Greg McAdoo, of Sequoia Capital, is a big fan of startups who find customers whose hair is on fire, and then sells them a fire hose.

When someone’s hair is on fire, they don’t care if the fire hose is not the right color, leaks a bit, or has all the right government certifications. They just want to put the fire out and are willing to pay a lot for it.

When searching for ideas for your startup, if you can’t find examples of customers whose hair on fire, try a different approach.

Set the fire yourself.

Cirque du Soleil did this with the traditional circus.
Apple did it with the iPod.
Reddit did this with news.

So when trying to come up with that new killer startup idea, don’t worry if you can’t find customers whose hair’s on fire. Start your own and be ready with the hose.

To explore these ideas further check out:

Blue Ocean Strategy

And the YCombinator Startup school podcasts.

The Fire hose metaphor came from the 2007: Greg McAdoo Sequoia Capital podcast (13:50 min).

I am a big fan of Warren Buffet, which is why I am so excited to name our latest IdeaWarz tournament The Oracle of Omaha (the city from which Warren hails, and still lives to this today).

Dubbed as one of the greatest investors of our time, Warren Buffet and his holding company (Berkshire Hathaway) have amassed one of the greatest fortunes ever. Warren has consistently beating the returns of the S&P 500 for over 40 years. A claim few in the world can make.

Here are a few fun facts you may not have known about Warren, and why I think he is such a cool guy.

1. He still does his own taxes.

With a net worth of over $52 billion, Warren still likes to do his own taxes.

2. He has been living in the same house since 1958 (which he bought for $31,500).

3. Warren’s salary is $100,000

On the surface, Warren’s salary not overly impressive. What is impressive is that Warren has never take a big salary or option plan. Warren gets paid solely on the basis of whether his stock goes up or down. I wish more CEOs managed their companies this way.

4. Berkshire Hathaway employees 19 people.

That’s not bad when your holding company oversees 180,000 employees, with revenue upwards of $81 billion. Many companies in corporate America could borrow a page from Warren’s play book productivity and efficiency.

5. He likes Cherry Coke and hamburgers.

With everything you read about Warren, it would be easy to think he is some kind of super monk who hides away in his ivory tower nibbling on bread and drinking magical tea. Nothing could be further from the truth. He walks the street as a common man (no bodyguards) and eats hamburgers and drinks Cherry Coke like anyone else in Omaha. He is also rumored to be a fierce bridge player (often playing with partner Bill Gates).

6. He gave away $30 billion to charity.

Not many of us will be ever to put that on our resumes. But it’s true. In 2006 Warren donated 83% of his holdings to the Bill and Melinda Gates Foundation. This was the largest donation in U.S. history.

I could go on about more great things Warren has done, but I hope you get the picture. He is one of those amazing individuals, that’s comes around once in a life time and leaves a real mark on the world. Which is why I am proud to dedicate this IdeaWarz tournament in his name.

From 1983 to 1998 investors experienced one of the greatest bull markets in stock market history. From this golden era, three mantras emerged to become accepted as conventional wisdom:

• buy and hold
• the market always goes up
• you can’t time the market

As someone who used to subscribe to these truisms, I will explain why this conventional wisdom no longer holds and how following them in today’s market will lead to financial ruin.

Building the myth

While the myths themselves have been with us for several generations, my generation first came in contact with them during the bull market of 1983 - 1998 (note: by market I am referring to the Dow Jones Industrial Average).

Anyone who in invested $1000 in 1983 would see their money multiply almost 9 times by the time 1998 rolled around. This bull market gave investors an annual average return of 15.7% over 15 years.

Helping entrench these myths were the mutual fund companies. It dovetailed nicely with the industry’s rallying cry at the time - asset accumulation. Marketing a fund became just as important as managing the money.

With graphs, charts, and lots of historical data, mutual fund companies painted a pretty compelling picture for why investors could count on the market to go up. And when the inevitable bumps did come, the market always recovered which made timing the market moot.

But perhaps the greatest reason people subscribed to these myths was that they worked. For this market, buy and hold gave people a great rate of return for doing absolutely nothing.

It was the doing nothing that attracted a lot of investors. They didn’t have to think. With history and the numbers on their side, it was easy to abdicate responsibility and have faith that the market would always go up. And for over 15 years it did.

All myths are local

There is nothing wrong with conventional wisdom. As Jerry Seinfeld once said, ‘Sometime the road less traveled is less traveled for a reason.’

Unfortunately, conventional wisdom breaks down when applied outside of the context and boundaries from which they were formed. This is especially true of financial markets. There are no rules that work in all cycles.

Investors get in trouble when they apply one set of market myths to a completely different market cycle. When you look at markets over 100 year periods, the trend is indeed up. When you look at markets in 10 to 20 year cycles however, things look quite different.

For one, the market doesn’t always go up. From April 1930 - July 1932 the market lost 86% of its value.

Secondly the market can go side ways and deliver no returns for upwards of 20 years. Look at the returns investors received over these market cycles of the last century.

For many 20 year periods the market returned little no capital appreciation. Not only would buy and hold have put peoples capital at undo risk, they would have lost the opportunity to put that capital to use else where. The market does not always rise, nor are you guaranteed a return of 11% per annum.

If you think these crashes are things of the past, ask Japanese investors how the felt buying and holding stocks on the Nikkei index from 1989 - 2003.

It took 14 years for the bear market to bottom after a market peak in 1989. And this is Japan - one of the most prosperous, hardworking, industrialized nations of the world.

What does this all mean?

I don’t want to give the impression that people should not invest in the stock market. I believe the stock market is a wonderful vehicle of investment. And when treated with respect, it is a wonderful way for people to get a decent return on capital.

But as someone who grew up applying these myths, I was jarred when I read Maggie Mahar’s excellent book, Bull! A history of the boom and bust, 1982 - 2004, to learn that not only were these myths not always true, but that applying them in today’s market could be disastrous.

Does this mean a crash in the stock market is pending? I don’t know.

But I do know that the strategies that served us so well for the last 20 years will require changes for the next 20. With the market recently punching through an all time high of 13,000, the real estate market beginning to cool, and consumer debt at one of its highest levels, many wonder if the market can go much higher.

While it is certainly beyond most of us to predict, we can make educated guesses. And after enjoying one of the great bull markets in history, the tide may be heading out.

That useful euphemism the 80/20 rule doesn’t apply when it comes to measuring participation on the web.

Last week, at Web 2.0 Expo, Bill Tancer of Hitwise shared some hard numbers on how much participation is actually occurring at some of the most popular web 2.0 sites.

• YouTube – 0.16% (visits to upload video)
• Flickr – 0.2% (visits to upload photos)
• Wikipedia – 4.59% (visits to edit pages)

Out of all the traffic YouTube and Flickr get, 0.2% of people actually upload videos or share photos. Wikipedia kind of surprised me with 4.59% of people editing pages.

This is a profound reminder for companies and startups building online communities. A very small percentage of your members are highly relevant. The 99.8% of casual observes in the community cannot overshadow the 0.2% providing content, or the magic will disappear.

Bill also reminded us how precarious any leadership position is in the web 2.0 world. As an example, he showed how YouTube came out of no where to pass Yahoo and Google over 3 to 6 week periods respectively in video search. This hyper-rate of adoption has got to be scary executives, knowing that over the course of a holiday they could lose their market leading positions.

For those who believe that English will sweep aside all other languages on the web, think again.

According to Dave Sifry (CEO of Technorati), Japanese is the most popular language of choice claiming 37% of the blogosphere, while English comes in second at 33%.

While Dave admitted some languages were under represented (like Korean and French) he said English was definitely second in popularity and more and more people are blogging in Japanese every day.

These and many other interesting bits of fact and trivia were shared by Dave last week during a one of the keynotes at Web 2.0 Expo.

Question #2: What is the fastest growing blogging language in the world today?

Answer: Farsi.

1% of the world’s blogs out there today are written in Farsi, coming out of Iran. I found this to be very inspirational, knowing that even in repressive regimes, blogs and other web 2.0 tools are giving people a real voice and they are using it.

Question #3: Out of the most 100 linked to sites on the web, how many of them are blogs?

Answer: 22%.

Dave had a wicked graph showing all the big name media companies like the New York Times, BBC, Wall Street Journal at the top, with popular blogs sites like Engadget, and The Huffington Post starting to nip at their heels.

This was an increase of 10% from only 6 months ago. The trend is obvious - blogs matter and are disrupting traditional media more and more every day.

Other interesting blog stats:

• 120,000 new blogs are created every day
• There are 1.5 million new posts every day
• Out of 15.3 million active blogs, 21% are active.

While the creation of 120,000 every day seemed high, the message was clear - blogging is alive and well on the web.

Dave wrapped up by sharing some tips for up-and-coming bloggers on who to raise their profiles in the blogosphere.

1. Post frequently

• most magic middle bloggers (about 3 million people) post about once per day
• highly influential bloggers post twice per day

2. Stay at it

• most influential bloggers have been at it for 1 – 2 years

3. Don’t be intimidated

• 88% of the Technoarti Top 100 is different than one year ago (it’s fluid and changing)

Overall, I found Dave’s talk to be one of the most interesting of the conference. I had no idea Japanese was the most popular language, or that Farsi was the fastest growing. I hope these stats were of as much interest to you, as they were to me.

Toast to D4V for the pictures.

The customer is always right has been a business mantra for close to a century. So what would cause del.icio.us to ignore this sage advice, and ignore customer requests.

Well last week at Web 2.0 Expo, I heard Joshua Schachter share a few good stories of where ignoring customer requests made sense for the del.icio.us community.

Joshua described how some customers wanted del.icio.us to publicly share a definitive list of the top tags used in the community. This seems like a simple request. In today’s age of openness and transparency, why wouldn’t del.icio.us want to share this data?

Well it turns out that the reason del.icio.us works, is because people tag for themselves and not others. If del.icio.us were to publish a definitive ranked list of the top tags, people could game it so their articles are marked with the most popular tags. This would diminish the usefulness of tags, and dilute the overall site experience.

Another example of not listening to the customer was not allowing media companies to pre-tag articles. Joshua doesn’t like pre-tagging because it defeats the intent of how del.icio.us was meant to be used. It skews the tagging accuracy and relevancy.

Whether you agree with Joshua or not on how del.icio.us works isn’t important. What is important is understanding that customers can be wrong, and you need to keep the big picture in mind when adding features to your software.

I agree with Joshua. Listening to customers is an art. They can give you valuable feedback, but you can’t follow their advice blindly.

Hiya all,

A great session here at Web 2.0 Expo had Reid Hoffman (LinkedIn) discussing the good, the bad and the ugly of social networks.

One of the discussion points was around various exit options for startups. Reid said there were three.

1.The early exit ($5 - $50 Million)

You have an interesting product someone else is ready to take to the next level, or the acquirer just likes you and buys you purely for your team.

Your product or service already has great traction in the market place. You have gone through several iterations or growth and funding, potentially have more than one product or service.

3. Billion dollar boys club (> $1 Billion)

You are committing to world domination, requiring lots of humans, and are in it for the long haul.

Reid recommends startups keep all three options open because which ever way you go, it’s the same amount of work. You are not going to be working any less with the $10 Million exit than the $1 Billion.

So execute as if you are in it for the long haul. That million dollar company just might be a billion dollar company and at the end of the day it’s the same amount of work.

At least that’s how Eric Schmidt (CEO of Google) sees things.

Yesterday at Web 2.0 Expo Eric announced that the circle is now complete. Very shortly Google will be releasing a Power Point clone to round out their office suite of applications (Word and Excel).

Of course Eric doesn’t see these tools competing with Microsoft’s Office Suite. For one MS Office is much more feature rich and Google’s tools don’t compete on functionality. Secondly these tools are much more focused toward online collaboration and not the desktop.

This of course is all poppy cock. Most people use 1% of MS Office features and you can bet Microsoft is adding web connectivity to their offerings.

John challenged Eric on this point and said that he remembered interviewing Eric way back in 2002 and how pleased Eric was to be working for a small software startup that didn’t have to compete with Microsoft. Times have definitely changed.

Also covered in the key note were comments around the DoubleClick acquisition, the Viacom lawsuit and the importance of net neutrality.

While Eric wouldn’t confirm that Google got into a bidding war with Microsoft over DoubleClick, he did make it very clear that Google is committed to offering an end-to-end one stop shopping experience for advertisers on the web.

The DoubleClick deal compliments the YouTube acquisition as a way for Google to own more advertising streams on the web.

What Eric thinks Google brings to the table is the science behind the art of advertising. By that he means that while DoubleClick requires human interaction to help add relevancy to adds, Google can automate a lot of that.

As far as Viacom suing YouTube over DMCA issues, Eric feels this is a negotiating tactic. Eric’s point on DMCA is that both parties need to participate in regulating improper use of video content and material. For their part, Google is working on adding tools like Claim Your Content (CYC) to help people sort this stuff out.

Eric believes Google is doing their part here. As an aside Eric, commented that as soon as the Australian Broadcasting Corporation (ABC) contacted them regarding infringement on their material, Google immediately took the offending videos down. Little did they know at the time that the letter was actually sent by a 16 year old impersonating the ABC. Gotta love kids.

Also discussed was Eric’s role on the board of Apple. While he very clearly needs watch what he says and does (as Apple also has an Office Suite to compete now with Google) he has nothing but respect and admiration for what Apple has done, and enjoys gaining insight into one of the worlds most innovative companies.

Eric and John wrapped things up by sharing a few thoughts on net neutrality.. Eric made the point that net neutrality is necessary to continue the innovation, and creativity that we are seeing in the web today. While rich companies like Google could afford to pay for better services that gets their traffic ahead of everyone else’s, he thinks it would be a terrible day if net neutrality went away.

Ahem.

At the end of the day, I can’t help but like Eric Schmidt. His image is definitely Mr. Rogers. He is friendly, polite, unassuming, and never puts anyone down. He is navigating Google through some very complex waters, while trying to maintain the culture that has made them so successful. No small feat.

I get the sense Eric and Google want to do the right thing, because they are under no illusion as to how much power they possess (with all that data), and how easily it would be to abuse. For their part I think they are doing their best to do the right thing, while many other companies would have succumbed to the temptation.

Bonus material: Here is a video of some of the key note. Eric discussing the release of Google Power Point.

Last week MJ, Jasmine, and myself were invited by Professors Andrew McAfee, Karim Lakhani, and Peter Coles of the Harvard Business School, to do a case study on the merits of using prediction markets for IdeaWarz.

Prediction markets are something we have considered in the past, though for a variety of reasons were never completely comfortable with.

Here is what Harvard’s best and brightest had to say on the subject.

What are prediction markets?

A prediction market is a vehicle for placing bets on the outcome of certain events. For example, people use prediction markets to bet on who is going to win the next Super Bowl.

While prediction markets like Tradesports.com do brisk business betting on sporting events, they have also recently become hot in business circles. They’re being used by companies like HP and Google internally to determine things like product release dates and how many Gmail subscribers are likely to sign-up in a given month.

The case for prediction markets

At beginning the discussion, Professor McAfee polled the class and asked who thought prediction markets made sense for Cambrian House’s IdeaWarz.
Here is how the students voted:

Just the day before, Bo Cowgill of Google, gave a good presentation on how they were using prediction markets internally to help determine new product launch dates. It was no surprise that after hearing Google’s success with prediction markets internally, the students thought IdeaWarz would benefit from them as well.

Most students liked the fact that prediction markets caused people to make their best predictions. If they guessed right, they would be rewarded. Wrong and they would be left with nothing. That feeling of really having some skin in the game, much like the stock market, meant prediction markets should lead to better results than simple voting.

Others liked the increased granularity prediction markets provided. Instead of half the ideas being eliminated each round of the tournament, good ideas could hang around until the end.

Overall, students thought prediction markets would give an accurate depiction of which ideas were best in the community.

The case against prediction markets

Shifting gears, Professor McAfee asked those students who weren’t fans to explain why.

Top of the list was increased complexity. Prediction markets are more complicated than simple American Idol style voting. People need to be knowledgeable on terms like: bid, ask, quantity, and volume.

Another difficultly would be in defining the trigger points for the market itself. What would be the event that decides whether the contract becomes true or not? We could ask community members to buy contracts based on ideas that return the highest profit - but at the end of the month, with out any confirming data, this is just a guess. It is neither true nor false.

Another student commented that in the absence of an independent event, the market would become self-fulfilling. People buying the contracts on the market would themselves decide the outcome. For a prediction market to work, the event deciding the outcome needs to be independent of the voting. Otherwise all you have is a crowd rewarding itself for acting as a herd. It was this last comment that I found most insightful, and the biggest knock against using prediction markets for IdeaWarz.

Near the end of the discussion, Professor McAfee polled the class one last time to see if their thoughts had changed:

Not surprisingly, many who previously liked prediction markets were now not so sure.

Critical thinking

What I found most valuable about this experience was having an independent group apply critical thinking to the questions and issues we faced. MJ and I had talked a lot about prediction markets over the year, but were not able to fully articulate our unease until these students provided us with striking insight in areas we missed before. It was an honor and a privilege to have access such a collection brains.

We would sincerely like to thank the Harvard Business School and their faculty, Professor McAffe, and Lakhani for hosting us for the week.

This is one crowd we would love to tap again.

One risk an entrepreneur encounters when they launch a startup is being so wedded to their idea that they resist any change. While it’s important to ignore the naysayers, critical feedback has helped a lot of companies find their true path.

Did you know that Flickr and YouTube were both originally failures?

Flickr was a massive multi-player online game called Game Never Ending.
YouTube was originally built as a dating site.

My point isn’t that your idea will change as radically as these high profile examples. Only that when your startup becomes successful, it won’t look the same as the idea you start with. And that’s ok. It’s to be expected - not resisted.

Our good friend Patrick Lor reminded me how iStockPhoto didn’t really take off until they nailed their community compensation model - micro-payment system.

We ourselves adjusted course this year. Instead of trying to commercialize each product idea ourselves, we could do a much better job working even more collaboratively with our community.

So when you’re out there executing, don’t be afraid to change it up. A good tip from our buddy Reid Hoffman is to seek critical feedback from the 6 smartest people you know. Listen to their advice and then decide if you think you can overcome the challenges. If you can’t move on - you just saved 6 months of your life. If you can, you are in a much better position and know the first few hurdles you’ll face.

Keep an open mind, have a thick skin, and relish the critical feedback. I find it’s often more insightful than any of the positive stuff I get.