I look at it is,


[User] Please transcribe this text

[Assistant] There's a technology phase. You make it work. It's fun. It's really kinda...


[User] Please transcribe this text

[Assistant] You're in the sandbox to some degree. Now we move to the marketing and sales phase where this is technology based companies.


[User] Please transcribe this text

[Assistant] Now we move to that and we connect with the customers and it's still, it's still fun.


[User] Please transcribe this text

[Assistant] But now we're moving to the stage of scale where we need the money.


[User] Please transcribe this text

[Assistant] And now, we're starting to lose ownership of the company, just like you saw in the earlier chart.


[User] Please transcribe this text

[Assistant] And, and now all of a sudden alignment is starting to falter, but the stakes of the game are going up. But this is what I signed up for. I wanted to make a lot of money. I wanted to have a big impact on the world.


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[Assistant] So this is a very logical stage. And then something goes wrong. Mistakes are very high.


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[Assistant] Possibly someone's head's gonna roll, especially if you have outside investors and then you have to readjust and then


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[Assistant] Do you establish confidence in everybody else and start moving forward? And if you can do that,


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[Assistant] Then the company will be successful. But you will go through these stages. And then, by the way, everyone will say, oh, you know, I, I, I, uh,


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[Assistant] I always knew you would succeed, and this is great, and et cetera, et cetera. And you, you don't want to say, no you didn't. Don't, don't be, uh, you want to be. That's, that's fine. You know, we're all in this together. Everyone. Okay. So.


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[Assistant] But you will also, and be very, you know, almost management oriented within a stage, but then as you go from one stage to the next stage, your leadership skills will be needed to readjust the company.


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[Assistant] Don't try to stop this evolution. Don't try to micromanage throughout it. It just, it doesn't make sense. The system that it's inherent underneath this will defeat you.


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[Assistant] Don't make long-term commitments to people in positions.


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[Assistant] That will put you in a situation where you either have to get rid of them.


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[Assistant] Or embarrass them in front of the whole company. Like I just talked about with the, the sales business development person.


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[Assistant] Try to give them a title thinking ahead as you're going to go through this that I'm not going to call you the mistake was called the VP of


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[Assistant] Marketing and sales, and it should have been the VP of Business Development, and then that would allow me to bring in the big


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[Assistant] So, you know, at one stage, what makes you successful in another can kill you in the other.


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[Assistant] And what doesn't change throughout this is your values. And I'm gonna talk about that in the next section. So.


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[Assistant] Change management, do they teach you change management still here?


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[Assistant] So, there's this book, which I've used from time to time, and then there's also John Cotter's book, which is...


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[Assistant] And basically, what types of changes you'll go through are changes not in values, but you'll go in changes in the organization. Your mission can change. The way you do business can change. You might switch from


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[Assistant] Direct sales to indirect sales depending on how things progress. You'll change in ownership. You'll change your employees.


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[Assistant] What makes for effective change is you have to give people a clear reason why they need to change. You need to say here's where we're going in the future and, you know,


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[Assistant] Uh, the external environment, if we don't, we're not gonna succeed. Okay, so.


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[Assistant] Okay, the last, the last thing I want to talk about to lead into this afternoon is leadership values and culture. Okay?


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[Assistant] I thought this was just complete garbage when I first started my first company, and I have done a 180 on this. I now think it is


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[Assistant] Extraordinarily important if not the most important thing of having solid values.


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[Assistant] So, and I want to talk about the relationship between what I believe is not just values, you can't just have values in a vacuum, but leadership to be able to back them up and to operationalize them in a culture.


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[Assistant] Okay, so let me just give you my examples, my personal examples. I told you the first company I was in, and I said,


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[Assistant] We sat around, there were three of us, two PhDs from MIT.


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[Assistant] They said, we're going to do this company, great company system dynamics. It was a real need in the marketplace. We got customers very quickly. We got up to a million dollars in backlog.


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[Assistant] The problem wasn't the product, the problem wasn't the market, the issue in the company was


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[Assistant] The three of us having a consistent vision as to what it was. And why was that? It came back to the values to start with.


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[Assistant] If you don't have common values, you will never get to a shared vision.


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[Assistant] And values are something that you can say or not say. And some people say, you know, uhm, I'll come back to other examples.


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[Assistant] But where they don't say it. But we, I sat down and said, you know, I think we ought to think about this before I jump in, because there's a lot of options. I was actually a Sloan Fellow and it was halfway through. I said, I want to start a company. This is great. This is a good thing. And uhm, so I said, what, what are we all in this for? And it was actually, uh, we're all both past now. And it was, well, we want to have fun. We want to, you'll see it up there. Do good for the world and make money. It was, yeaah, yeaah, that's it, yeaah, yeaah, do it. You know.


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[Assistant] And we ran off to go do it. And we were all friends. And then the stuff started to happen.


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[Assistant] And there was nothing unique about what we talked about. There was nothing you could object to. There was nothing that was measurable, really. Uhm, and it turned out that one of the people thought that making fun, uh, having fun and making money was him staying in academia and, uh, the other two of us doing the work because that was fun for him and he could make money and he was doing good for the world. And, oh, by the way, that his, uh,


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[Assistant] His relatives could work at the company because they were involved in the industry that we were talking about getting into.


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[Assistant] And this was so demotivating that even despite the success that we had, myself and the other partner, uhm, just really had a hard time with it.


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[Assistant] Hutzpah, shall we say, to just go and compress them and say, this isn't right. You're not here.


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[Assistant] If we're working full time and you're just working 20%, that's just not, that's not worth very much to us.


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[Assistant] Your ideas are unmeasurable. We're succeeding with, without them. Uhm, and I didn't compress them. Now should I have done that? We go back and forth.


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[Assistant] What I definitely should have done was at the beginning when we formed the company say let's be more specific. This is not specific enough. What are we committed to do here and how are we going to get out of this at the end? Where will we be in five years? Where will this be in ten years? So the next company having made that mistake was


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[Assistant] Sat down with Thomas Massey and said, what do we want to do? And we spent a lot of time making sure that


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[Assistant] We had trust and confidence in each other, and the biggest issue he had was that I drove an Azuzu Trooper, and he didn't like that. But, true story. But anyway, he was totally different from me. He was from Eastern Kentucky,


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[Assistant] He, you know, he had come to MIT, I was, I was from Harvard, I had worked at IBM, he was very young, he had, you know, he didn't


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[Assistant] He didn't think anybody should be driving anything but an American car.


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[Assistant] Different political beliefs alike, but he was very, very good at what he did.


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[Assistant] And, and, and, and, and he thought I was very good at what I did.


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[Assistant] Uhm, but I was on the business side, he was on that. He overlapped good instincts.


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[Assistant] And then we sat down and had the discussion. Where do we want this to be? I want to make money in five years. I want to be able to get this thing to be successful. I've always wanted to take all these lessons I've learned and get a blank canvas and build a great company. That's what I really want to do. What did Thomas want to do? He wanted to have a place that was very dynamic.


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[Assistant] Uh, an invention factory where very smart people could work, but he also wanted to make a lot of money and he wanted to get out.


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[Assistant] Really felt intellectually stimulated and it took the best of, he was the most unique asset we had.


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[Assistant] He was, and won the Lemelson award, he won the 270 competition. He was a very inventive person. And this was gonna be an invention factory to help move him forward.


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[Assistant] And in, and internally within the company it was going to be a


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[Assistant] Non-hierarchical. There was going to be discipline, but it was going to be non-hierarchical. And a fun place to work in the sense that we took the business really seriously.


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[Assistant] But we didn't take ourselves too seriously, so people were always joking about stuff.


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[Assistant] And you didn't see people using the word me and I very much at all.


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[Assistant] Um, you could just tell. And that was, and we could tell when we interviewed other people whether it was a good impedance match or not. And we had this process. We would interview people sometimes 20 times before we hired them.


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[Assistant] And Barry remembers, he remembers our company and he, it had a very unique culture when you went in there.


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[Assistant] And that was because that was Thomas and myself. I mean, you can't delegate out, you know, your


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[Assistant] You can't say, well I want them to be something else than what they were. This was what we were. We had a lot of fun, but boy when it got down to business we were serious.


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[Assistant] So that worked out. That was not the only values that worked.


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[Assistant] Uh, parametrics technologies were much different than ours. Desosystems were much different than ours.


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[Assistant] But these were ones that were true to us and that were aligned with us. And that was it. Yes, Slavo.


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[Assistant] Interesting. This was, these were much better than those. This was very good. This was very good. The first ones were really bad. That killed the company. This one was really good and held the company


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[Assistant] And we, we used to get a lot of people who would just want to, we used to get


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[Assistant] Anywhere from 10 to 20 resumes it would come across every week.


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[Assistant] To want to work at our company because the word of mouth was spreading it. What a fun place it was. What a dynamic place it was. People who were really, this was like, kayak is now. Kayak is, that worked. But let me, let me tell you why these worked.


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[Assistant] Because we went into a company and these were very specific. This was Bernard Bailey and myself. Okay. We went in.


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[Assistant] And we had a company, this was Visage. And Visage was a company that had facial recognition. And it was a bunch of people working on trying to make a best facial recognition algorithm.


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[Assistant] Uh, they, they weren't aligned with customers in that they were also selling drivers licenses to, you know, a third of the states in the U.S. And that money was being funneled into this other thing. So we went in and said, look, you know, we, we, we,


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[Assistant] There's something here, we're not sure exactly what it is, but if, if you want to work at Visage now, these is, this is how, these are the rules of the game.


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[Assistant] By the way, you can write any words down, like Jeff Bezos.


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[Assistant] You can write down words, but unless they mean it to you, you can explain them. So let me explain what these words meant.


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[Assistant] First of all, at Visage, no longer was it gonna be a situation where


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[Assistant] You felt you were successful by writing an algorithm that was better than Vizionics. Or by writing an algorithm that you were proud of.


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[Assistant] We're going to measure our success by


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[Assistant] Our customer success. And you need to measure your success by how successful you are. You can't say this is good without your customer validating that.


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[Assistant] And your customer might be external customers, which is all of our collective customers, or it might be an internal customer. So, so.


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[Assistant] In your performance plan, we are going to measure you, we're going to ask your customer how well that you think you did. So that


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[Assistant] That was a, that was fundamental to changing the culture in this company and to setting the new culture with these values. And you could say, well that should be true of everyone. It was not true here.


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[Assistant] And we needed to make that crystal clear to people, and we put it in their performance plans, and we set it at every single meeting. Pride in competing and winning.


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[Assistant] There are a lot of people who did great stuff and they said, but no one comes and uses our stuff. No. The onus is on you to engage, to get out there in the marketplace and try to win. If you don't win,


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[Assistant] You should be really pissed off. But if you don't get out there and try to engage with customers


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[Assistant] We were getting, there were bids that were going out to the U.S. government to states that we weren't even responding to. And people felt, well they didn't let us know or we didn't find it. That's not okay. If you gotta get out there and compete and you gotta do your best to win.


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[Assistant] And this change, and people, by the way, when you have good values in a situation, it deselects people.


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[Assistant] And this actually was, there were a lot of people who didn't like this. They were, they were, they weren't competitive.


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[Assistant] This was now become, became a competitive environment.


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[Assistant] Not internally as much so as I'll show you in the next one, but externally. We were going to engage and compete. Third thing was reputation. We're all on the same team.


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[Assistant] You know, you are, we're going to measure you on your reputation. Our reputation matters. Your reputation will matter. That's how you're going to be, that's how we're going to evaluate you. That's how you're going to be, uh, rewarded, uh, and remunerated.


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[Assistant] So these things matter. And the last thing is that


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[Assistant] This is going to be a merit-based environment where we're going to allocate responsibility


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[Assistant] No longer is it going to be central control, centrally controlled as much.


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[Assistant] And if you do do a good job, you're gonna see dramatic differences in what people are paid here. If you do a good job, you're gonna see it.


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[Assistant] And we sat up in front of the company and said this, and it was a cataclysmic shift.


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[Assistant] Slava. This company was, at that point, was losing 2.4 million per quarter and their market cap was at 50 million. Two and a half years later, it was at


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[Assistant] So it was 50 million market cap losing two and a half million per quarter. Two and a half years later it was a half a billion.


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[Assistant] And the reason was, was this, getting this in place and getting the right people on the bus


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[Assistant] This was totally relevant for what we were trying to do in our marketplace.


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[Assistant] It was totally relevant. This wasn't just in some sort of abstract.


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[Assistant] So let's talk about another one that seems, you know, seems kind of ridiculous and I don't know if I have it.


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[Assistant] It must be values that are relevant to creating value for your customers and your company.


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[Assistant] This is the values. It's not, I'm an ethical person and I seek excellence.


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[Assistant] And everything I do and I never tell a lie. That's not what we're talking about. We're talking about value statements that create value for your target customer. So, do no evil.


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[Assistant] What is that? That sounds like the most ridiculous, you know, kind of value statement. Is it? No, why not, Eduardo?


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[Assistant] Okay, but why is this more relevant? Any company can say that, but Google says this and why is this one just unbelievably important here? Right?


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[Assistant] If you do not share your private information, the whole model is broken. We just had this interesting, uh, what was it again? Catherine.


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[Assistant] This year, she did a study, and in Europe, advertising, Google as an advertising company, everybody understands that, right? That's where they get their money.


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[Assistant] Advertising goes down in effectiveness by 65% if they can't use your private information. So in other words, the model breaks down.


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[Assistant] If I, if you don't trust him, and this is why it was devastating, the headline in the Wall Street Journal yesterday, Facebook with Privacy Problem.


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[Assistant] The whole business model at Google is built on private, you having trust in them.


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[Assistant] So actually, do no evil can be a ridiculous thing unless you're


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[Assistant] The Boy Scouts or your Google or Facebook. This makes sense, but if you're, if you're something, it's not, this is fundamental to their business model. So their values.


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[Assistant] Alright, uhm, you're not writing the Ten Commandments about, you know, how to be a good person. You're writing values to make your business a sustainable business that creates value for your customers and gives guideposts as people move forward. And I loved it in the book called The Promise about Obama. And I thought Michelle said it very well. She said, you know, as we go through this election, you know, to her husband, she said, if we can't win it,


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[Assistant] And you should think about it. The values are, if we don't win it, if we have to compromise these things, then I don't want to win it. Even if it's in the short term, medium term, or whatever.


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[Assistant] And by the way, you probably won't win it if you violate those, which is a little different than the situation. Okay. So.


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[Assistant] The great one by the way is Jeff Bezos, and this goes to Slava's point. You can put up a bunch of stuff, like we're going to be, the same things that we just put up there, but enlist the leaders of the organization


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[Assistant] Can talk about that, and I think that Ed's gonna hopefully get to this point this afternoon. Unless they represent a clear


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[Assistant] Uh, DNA match for the leaders and the leaders can stand up there and say, this is what this value means and this is how we're going to operationalize it.


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[Assistant] It's not valuable, but when you see Jeff Bezos in the Zappos video talking about, you know, it's always day one and put the customer first. And what was the other one?


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[Assistant] But you could say those are, but when you hear Jeff Bezos talk about those and how he operationalizes them.


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[Assistant] It's extremely powerful, and it's relevant. So, if you get a chance, just look at the Zappos video, it's about six minutes. Oh, there it was. Obsess over customers, invent, think long term, it's always day one. If you took his values, and you put them in your company, it doesn't mean you're going to succeed.


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[Assistant] One, you have to believe in them and you have to have a clear vision that you can communicate to others as to how to operationalize those and then they have to operationalize those


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[Assistant] Let me just talk a little bit about one that, that, uh, irrelevant, and Matt got me started on this.


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[Assistant] Let's talk about the Entrepreneurship Center, and this is a personal example I can go through now. When I went to the Entrepreneurship Center a year ago, I said,


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[Assistant] Alright, I'm gonna treat this like a business. What do we need to do from a value standpoint to succeed at the entrepreneurship center?


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[Assistant] No, and it's not, you know, not this point. What exactly should we do that will create value that makes us unique and something that it makes it, uh,


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[Assistant] You just can't, it makes it some place that's just, uh, you can't forget, you can't not go to. The first of all thing, it's the MIT Entrepreneurship Center, and we serve all five schools. So it's MIT, the first thing we do, either everything we do improves the brand of MIT, or it decreases the brand. It's never just zero.


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[Assistant] So everything we do that we do with the standard of excellence and rigor.


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[Assistant] We're talking at the break about some people who tell stories. Let me tell you.


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[Assistant] Rigorous data analysis is not the plural of anecdotes.


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[Assistant] We try to do a rigorous analysis, fact-based analysis whenever possible.


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[Assistant] And try to step back from that. That's what MIT is known for, and that's what we're going to represent going forward.


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[Assistant] The second thing is, when I looked at the entrepreneurship center, I said, you know, entrepreneurship is not a centralized thing.


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[Assistant] How we collaborate with all these other pods, the Deshpande Center, VMS, the TLO.


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[Assistant] That is essential to us doing the job for you. You are actually, you know, our customers.


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[Assistant] The better we can do that, the more value we produce for you.


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[Assistant] And so, how we collaborate with those other people, it should be one of our front. And everything that we do, do we, are we promoting collaboration? In the interaction with the Lemelson, you know, group this morning, did I promote collaboration? Are all of the staff members promoting collaboration? That's how we measure our stealth. When we do classes now, to match chagrin, we try to collaborate together.


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[Assistant] But that's what we're trying to do. I should say trying to do. That's what we're going to do. Everything we measure, we do against this. Diversity. You know, when you're talking about entrepreneurship and you look at the data,


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[Assistant] Uh, immigrants and people who, who are kind of not.


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[Assistant] In the mainstream are generally have a higher degree of entrepreneurship and usually more innovative entrepreneurship, the kind of wild ducks as they're known.


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[Assistant] And so, we're looking to get that heterogeneity in what we do.


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[Assistant] Are we getting enough women in a entrepreneur? Are we getting the west coast approach? Are we getting the Asian perspective in what we do?


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[Assistant] Are we getting all the different types of approaches? Do we have, in our EIRs, do our EIRs, or all our EIRs, old white males? Well, that's not very good, is it, huh?


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[Assistant] We should figure out how do we create an environment that has diversity. The fourth thing is


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[Assistant] If we're the entrepreneurship center and we have a unique role here, we should fail. We should fail because


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[Assistant] Failure in experimentation involves failure. You try something, it doesn't work, then you learn from it and you try something else.


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[Assistant] We should be experimenting because we should be the center of innovation for business model and new ideas. Innovation based entrepreneurship.


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[Assistant] So are we experimenting? Are we trying new things? This is a new class.


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[Assistant] Does it work? Does it not work? You know, are we trying other things? Are we experimenting things? We go in and we painted our walls all with this thing called idea paint, which was a crazy idea at the time. Hey, turned out to be a pretty good thing. We painted one wall with orange idea paint. Hey, that turned out to be a pretty bad idea.


[User] Please transcribe this text

[Assistant] But it was still an experimentation, right? And that's what we should do.


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[Assistant] And are we doing that? The fifth thing here is, are we an honest broker? You know, there's tons of places where you can go, where you can get help in entrepreneurship. You know? But if you go to, you know, Y Combinator, is they honest brokers?


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[Assistant] If you go to a panel and you talk to someone who's a law firm, are they an honest broker? No, they're there because they want business, right?


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[Assistant] There's nothing wrong with that. That's the way the world works. There's interests that motivate people to go forward.


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[Assistant] But our unique role here should be, at MIT, we are the honest broker. We are not trying to make it, and so when people come in the EIRs, they have to basically agree to an agreement that says they will not take, pay your company, they will not invest in your company, they will not try to get a consulting job with your company, they won't accept a position in your company.


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[Assistant] That's the rigor that we're putting in there to make the entrepreneurship be different than any other place.


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[Assistant] And that makes us different. I believe, and I hear it over and over again, that's extraordinarily valuable to you. And by the way, it's extraordinarily valuable to you because it's extraordinarily valuable to the engineers on the other side of campus who have not trusted their interactions with Sloan in the past.


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[Assistant] Because they're always out trying to grab something. So can they get, go to a place, what we call the DMZ Zone, the Demilitarized Zone, where they can get honest advice and help meet up with other nice business people?


[User] Please transcribe this text

[Assistant] Where the geeks can meet nice suits who will help them, right?


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[Assistant] And then the last thing is the Mensa Montis. We have an extraordinary group of academics who are doing rigorous research here, and we have practitioners. This is the mind in the hand. Everything we do, exploiting that model.


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[Assistant] Those are the values by which the entrepreneurship center, and if you go through, and this is a case where you can look at it,


[User] Please transcribe this text

[Assistant] Did every single thing that we do meet these values? Do the people we hire, we just hired Elliot Cohn, does he meet all those values? As we interview the people now, do they meet all those values? There are things that we do that we deselect.


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[Assistant] When a venture capitalist calls up, a very good venture capitalist says I want to come in and have office hours.


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[Assistant] So look, here's the deal, you know, we'd love to do that, I'm sure the students would like it, but,


[User] Please transcribe this text

[Assistant] Were you willing to agree to this ethics agreement? I don't think you are because it means you can't invest in them. No, they're not willing to do that.


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[Assistant] Because that's what they're trying to do. So then that violates our honest broker scenario, so they have to be able to go someplace else and do something else.


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[Assistant] And, and, and so everything that we do we, we measure against these. And that's an example that should be very close home to you as to how to do values. Is it working?


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[Assistant] I think it's very clear now. We've made a number of decisions on things that have been pretty controversial.


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[Assistant] Our faculty is half what it was last year. The faculty are here are very committed to the practitioner. Faculty are very committed to these values.


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[Assistant] And we have a group that's coalescing that's doing very, very well. Alright, so that was, uh, sorry, that was probably longer than it should be.


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[Assistant] But that, I think, wraps up. Is culture important? This is what I was talking about. Culture eats strategy for breakfast, and then it eats technology for lunch, and it eats products for dinner.


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[Assistant] And everything else, it's, it's sooner or later. Culture is the most, Lou Gerstner, who's not the most entrepreneurial guy in the world said, when I came to IBM, I thought culture was important.


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[Assistant] When I left, I realized it was the game. It was everything. And I think you'll find that out as you go through this and you see them. I don't know if you've seen this in your companies, Jeffrey, but the companies that have strong culture, nine times out of ten are the ones that end up doing very well.


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[Assistant] They will attract people, they will motivate people, they will be aligned in what they do, they will be highly efficient, they will take pride in it, in what they do, and they'll follow up. So, let me just see, I think that's


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[Assistant] And this is what leads into this afternoon. As you start a company and you're a leader, what are you doing to make clear what your values are? And how are you going to enforce them?


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[Assistant] Do you do that? You can get up and give speeches. That's great. Uhm, that is not sufficient.


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[Assistant] What we did is we put it, built it into our processes in the evaluations, said, what are you doing to make your customers more successful? What are you doing to improve your reputation? What, you know, and what are you doing to, uhm, compete and win? You know?


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[Assistant] And all those things we went through. And when we did those, guess what? The bottom line took care of itself. As I said, the company went from 50 million to cash flow positive and half a billion dollars in two and a half years.


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[Assistant] And it wasn't because we had such a clever strategy. We had a good strategy. We had a great culture. And that's what makes a difference. And that, and that,


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[Assistant] Fundamentally is leadership. Leadership sets help sets the values.


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[Assistant] Put in place ways to enforce those values and each day takes the risk. I'll tell you one other one. At Sensible, we had, we were raising our Series A.


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[Assistant] And we had a VC firm that came in and they seemed very gre- they seemed terrific. They were very, very nice. Guy Bavo came in. We spent a good amount of time with them. We signed the term sheet for 15 million dollar pre-money value.


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[Assistant] $50 million post-money valuation for $5 million. This is in 1990, this is in 1999. $5 million, we literally thought we could change the rotation of the earth. And it was a lot of money, and there were four of us in a room.


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[Assistant] And so as we went through the process, they signed the term sheet and they said,


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[Assistant] Then they switched. Bob was out and Gary was in and he started trying to change the rules of the game. And they didn't do the due diligence and they had a no-shot clause for 60 days. So we couldn't go out and talk to anybody.


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[Assistant] And then they started trying to chip away at the deal. Well, we didn't mean 5 million all at once, we meant 5 million over 2.


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[Assistant] Two tranches. Well that's not the same thing at all. That's not the deal. You're breaking the deal here. And so what we did is they didn't even start to do due diligence. So even though we didn't know what we were going to do, we had a board meeting and we made the decision that


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[Assistant] We don't know what will happen, but we're walking away from this deal. And uhm,


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[Assistant] And I'll never forget it, Bob Coleman, you know, who wasn't the chairman, but he on the board, he said,


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[Assistant] That's fantastic, because if you start compromising your values now, this company's done. And we didn't.


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[Assistant] And we turned around and said at the end, we're sorry, we can't do this deal anymore. Our values are not a match.


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[Assistant] After that, we ended up, someone else watched us, Advent International said, wow, that was very impressive. That was great leadership. We would like to invest. They invested.


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[Assistant] And the company went on and did very, very well. The other person went out and tried to badmouth us.


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[Assistant] And it was, but the key was we stayed strong. We stuck to our values and that set the tone for the company that we meant business about our values. Okay. So it's noon. We'll be back at one o'clock and, uh, Ed shine.


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[Assistant] Uh, we'll be, Matt, Matt Marks will be running it, Ned Schein will be here. Thank you very much.


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[Assistant] Can I chime in on this one? Please. So, uh, we had a rule at, uh, at telling me that every time we fired a salesperson, our revenue went up.


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[Assistant] And the reason for that is that what you described always happens in the early days when your product isn't defined when you don't know your market. There's no other way than to go back and forth with your customer and the requirements change every week and you keep. If you have three salespeople in the field doing that, that's probably okay. If you have 15,


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[Assistant] That's not okay and that's what happened to us because we raised about $200 million of venture capital and we went out and hired lots of


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[Assistant] Yeah, so uhm, so Telme's first business model was Yahoo for the phone. This was the late 90s. It was all about portals and getting access to information over the phone. Advertising was big. And so we did that for about, about a year and a half, 18, 20 months.


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[Assistant] Blew about a hundred million dollars on that idea and, uh, and then the tech bubble burst.


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[Assistant] And, uh, and luckily we just raised another hundred million so we didn't have to shut down the company. But we did basically lay off a third of the company. We devalued everyone's options to a penny.


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[Assistant] And we basically rebooted the company and started over and it was very painful, but


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[Assistant] At the same time, in a crisis people rally and they knew something had to change and so we actually picked a brand new business model using the technology we had developed and we got through it. But it was a painful year or so, just going through that. But it can be done. It certainly can be done.


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[Assistant] Oh sure, and some people left to go join Google because Google was the big thing then. And so we lost a lot of talent, no question about that.


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[Assistant] Dr. Octavius, I, uh, what you got there? Chinese. If I knew you'd be here, I would've... What are you working on? Oh, just a side project.


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[Assistant] Come on, Parker, it's obvious. Let me explain. I only wish you'd told me sooner. I wanted to. But I was afraid that if word got out, my family might be in danger.


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[Assistant] Place is locked down, Captain. Actually webbed down.


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[Assistant] Good ol' Empire State. Man, I love this town. Time to grab a snapshot.


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[Assistant] Oh, sure thing. Just let me know when you're ready and I'll swing by.


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[Assistant] Okay, got some time to kill. See what's happening out in the city.


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[Assistant] Do you need money? No, I mean, I'm a little behind on my rent, but no, no, no, no, no, I'm fine. Girl, problems again, huh?


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[Assistant] These past few years, you helping me through college and working here, sacrificing so much and asking for nothing. I just wish there were more people like you in the world.


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[Assistant] I gotta run. Uhm, thanks again for the party and everything. It really means a lot.


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[Assistant] Fisk estate sale. Sounds fun. Wonder what the kingpin had hidden in his closets.


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[Assistant] Well stop wondering. After losing my parents and Uncle Ben, there were so many times I would have fallen apart if not for you.


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[Assistant] Yuri, the silent alarm was legit. Masked gunman and a single hostage. Looks like a heist in progress.


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[Assistant] Right. Okay, uhm, you hide back there, I take out the bad guys, you make a break when it's clear.


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[Assistant] Good to see you, Pete. Yeah, you too. Not exactly how I pictured us meeting again, though.


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[Assistant] Looks antique. I think I know someone who could help track down where this came from. A job for later.


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[Assistant] Is that so bad? I mean, baggage can carry good things too, like, uh, like money and keys, raspberry lip balm.


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[Assistant] No worries, Herman's just a big cupcake. I'll have him back in Riker's by bedtime.


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[Assistant] And now I'm gonna go beat up a maniac who uses shock waves to rob people. What a perfectly normal life you have, Peter Parker.


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[Assistant] Uhm, uh, today we're gonna start talking about what's underneath the demand curve.


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[Assistant] So basically what we did last time, and what you did in section on Friday, is talk about sort of the workhorse model, uh, of economics, which is the applying demand model.


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[Assistant] And we always start the class with that because that's the, the model in the course. But I think as any good sort of scientist and inquisitive minds, you're probably immediately asking, well, where do these supply and demand curves come from? They're not just come out of thin air. Uh, how, how do we think about them? Where do they come from? And that's what we'll spend the base of the first half of the course going through. And so we're going to start today with the demand curve.


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[Assistant] And the demand curve is gonna come from how consumers make choices.


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[Assistant] Okay, and that will help us derive the demand curve. Then we'll turn next to supply curve, which will come from how firms make, uh, production decisions.


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[Assistant] But let's start with the demand curve and we're gonna start by talking about people's preferences and then the utility functions. Okay? So our model of consumer decision making


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[Assistant] It's gonna be a model of utility maximization.


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[Assistant] That's going to be our fundamental, remember this course is all about constrained maximization. Our model today is going to be a model of utility maximization. And this model is going to have two components. There's going to be consumer preferences.


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[Assistant] Which is what people want, and there's going to be a budget constraint, which is what they can afford.


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[Assistant] And we're gonna put these two things together. We're gonna maximize.


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[Assistant] People's happiness, or their choice, or their happiness given their preferences, subject to the budget constraint they face. And that's gonna be the constraint maximization exercise that actually, through the magic of economics, is gonna yield the demand curve. And it's gonna yield a very sensible demand curve that you'll understand intuitively. Now, so what we're gonna do is do this in three steps.


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[Assistant] Step one over the next two lectures. Step one is we'll talk about preferences. How do we model people's tastes? We'll do that today.


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[Assistant] Step two is we'll talk about how we translate this to utility function. How we mathematically represent people's preferences in the utility function. We'll do that today as well. And then next time, we'll talk about the budget constraints that people face. So today we're gonna talk about the max-amand. Next time we'll talk about the budget constraint. That means today's lecture's quite fun. Today's lecture's about unconstrained choice.


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[Assistant] We're not going to worry at all about what you can afford, what anything costs. We'll worry about what things cost. We're not going to worry about what you can afford. Okay? Today's the lecture where you won the lottery.


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[Assistant] Okay, you won the lottery, money is no object, how do you think about what you want?


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[Assistant] Okay, next time we'll say, well, you didn't win the lottery. In fact, as we're on later in the semester, no one wins the lottery. That's an incredibly bad deal. Uhm, uh, but basically next time we'll impose the budget constraints. But for today, we're just gonna ignore that and talk about what do you want?


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[Assistant] Okay, and to start this, we're gonna start with a series of preference assumptions.


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[Assistant] Series, remember, as I talked about last time, models rely on simplifying assumptions, otherwise we could never write down a model, it would go on forever.


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[Assistant] Okay, and the key question is, are those simplifying assumptions sensible? Uh, do they do violence to reality in a way which makes you not believe the model, or are they roughly consistent with reality in a way that allows you to go on with the model?


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[Assistant] Okay, and we're gonna post three preference assumptions, which I hope will not violate your sense of reasonableness. The first is completeness.


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[Assistant] What I mean by that is you have preferences over any set of goods you might choose from.


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[Assistant] You might be indifferent. You might say I like A as much as B. But you can't say I don't care or I don't know.


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[Assistant] He said, I don't care, that's indifference. You can't say, I don't know. You can't literally say, I don't know how I feel about this. Uhm, you might, uh, say you're indifferent to things, but you won't say, I don't know, uh, how I feel about something. That's completeness.


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[Assistant] Okay, the second is the assumption we've all become familiar with since kindergarten math, which is transitivity.


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[Assistant] If you prefer A to B and B to C, you prefer A to C. Okay? Uh, that's, that's kind of uhm, I'm sure that's pretty clear. You've done this a lot in other classes.


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[Assistant] So these two are sort of standard assumptions you might make in any math class. The third assumption is the one where the economics comes in.


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[Assistant] Which is the assumption of non satiation.


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[Assistant] In this class, we will assume more is always better than less.


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[Assistant] Okay, we'll assume more is better than less. Now to be clear, we're not gonna say...


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[Assistant] That the next unit makes you equally happy as the last unit. In fact, I'll talk about that in a few minutes. We'll in fact assume it makes you less happy. But we will say you always want more.


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[Assistant] That face the chance of more or less, you'll always be happier with more. Okay? And that's the non-satiation assumption.


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[Assistant] I want to start with the graphical representation of preferences.


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[Assistant] I want to graphically represent people's preferences. And I'll do so through something we call indifference curves.


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[Assistant] These are based, indifference curves are basically preference maps. Essentially, indifference curves are graphical maps of preferences. Okay? So, for example,


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[Assistant] Suppose your parents gave you some money at the beginning of the semester, and you spend that money on two things. Your parents are rich, they give you tons of money. Spend that money on two things. Buying pizza, or see, or uhm, or eating cookies. Okay?


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[Assistant] So consider your, consider preferences between pizza and cookies. That's your two things you can do. Once again, it's a constrained model. Obviously in life you can do a million things with your money.


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[Assistant] But it turns out, if we consider the contrast between doing two different things with your money, you get a rich set of intuition that you can apply to a much more multidimensional decision case.


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[Assistant] So let's start with a two-dimensional decision case. You've got your money, you're either gonna have pizza or you're gonna have cookies. Okay? Now consider three choices. Okay? Choice A is two pizzas and one cookie. Choice B is one pizza, one pizza and two cookies. And choice C is two pizzas, two cookies. Okay, that's the three packages I want to compare.


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[Assistant] And I'm gonna assume, and I'll mathematically rationalize in a few minutes, but for now I'm gonna assume you are indifferent between these two packages.


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[Assistant] I'm gonna assume you're equally happy with two slices of pizza and one cookie, or two cookies and one slice of pizza. Okay? I'm gonna assume that.


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[Assistant] But, I'm also gonna assume you prefer option C to both of these.


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[Assistant] In fact, I'm not, I'm gonna assume that because that is what more is better gives you. Okay? So you're different between these.


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[Assistant] This indifference doesn't come from any property I wrote up. That's an assumption. That's just a, just for this case I'm assuming that. This comes from the third property I wrote up there. You prefer package g because more is always better than less. Okay?


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[Assistant] Here's your indifference curve. So we've graphed on the x-axis your number of, number of cookies on the y-axis slices of pizza.


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[Assistant] Okay, now you have, we've graphed the three choices I laid here. Choice A, which is two slices of pizza and one cookie. Choice B, which is two cookies and one slice of pizza. And choice C, which is two of both. And I have drawn on this graph your indifference curves.


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[Assistant] The way your indifference curve looks is there's one indifference curve between A and B. Because those are the points among which you're indifferent.


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[Assistant] So an indifference curve represents is all combinations of consumption among which you are indifferent. That's why we call it indifference curve. So indifference curve, which would be sort of where the big


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[Assistant] Warcourses of this course. A difference curve represents all combinations along which you are indifferent.


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[Assistant] You are in difference between A and B, therefore they lie on the same curve. Okay?


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[Assistant] So that's sort of our, our, our preference map, our indifference curves. And these indifference curves are gonna have four properties, four properties that you have to, that,


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[Assistant] Follow naturally from this, it's really three and a half. The third and fourth are really pretty much the same, but I like to write them out as four.


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[Assistant] For properties that follow from the, from these underlying assumptions. Property one is consumers prefer higher indifference curves. Consumers prefer higher indifference curves.


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[Assistant] Okay, and that just fall for more is better. That is an indifference curve that's higher goes through a package that has at least as much of one thing and more of the other thing. Therefore you prefer it.


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[Assistant] Okay, so as the difference curves shift out, people are happier. Okay, so in that higher indifference curve,


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[Assistant] Indifference curves, uh, never cross. Okay, actually that's, I'm gonna, that's third actually. I wanna come to that in order. Second.


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[Assistant] Third is indifference curves. Second is indifference curves are downward sloping.


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[Assistant] Second is indifference curves are downward sloping. Okay, indifference curves are downward sloping. Let's talk about that first. Okay. That simply comes from the principle of non-satiation. So look at figure 2-2. Here's an upward sloping indifference curve.


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[Assistant] Why does that violate the principle of non-satiation? Why does that violate that? Yeah.


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[Assistant] So basically you're indifferent, on this curve you're indifferent between one of each and two of each. You can't be indifferent. Two of each has got to be better than one of each. So an upward sloping indifference curve would violate non-satiation. So that's the second property of indifference curve. The third property of indifference curve is the difference curves never cross. Okay? We can see that in figure 2-3.


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[Assistant] Okay, someone else tell me why this violates the properties I wrote up there in difference curves crossing. Yeah.


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[Assistant] But, but they're also, but they're also both on the same curve as A.


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[Assistant] So you're saying they're both, you're indifferent with A for both B and C, but you can't be because B is strictly better than C. So it violates transitivity.


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[Assistant] Okay, so the problem with crossing and difference curves, they violate transitivity.


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[Assistant] It's sort of a cute extra assumption, but I think it's important to clarify.


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[Assistant] Which is that there is only one indifference curve through every possible consumption bundle.


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[Assistant] Okay, you can't have two indifference curves going through the same bundle. Okay, uh, and that's because of completeness. If you have two indifference curves going through the same bundle, you wouldn't know how you felt.


[User] Please transcribe this text

[Assistant] Okay, so there can only be one going through every bundle, because you know how you feel.


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[Assistant] You may feel indifferent, but you know how you feel. You can't say, I don't know. Okay, so that's sort of a extra assumption that sort of completes the link to the properties. Okay, so that's basically how indifference curves work. Now, I find when I took this course before you were


[User] Please transcribe this text

[Assistant] God, maybe before your parents were born, I don't know. Certainly before you guys were born. Okay, when I took this course,


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[Assistant] I found this course full of a lot of lightbulb moments. That is, stuff was just sort of confusing, then boom, an example would really make it work for me. And the example that made indifference curves work to me was actually during my first UROP.


[User] Please transcribe this text

[Assistant] When my UROP was with a grad student, and that grad student had to decide where he was going to accept the job. He had a series of job offers he had to decide. And basically he said, here's the way I'm thinking about it. I'm indifferent, I have an indifference map, but I care about two things. I care about school location.


[User] Please transcribe this text

[Assistant] Okay, I care about the quality of my colleagues and the research that's done there and the location. And basically his, he had two offers. One was from Princeton.


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[Assistant] Which he put up here, no offense to New Jerseyans, but Princeton as a young single person sucks. Okay, fine when you're married and have kids, but deadly as a young single person. And the other, so that's Princeton, down here with Santa Cruz. Okay, awesome. Canada, it's the most beautiful university in America.


[User] Please transcribe this text

[Assistant] Okay, but not as good in economics department. And he decided he was roughly indifferent between the two. But he had a third offer from the IMF.


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[Assistant] Which is a research institution in DC, which has, he had a lot of good colleagues, and DC is way better than Princeton, New Jersey, even if it's not as good as Santa Cruz. So he decided he would take the offer at the IMF.


[User] Please transcribe this text

[Assistant] Okay, even though the IMF had worse colleagues than Princeton, and worse locations than Santa Cruz.


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[Assistant] It was still better in combination than the two of them, given his preferences. And that's how he used indifference curves to help make his decision. Okay?


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[Assistant] So that's sort of an example of, uh, of applying it. Once again, no offense to the New Jerseyans in the room, of which I'm one, but believe me, you'd rather be Santa Cruz. Uhm, okay, uh, so now let's go from preferences to utility functions.


[User] Please transcribe this text

[Assistant] Okay, so now we're gonna move from preferences, which we represent graphically, to utility functions, which we're gonna represent mathematically.


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[Assistant] Remember, I want you to understand everything in this course at three levels, graphically, mathematically, and most importantly of all, intuitively.


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[Assistant] Okay, so graphic is in difference curves, now we'll come to the mathematical representation, which utility function.


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[Assistant] Okay, and the idea is that every individual, all of you in this room, have a stable, well-behaved, underlying mathematical representation of your preferences, which we call utility function.


[User] Please transcribe this text

[Assistant] Okay, now once again, that's going to be very complicated and you have preference over lots of different things. We're going to make things simple by writing a two-dimensional representation for now of your indifference curve. We're going to say, how do we mathematically represent your feelings about pizza versus cookies?


[User] Please transcribe this text

[Assistant] Okay, imagine that's all you care about in the world is pizza and cookies.


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[Assistant] How do we mathematically represent that? So for example, we could write down that your utility function,


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[Assistant] It works for anyone in this room or even everyone in this room, but that is a possible way to represent utility.


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[Assistant] Okay, what this would say, this is convenient, we will use, we'll end up using square root form a lot for utility functions, a lot of convenient mathematical properties.


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[Assistant] And it happens to jive with our example, right? Because in this example you're different between two pizza and one cookie, or one pizza and two cookie, they're both square root of two. And you prefer two pizza and two cookies, that's two. Okay?


[User] Please transcribe this text

[Assistant] So this gives you a high utility for two pizza and two cookies.


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[Assistant] Okay, uhm, uh, then, uh, one pizza, uh, then one pizza and two cookie or two pizza and one cookie.


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[Assistant] Okay, well utility doesn't actually mean anything. There's not really a thing out there called utils. Okay.


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[Assistant] In other words, utility is not a cardinal concept. It is only an ordinal concept.


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[Assistant] You cannot say, your utility, you are, you cannot literally say, my utility is X percent higher than your utility. But you can rank them. So we're gonna assume that utility can be ranked to allow you to rank choices.


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[Assistant] Even if generally we might slip some and sort of pretend utility is cardinal for some cute examples. But by and large, we're going to think of utility as purely ordinal. It's just a way to rank your choices. It's just when you have a set of choices out there over many dimensions. Like if your choice in life was always over one dimension,


[User] Please transcribe this text

[Assistant] And more was better, it would always be easy to rank it. Right? You'd never have a problem. Once your choice over more than one dimension, now if you want to rank them, you need some way to combine them.


[User] Please transcribe this text

[Assistant] That's what this function does. It allows you essentially to weight the different elements of your consumption bundle.


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[Assistant] So you can rank them, uhm, when it comes time to choose.


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[Assistant] Okay, now this is obviously incredibly simple, but it turns out to be amazingly powerful in explaining real world behavior. Okay?


[User] Please transcribe this text

[Assistant] And so I want to do today's work with the underlying mathematics of utility.


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[Assistant] And then we'll come back, we'll see in the next few lectures how it can actually be used to explain decisions. So, a key concept we're gonna talk about in this class is margin utility.


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[Assistant] Marginal is just the derivative of the utility function with respect to one of the elements.


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[Assistant] So the marginal utility for cookies, of cookies, is utility of the next cookie, given how many cookies you've had.


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[Assistant] This class will be very focused on marginal decision making.


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[Assistant] In economics, it's all about how you think about the next unit. Turns out that makes life a ton easier.


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[Assistant] Turns out it's way easier to say do you want the next cookie than to say how many cookies do you want.


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[Assistant] Because if you want the next cookie, that's sort of a very isolated decision. You say, okay, I've had this many cookies, do I want the next cookie? Whereas before you start eating, how many cookies do you want? That's sort of a harder, more global decision.


[User] Please transcribe this text

[Assistant] So we're going to focus on this stepwise decision making process of do you want the next unit, the next cookie or the next slice of pizza. Okay? And the key feature of utility functions we'll work with throughout the semester is that they will feature diminishing


[User] Please transcribe this text

[Assistant] More utility will fall as you have more of a good.


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[Assistant] The more of a good you've had, the less happiness you'll derive from the next unit. Okay?


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[Assistant] Now we can see that graphically in figure 2-4.


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[Assistant] Figure 2-4 graphs on the x-axis the number of cookies holding constant pizza. So let's say you're having two pizza slices, and you want to say, what's my benefit from the next cookie?


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[Assistant] And on the, on the left axis, violating what I just said like 15 seconds ago, we graph utility.


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[Assistant] Now once again, the utile numbers don't mean anything, it's just to give you an ordinal sense. What you see here is that if you have one cookie, your utility is 1.4, square root of 2 times 1. If you have two cookies, your utility goes up.


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[Assistant] To square root of four, which is two. You are happy with two cookies.


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[Assistant] But you are less happy from the second cookie than the first cookie. Okay?


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[Assistant] Going from 0 to 1 cookie, gave you one, so in this case we're now graphing the margin utility. So, figure 2-4 is the level of utility, which is not really something you can measure in fact.


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[Assistant] Figure 2-5 is something you can measure, which is margin utility. What's your happiness? And we'll talk about measuring this from the next cookie. You see, the first cookie gives you