Why are stupid people rich?

3 cosmically-stupid questions

Photo by Fatih Güney

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Introduction

This story took me 6 hours to research and write. 

 Not including lunch with spicy-hot Yemenite meat soup with  this week's hero.  If you include the train to Tel Aviv and shlepping out to Hatikva - then it would be 10 hours.

I want to ask you 3 cosmically-stupid questions this beautiful hot summer Friday:

1. How do people who are dumber than us make so much more money than us?

2. Can freemium be forever?

3. Why create value if you can’t capture value?

The story of the worlds greatest programmer

How do people who are dumber than us make lots more money than us?

My friend Michael is the greatest professional programmer I know.  

Maybe not the world’s greatest - that would probably be Linus Torwalds.

But my friend Michael is right up there.

We have been friends for over 20 years. 

He has clarity of thinking,  

He has high emotional and analytical intelligence, 

He has fantastic attention to detail and capability of system thinking about a problem. 

He is a relentless learner.

He is an active coder at age 73.  

Proof that a great programmer is a great designer and great communicator.

These traits enabled him to execute hundreds of successful projects with his independent software development team over the years for some of the household names in the Israeli tech industry.

One of his clients was acquired by Nvidia 5 years ago in a $7BN transaction.   

We’ve worked on a few projects together.   One project was a system for security threat modeling called PTA - Practical Threat Analysis.    I’m not sure that Michael actually knew that PTA has at least 2 other meanings in American English.      Israelis can be remarkably brilliant in tech and astonishingly ignorant about other languages and culture.  Both at the same time.

Back in the day, I got a phone call from Michael.   

I was doing a data loss prevention project at one of Israel’s telecom service providers.

His software house had just finished a threat analysis project for the big Israeli cable TV provider.   

Michael saw the potential in a packaged application for threat modeling.  He and one of his engineers developed a desktop application for Windows.    I was their beta tester. I started looking at how it could help my telecom client.

The final version of the application was intuitive and very slick. The next release was even more powerful.

Danny, “Michael what is the SRP - Suggested Retail Price?”

Michael, “Zero. I don’t want to have to take money from people and commit to support.

I’ll provide a free download.

You can develop libraries and bundle support with your security consulting services”.

Can Freemium be forever?

Within 2 years, he had over 25,000 downloads and a nice array of case studies.

But not a dollar in revenue.

On the other hand, the software was so easy to use and so reliable that he didn’t have any support costs.

Not being as smart as Michael, I started monetizing PTA for my own cyber security and privacy consulting practice.

It was free.  

Michael was happy with the thought that he had created great software and that someone else would take care of customer service.

Someone like me.

I created libraries for HIPAA, FDA Cyber and ISO27001.    I started selling privacy compliance as a fixed-priced, fixed-delivery project with unlimited support for $40K/project.   Within 2 years, I sold over 30 projects.  It was a good business for a solo consultancy.  Before long, I had thousands of downloads of my libraries from security analysts all over the world.   I was invited to give a talk at an international conference on GRC with Bruce Schneier.

Meanwhile back at the ranch.

Michael started talking about raising venture capital to create an enterprise version of the software.  I worked with a third friend, Avishai, to develop business and financial plans.  Avishai had 2 successful tech exits under his belt and was well known in the Israeli VC community.

The first question that a VC will ask, “How much traction do you have?”

The answer was 0 revenue for the software.

We said, “We have a community of over 25,000 users including Nokia and PwC”.

The investors said, “Very nice, but without traction, how can we invest in your company?”

And Michael hit a dead end with investors.

By the way, he didn’t attend any of the investor meetings.

Why create value if you can’t capture value?

9 years ago, Michael and Avishai started a learning venture called TikTek.

TikTek is a peer-to-peer learning platform for high school students in Israel.   

Michael and Avishai funded the project themselves and over the years received support from Microsoft and Harel, one of Israel’s largest insurance companies as part of their CSR program.

TikTek is run by volunteers.

The platform has 782,000 daily active users.

I had lunch last week with Michael at a Yemenite restaurant in Hatikva.  

Over the spicy-hot meat soup I asked, “What’s the plan for TikTek?”

Michael, “We want to find a rich donor that will pick up the project and sponsor it for us. We’re bleeding cash”.

Danny, “What happened to Harel?”

Michael, “They wanted to put a banner on the home page, advertising their support for us.  They asked for access to the childrens’ phone numbers so that they could market insurance products to the parents.

I told them absolutely not, and they stopped their funding”.

Danny, “I agree that disclosing phone numbers is a show-stopper, but what’s wrong with giving them recognition in return for $50K/quarter?

They’d be paying for 781,000 eyeballs / day.    0.2 cents / impression / month.  That sounds like a great deal to me”

Michael, “Absolutely not. I told them no. We’re an advertising-free platform”.

Danny, “You have millions of alumni that succeeded in high school because of TikTek.   Why don’t you contact your alumni and offer them the opportunity to give back on a subscription basis?

Some of these alumni work in Israeli high tech companies and make $500K a year salary. Some of them have billion dollar exits.   Your alumni can fund the platform.

Why not ask parents with money to contribute to the success of the platform that helps their kids succeed in high school and for free?”

Michael,  “I don’t know how to do that.  We don’t have emails or phone numbers”.

Danny, “Get on Instagram and start asking for alumni and parents to be part of the phenomenal success of TikTek?”

Michael, “Danny, you know, neither I nor Avishai are social media people”.

Danny, “Then hire a 9th grader to be your social media marketing person and recruit Instagram influencers who would sell subscriptions to alumni and parents.  Give her 10% of the take”.

Michael, “I don’t want to be begging for contributions. It would damage the reputation of the platform”.

The scenario began to sound like PTA.   Amazing project. Great software.  Zero ability to capture value.

Zero ability to capture value

A successful company is measured by 2 things:

1. How much value does it create?

2. How much of that value does it capture?

TikTek creates billions of dollars in value for parents of high school students.

The creators of TikTek capture zero value from their amazing project.

David Ogilvy said that positioning comes before marketing.

Positioning as "free forever platform with no advertising in Israel only" made TikTek wildly successful.

But it also means that it can only be marketed as a "free forever platform with no advertising in Israel only”.

How would you capture value  from a peer-to-peer learning platform with 782,000 active users each day and millions of successful alumni?

Let me know.