Serious Taboos

Wednesday, December 5th, 2007

As I’ve already mentioned, in Serious Play, Michael Schrage, of the MIT Media Lab, examines how organizations use models, simulations, and prototypes to stimulate innovation.

He notes that when we want to learn about an organization, we should fight the impulse to look at what it puts into its models and simulations:

“I’ve learned that you learn far more about an organization from what they won’t model than from what they do,” asserts political scientist Garry Brewer, coauthor of the classic study of U.S. military simulations The War Game. “What I’ve observed — in both the military and private industry — is that organizations frequently leave out the very assumptions that are most important or most threatening to their sense of themselves. They always have a ‘good reason’ for this…. As a result, many organizations expend an extraordinary amount of effort developing models that can never be as useful or as valid as they say they want.”

For example:

In its war games during the 1980s, for example, the U.S. Navy would not allow aircraft carriers — its biggest, most expensive, and perhaps most controversial weapons platform — to be sunk hypothetically. This taboo persisted even after the Argentines successfully sank a British carrier during the Falklands War. It held fast even when the navy’s own submariners argued that carriers were particularly vulnerable to under-sea attack. For a variety of budgetary, political, interservice-rivalry and national-security reasons, the navy was permitted to run extensive war games and simulations in which its biggest and most vulnerable carriers were given a pass. The taboo was tacitly respected in virtually all formal reviews. External efforts to simulate conflicts in which carriers were destroyed were met with threats of security classification. One result, documented in Thomas B. Allen’s War Games, a popular history of U.S. war gaming, is that the navy acquired a reputation for cheating that undermined the credibility of naval proposals and exacerbated interservice rivalries. This particular taboo was deeply ironic because, as Harvard’s Stephen Peter Rosen ably documents in Winning the Next War, simulations and war games had been largely responsible for encouraging the navy to adopt aircraft carriers in the first place.

I discussed the U.S. Navy’s effective use of war games in Learning to Learn to Fight.

Erratum: I bow to mon frère‘s superior war-nerditry, for he caught this error in Schrage’s text: The HMS Sheffield was a destroyer not a carrier.

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Serious Shell Games

Wednesday, December 5th, 2007

As I’ve already mentioned, in Serious Play, Michael Schrage, of the MIT Media Lab, examines how organizations use models, simulations, and prototypes to stimulate innovation.

One of the most important lessons is that it matters how we use those models, simulations, and prototypes:

At Royal Dutch/Shell, the world’s second-largest oil company, senior executives used to be urged to come up with three scenarios whenever they considered a strategic course of action. Each scenario was typically a small jewel of narrative analysis and foresight. But there was a catch. “The problem was we always chose the middle one,” Shell UK head Chris Fay told the Financial Times. “So now we only put forward two.”

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Tesla Motors founder ousted

Wednesday, December 5th, 2007

I’m not at all surprised, but I’m always a bit sad when I hear stories like this. Technology Tesla Motors founder ousted:

Tesla Motors has left founder Martin Eberhard by the side of the road months before the Silicon Valley electric car company rolls its hotly-anticipated Roadster supercar off the production line and into the hands of celebrity customers like the Google founders and California Governor Arnold Schwarzenegger.

Eberhard, long the public face of Tesla, has stepped down as president of technology and left the board of directors in a move that is — depending on who’s talking — either part of a planned transition or a hit-and-run take-out of the founder following the appointment of a new chief executive last week.
[...]
In August, Eberhard, who started Tesla five years ago with the financial backing of PayPal alum Musk, relinquished his CEO spot so the San Carlos, Calif., startup could hire a top executive with experience in large-scale manufacturing. Former Flextronics chief Michael Marks took over as interim CEO, but Eberhard says he never expected to be booted from the company.

“I truthfully thought I’d be spending quite a few more years at Tesla Motors,” says Eberhard before boarding a flight in Burbank to San Francisco. “The only surprise was that the board no longer wanted me as part of the company. There wasn’t any major disagreement going on, not that I know of anyway.”

As Eberhard recounts it, Musk told him about a month ago that he wanted him to leave at some unspecified future date. “I thought it was a strange notion to kick the founder out of the company anyway, where there wasn’t a big ideological difference on the board where we wanted to go,” Eberhad says. “For all Elon’s character and personality, he’s trying to solve same problem as I am. “

The end came suddenly last Tuesday. “Somebody in the company asked me if I would be leaving at a certain date and I said, `I don’t think so,’ but that turned out to be the case,” Eberhard says. On Wednesday, Tesla announced the replacement of Marks with a permanent CEO, tech veteran Ze’ev Drori, founder of chip company Monolithic Memories. Two days later Eberhard was packing up his office. “Elon did talk to me about leaving the company without having a [board] vote,” Eberhard says. “I left voluntarily when it was clear that I wasn’t going to win a vote anyway.” Eberhard, who will serve on a Tesla advisory board, says Musk explained why he was being ousted “only in the vaguest terms.”

When I reach Musk on his cell phone and put the question to him, he pauses and laughs a bit nervously. “I don’t know what to say without being negative,” says Musk, whose other post-PayPal ventures include rocket company SpaceX and solar systems installer Solar City. “It did not make sense for him to be at the company. Of course, if the board thought if it would be better for him to stay he would still be there.”

“I don’t think its ideological, it was more operational, I suppose,” he adds. “There wasn’t an obvious role for Martin.”

That rankles some at Tesla, acknowledges Darryl Siry, the company’s vice president of sales, marketing and service. “I think for a lot of people who have identified with Martin for many years and who are emotionally connected to Martin as a leader at Tesla, this transition is a bit jarring,” he says. “But we have to all adapt and move on.”

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Killer robots from Silicon Valley could replace soldiers

Tuesday, December 4th, 2007

This sounds like science fiction. Bad science fiction. That doesn’t mean I don’t love it though. Killer robots from Silicon Valley could replace soldiers:

Robotex is the brainchild of Terry Izumi, a reclusive filmmaker who comes from a long line of samurai warriors, has trained Secret Service agents, and worked both at DreamWorks and in Disney’s Imagineering division.

When Izumi decided to build a better war robot in 2005, he recruited Nathan Gettings, a former PayPal software engineer and founder of Palantir Technologies, who brought in his brother Adam as well as a fourth (silent) partner who hails from both PayPal and YouTube. They had a prototype in no time. But they needed a weapon, and that’s how Jerry Baber, his revolutionary shotgun, and a pilotless mini-helicopter come into the picture.

Samurai, Secret Service, Disney Imagineering, Palantir Technologies? And a pilotless mini-copter? Can it get any better? Yes:

With that meeting, he turned a promising little robot into something both multifunctional and truly scary. His company’s $8,000 Atchisson Assault-12 shotgun was fresh off the assembly line after a dozen years in development. It’s made of aircraft-grade stainless steel, never needs lubrication or cleaning, and won’t rust. Pour sand through it and it won’t clog. It doesn’t recoil, so it’s accurate even when it’s firing in automatic mode, which it does at a rate of 300 rounds per minute.

“It delivers the lead equivalent of 132 M16s,” says Baber. “When they start firing from every direction, it’s all over.”

And the AA-12 is versatile. Along with firing ridiculously powerful FRAG-12 ammo — a straight-out-of-Terminator shell that contains a whirling miniature grenade — the AA-12 can handle non-lethal Tasers and even bullets that are deadly up to 120 feet but fall harmlessly by 800 feet.

Limited-range bullets are important in urban combat situations, Baber explains, because once an insurgent gets between the robot and a soldier operating it on the ground, the bot is rendered useless – unless the soldier wants to shoot at himself.

Baber has paired the AH and its smaller sibling, the MH, with a remote-control mini-helicopter called the AutoCopter, which holds two AA-12s and can carry the bots into battle. His plan is to buy the robots from Robotex and the helicopter from Neural Robotics in Huntsville, Ala. Then he’s going to arm them, resell the systems, and split the profits.

Of course, anyone who’s piloted a remote-control helicopter should take pause at the notion of mounting “the lead equivalent of 132 M16s” on one.

Anyway, check out the CGI video.

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Serious Play Between the Spreadsheets

Tuesday, December 4th, 2007

As I’ve already mentioned, in Serious Play, Michael Schrage, of the MIT Media Lab, examines how organizations use models, simulations, and prototypes to stimulate innovation.

One of the most important tools for serious play is the spreadsheet — which may not seem particularly playful for those outside the world of finance:

“Spreadsheets totally changed the financial business,” observes George Gould, a cofounder of the Donaldson, Lufkin, Jenrette investment-banking firm and undersecretary of the Treasury in the Reagan Administration. “Certainly, spreadsheets made CFOs more powerful than they used to be — a fact that is reflected in their pay scales.”

Low-cost spreadsheet software effectively launched the largest and most significant experiment in rapid prototyping and simulation in the history of business. [...] Financial models that had once cost thousands of dollars to design and build now cost thousands of pennies. [...] Within five years of the 1979 introduction of VisiCalc, the first electronic spreadsheet for personal computers, over 1 million software spreadsheets were being sold annually.

Here’s where things get interesting:

Operationally, Gould asserts, spreadsheet affected every significant facet of finance. “They were the great leveraged-buyout tool of that [1980s] era,” he notes. “They turned what had been a traditional financial analysis into a blueprint of how to run the business to maximize cash flow. Mergers and acquisitions once driven by long-term investment-banking relationships were now being driven by aggressive young bankers with even more aggressive spreadsheet models. But they were seen as credible models, so boards of directors were legally obligated to take them seriously.”

Spreadsheets turned financial analysis into a blueprint for running the company. But that’s not the main reason they caught on, at least not initially:

Dan Bricklin, the Harvard Business School student who created VisiCalc with MIT’s Bob Frankston, attributes the success of his software to the speed with which it paid for itself. Bricklin observes that well-heeled Wall Street analysts — thoroughly sick and tired of recalculating spreadsheet after spreadsheet on paper — would cheerfully shell out over $2,500 to buy VisiCalc and an Apple II personal computer simply to be able to reduce the time and tedium associated with the manual approach. “For most of these guys,” Bricklin recalls, “the payback for their investment was under a week.”

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Charles Munger and His Amusing But Aprocryphal Planck Anecdote

Tuesday, December 4th, 2007

I’ve already mentioned that Berkshire Hathaway’s Charles Munger gave a speech at UCSB in 2003 that was chock-full of thought-provoking bits. Here’s an amusing but apocryphal story about Max Planck, the famous physicist:

After he won his prize, he was invited to lecture everywhere, and he had this chauffeur that drove him around to give public lectures all through Germany. And the chauffeur memorized the lecture, and so one day he said, “Gee Professor Planck, why don’t you let me try it as we switch places?” And so he got up and gave the lecture. At the end of it some physicist stood up and posed a question of extreme difficulty. But the chauffeur was up to it. “Well,” he said, “I’m surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I’m going to ask my chauffeur to respond.”

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Charles Munger and His Amusing But Aprocryphal Planck Anecdote

Tuesday, December 4th, 2007

I’ve already mentioned that Berkshire Hathaway’s Charles Munger gave a speech at UCSB in 2003 that was chock-full of thought-provoking bits. Here’s an amusing but apocryphal story about Max Planck, the famous physicist:

After he won his prize, he was invited to lecture everywhere, and he had this chauffeur that drove him around to give public lectures all through Germany. And the chauffeur memorized the lecture, and so one day he said, “Gee Professor Planck, why don’t you let me try it as we switch places?” And so he got up and gave the lecture. At the end of it some physicist stood up and posed a question of extreme difficulty. But the chauffeur was up to it. “Well,” he said, “I’m surprised that a citizen of an advanced city like Munich is asking so elementary a question, so I’m going to ask my chauffeur to respond.”

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Is the whole thing a Kafkaesque nightmare?

Monday, December 3rd, 2007

Independent film-maker Tom DiCillo made a movie called Delirious, which Roger Ebert enjoyed — but despite Ebert’s good review, it only made $200,000. So DeCillo asked Ebert, Is the whole thing a Kafkaesque nightmare?

“To give you some indication of how disoriented I feel at the moment,” he wrote, “I am getting no real, tangible feedback from anyone. And so I’m kind of struggling on my own to make sense of how a film I put my soul into, that Buscemi put his soul into, a film that generated such strong, positive reviews, had no life in the market.

“I’m not talking about gigantic box office success. I’m simply speaking of a modestly successful run that earned people their money back and, more productively, helped encourage other financiers and studios to invest in another one of my films. Of course I’m extremely proud of the film. Of course I feel a sense of victory in just getting it made. But for a filmmaker to survive there has to be some form of return.

“This is not intended to be a complaint or Whine Fest. I know this is a brutal business and I’m not asking for, nor expecting, special treatment, babying or sympathy from anyone. I’m just looking for some answers.”

Ebert answers his questions:

1. The film got unusually strong reviews. Why did it not find an audience theatrically?

Reviews work best in connection with a visible opening. When moviegoers have never seen an ad for a movie and it isn’t playing in their city, state or region of the nation, what difference do reviews make?

Apart from that, here’s a funny thing: Lots of moviegoers trust a critic less than a brainless ad promising them the sun, the moon and the stars. They have a certain reluctance to see a movie that might be good. Millions of teenage boys, in particular, flock to the stupid and the brutal, and have no interest in any film that involves words like “paparazzi.” (Millions of others are our hope for the future, of course, but opening weekends are driven by horror, superheroes and comic book and game adaptations, and depend on the fanboys.)

2. Were the U.S. distributors right in passing on it? In other words, is “Delirious” unmarketable?

Because I enjoyed it from beginning to end, I wouldn’t call it unmarketable, but it isn’t a high-concept (i.e., low-concept) film, and it needs a chance to be discovered.

Let me give you an example. The second funniest film I’ve seen in the last 10 years is “The Castle” (1997), from Australia. When I showed it at my Overlooked Film Festival, the 1,600 people in the audience almost lost their lunch, they were laughing so hard. It grossed less than a million in North America. It didn’t have stars, it wasn’t about castles, and hardly anybody went. So it wasn’t “marketable.” Because I Iove movies, it cheers me up when people have a good time at one. This one was released by the old Miramax. “The test audience didn’t like it,” Harvey Weinstein told me, after he yanked it. OK, either (a) the test audience was wrong, or (b) it was the wrong test audience.

3. If a small film like “Delirious” is judged by its opening weekend gross for survival, what does that say about the state of U.S. independent film? In other words, if an independent film needs a big opening weekend to succeed, how does this make it different from a Hollywood film?

It says indies are being forced out by the Opening Weekend Syndrome. Indie films will rarely have big opening weekends because they don’t have the publicity machines to grind out press junkets, talk-show guest shots, celeb magazine profiles, big ad campaigns, and fast-food tie-ins. They need a chance to find an audience. “Chariots of Fire” (1981) opened in one theater, crept into two or three, tip-toed across the country, had great word of mouth, played for months, and won the Oscar. Today, it would have closed after that first theater. Here’s a hypothesis: Anyone reading this article is likely to enjoy a movie more if it doesn’t have free collectibles at McDonald’s.

4. If a big opening weekend is the only guarantee of life for an independent film, does this affect the kinds of independent films being made?

Hard to say, because so many indie films are labors of love that their makers had to make. Consider Miranda July’s “Me and You and Everyone We Know” (2005), which had a $2 million budget and grossed less than $4 million. Not so great. When the lights went up at Sundance, Lisa Schwarzbaum of Entertainment Weekly was across the aisle from me. “Whatd’ya think?” she asked me or I asked her, I can’t remember which. I remember the reply: “I think it’s the best film in the festival.” Other person: “Me, too.” How in the hell can a movie that delicate and magical not find a big audience when I know there are people starving for films like that?

5. Does independent film exist anymore?

Yes, barely. The irony is that indies are embraced at film festivals, which have almost become an alternative distribution channel. “Delirious,” for example, was invited by San Sebastian, Sundance, San Francisco, Seattle, Avignon, Munich and Karlovy Vary. All major festivals. But you didn’t make “Delirious” to sell tickets for festivals. I frankly think it’s time for festivals to give their entries a cut of the box office.

If there is room for hope, it’s that good actors are happy to appear in them because the indies are a repository of great roles. Halle Berry has starred in movies budgeted at millions, but won the Oscar for “Monster’s Ball.” Robert De Niro top-lined millions of bucks, but won the Oscar for the low-budget “Raging Bull.” Charlize Theron could pull down $1 million-$2 million a picture or more, but won the Oscar for “Monster,” which cost lots less than a million. Actors know that beyond a certain budget level, mega-productions are less likely to contain great acting opportunities. What’s being marketed is the spectacle, not the performances.

6. Can any of these questions even be answered? Should I even bother with trying to find the answers? Is the whole thing a Kafkaesque nightmare or can it all be shrugged off simply by saying, “You win some, you lose some.”

I don’t know. Maybe DVDs and Netflix and Blockbuster on Demand and cable TV and pay-per-view and especially high-quality streaming on the Internet will rescue you and your fellow independents. I come from an innocent and hopeful time when we went to the Art Theater in Champaign-Urbana to see anything they were showing, because we knew it wouldn’t have Frankie Avalon in it, and they gave you a free cup of coffee, and we thought that was way cool. It was a movie by Cassavetes or Shirley Clarke? Or DiCillo or Sayles or Jarmusch? How did we get so lucky?

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In Japan Half The Top Selling Books Are Written On Mobile Phones

Monday, December 3rd, 2007

If you thought reading a book on a portable electronic device was odd, please note that in Japan half the top-selling books are written on mobile phones:

With all the talk about Amazon’s Kindle, there’s a bigger revolution taking place and those who studied classic literature will be horrified. In Japan, half of the top ten selling works of fiction in the first six months of 2007 were composed on mobile phones.

According to the Sydney Morning Herald, mobile phone novels (keitai shousetsu) have become a publishing phenomenon in Japan, “turning middle-of-the-road publishing houses into major concerns and making their authors a small fortune in the process.”

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Charles Munger on Side-Stepping the Gangs, Pimps, and Dope-Dealers

Monday, December 3rd, 2007

I’ve already mentioned that Berkshire Hathaway’s Charles Munger gave a speech at UCSB in 2003 that was chock-full of thought-provoking bits. Here’s another such bit:

Berkshire had this former savings and loan company, and it had made this loan on a hotel right opposite the Hollywood Park Racetrack. In due time the neighborhood changed and it was full of gangs, pimps, and dope dealers. They tore copper pipe out of the wall for dope fixes, and there were people hanging around the hotel with guns, and nobody would come. We foreclosed on it two or three times, and the loan value went down to nothing. We seemed to have an insolvable economic problem — a microeconomic problem.

Now we could have gone to McKinsey, or maybe a bunch of professors from Harvard, and we would have gotten a report about 10 inches thick about the ways we could approach this failing hotel in this terrible neighborhood. But instead, we put a sign on the property that said: “For sale or rent.” And in came, in response to that sign, a man who said, “I’ll spend $200,000 fixing up your hotel, and buy it at a high price on credit, if you can get zoning so I can turn the parking lot into a putting green.” “You’ve got to have a parking lot in a hotel,” we said. “What do you have in mind?” He said. “No, my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. And I don’t care how bad the neighborhood is going to be because my people are self-contained behind walls. All they have to do is get on the bus in the morning and come home in the evening, and they don’t need a parking lot; they need a putting green.” So we made the deal with the guy. The whole thing worked beautifully, and the loan got paid off, and it all worked out.

Posted in Business, Charles Munger, Economics, Urbanism | No Comments »

Mexican Ladders and the Process Edge

Monday, December 3rd, 2007

In Serious Play, Michael Schrage shares a story about Mexican ladders from Peter Keen’s The Process Edge to explain why you need to model the right thing to get the right results:

A leading Mexican manufacturer decided to reengineer how it built aluminum ladders. According to its sales and accounting model, the company had been making an operating profit of $4.50 per ladder. The reengineering initiative nearly doubled profits to $8.20 per ladder. Unfortunately, those profit figures proved meaningless. The reengineering had completely ignored the most critical cost issues because the company’s business model — and its accounting mechanisms — were flawed.

When the company switched to activity-based accounting to evaluate overhead, its managers were horrified to discover that the company’s legal expenses were higher for ladders than for any other product they manufactured. People who fell off ladders tended to sue the manufacturer. Those costs were crippling.

When the total litigation and settlement costs were tallied, the company discovered that it was losing almost $10 on every ladder that it made. And even after the reengineering initiative had slashed manufacturing costs by one third, it was losing more than $6 on every ladder.

With some legal finesse, the company found a way to offer its customers free accident insurance at a cost of just $2 per ladder.

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Social Networking through Computer-Aided Design

Sunday, December 2nd, 2007

In Serious Play, Michael Schrage, of the MIT Media Lab, examines how organizations use models, simulations, and prototypes to stimulate innovation.

I enjoyed this anecdote about the Boeing 777′s then-new computer-aided design program and how it was misused:

Boeing’s new digital design infrastructure was so clever that engineers got computer-generated e-mail alerting them to “interferences” created by design conflicts. If the avionics team and the hydraulics team developed systems that competed for the same physical space in the digital simulation, for instance, CATIA alerted both groups to the conflict. the purpose was to settle conflicts before design prototype.

Much to their surprise, the 777 project’s managers discovered that several engineers deliberately built conflicts with other systems into their proposed designs. Sabotage? Rebellion against the new technology? Engineering humor? Abuse of the prototyping medium? No, the interferences were generated so that engineers in one part of the company could figure out which of their counterparts they should meet with to discuss future design issues.

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Charles Munger on Increasing Price to Increase Sales

Friday, November 30th, 2007

Berkshire Hathaway’s Charles Munger gave a speech at UCSB in 2003 that was chock-full of thought-provoking bits, like this:

My fifth criticism is there is too little synthesis in economics. Not only with matter outside traditional economics, but also within economics. I have posed at two different business schools the following problem. I say, “You have studied supply and demand curves. You have learned that when you raise the price, ordinarily the volume you can sell goes down, and when you reduce the price, the volume you can sell goes up. Is that right? That’s what you’ve learned?” They all nod yes. And I say, “Now tell me several instances when, if you want the physical volume to go up, the correct answer is to increase the price?” And there’s this long and ghastly pause. And finally, in each of the two business schools in which I’ve tried this, maybe one person in fifty could name one instance. They come up with the idea that occasionally a higher price acts as a rough indicator of quality and thereby increases sales volumes.

This happened in the case of my friend Bill Ballhaus. When he was head of Beckman Instruments it produced some complicated product where if it failed it caused enormous damage to the purchaser. It wasn’t a pump at the bottom of an oil well, but that’s a good mental example. And he realized that the reason this thing was selling so poorly, even though it was better than anybody else’s product, was because it was priced lower. It made people think it was a low quality gizmo. So he raised the price by 20% or so and the volume went way up.

But only one in fifty can come up with this sole instance in a modern business school — one of the business schools being Stanford, which is hard to get into. And nobody has yet come up with the main answer that I like. Suppose you raise that price, and use the extra money to bribe the other guy’s purchasing agent? (Laughter). Is that going to work? And are there functional equivalents in economics — microeconomics — of raising the price and using the extra sales proceeds to drive sales higher? And of course there are zillion, once you’ve made that mental jump. It’s so simple.

One of the most extreme examples is in the investment management field. Suppose you’re the manager of a mutual fund, and you want to sell more. People commonly come to the following answer: You raise the commissions, which of course reduces the number of units of real investments delivered to the ultimate buyer, so you’re increasing the price per unit of real investment that you’re selling the ultimate customer. And you’re using that extra commission to bribe the customer’s purchasing agent. You’re bribing the broker to betray his client and put the client’s money into the high-commission product. This has worked to produce at least a trillion dollars of mutual fund sales.

This tactic is not an attractive part of human nature, and I want to tell you that I pretty completely avoided it in my life. I don’t think it’s necessary to spend your life selling what you would never buy. Even though it’s legal, I don’t think it’s a good idea.

(Hat tip to the Photon Courier.)

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A Thirst for Change

Tuesday, November 27th, 2007

A few years ago, Kara and Theo Goldin quit their jobs — she was a VP at AOL, and he was an IP lawyer at Netscape — to renovate their house and raise their young children. Then they realized they had A Thirst for Change:

In May, 2005, the Goldins launched Hint, a naturally flavored bottled water made without sweeteners or preservatives. Kara is the chief executive; Theo the chief operating officer. This year they expect revenues of $3 million to $4 million, and next year three times as much. The water is sold in several grocery chains, including Whole Foods Market, Stop & Shop, and Ralphs, as well as small stores. And, because Cherise McVicar, Walt Disney’s senior vice-president for national promotions, happened to try (and like) a sample of Hint, the Goldins now have an arrangement to put Disney’ characters on their bottles.

For the Goldins, the years between leaving their familiar world and entering unknown terrain were filled with questioning, sussing out possibilities, then a moment of recognition followed by months of experimenting, gathering info, listening, cold-calling, and being called naive. Then they just plunged in.
[...]
Kara began paying more attention to the concerns of health-conscious mothers. “I was looking for the low-hanging fruit,” she says. Then there it was: the sugared-up juice box. “I always wondered why there wasn’t another option.” There is, of course. It’s called water. But Kara figured kids (and everyone else) wanted a drink with flavor. At spas, she had been served water with fruit in it, and realized there was something to that: “I thought someone should put it in a bottle.”

Kara began testing fruit combinations on her family and friends while trying to squeeze information from any people in the beverage business who would talk to her. They were pretty skeptical that someone without any experience could succeed with the most difficult of drinks to produce and sell: one that was unsweetened and made without preservatives.

When she put together a business plan in 2004, she started to see what the skeptics were getting at. “I had no resources for labels, bottles, bottlers,” she says. “I had only halfway listened to their point about how hard it is to get shelf space [in stores].” The only thing that wasn’t a problem was money: She and Theo financed the company themselves initially. Now, after additional investments from friends and family, they own more than 90%.

Theo began devoting more time to Hint about six months before the May, 2005, launch — in two stores, one in Marin County, Calif., and the other in Manhattan. They hadn’t signed up any distributors yet, so they drove the first delivery to the local gourmet market (one case of each flavor — apple, cucumber, lime, and tangerine).

A few months later, they got their first big break. At the Fancy Food Show in New York, the San Francisco buyer for Whole Foods expressed interest in carrying Hint. He asked if the Goldins were with United Natural Foods (UNFI ). They had no idea what that was. Turns out it is the largest natural food distributor in the U.S. With the promise of Whole Foods as a customer, they worked out an agreement.

Getting distributors is what it’s all about in the beverage business. And for those who work on other things besides health foods, an unsweetened drink retailing for $1.69-$3.00 is a hard sell. The Goldins did, though, just manage to get in with an important network of independent distributors. “They have surprised a lot of people,” says Gerry Khermouch, the editor of Beverage Business Insights. “They’re selling overpriced, unsweetened water with a slight hint of fruit. They’re the niche of the niche.”

Now the Goldins have begun to grapple with some of the compromises they made early on. They’ve improved the production process so that Hint has a shelf life of 12 months instead of four. They’ve changed their 16-ounce bottle, which was originally an inch shorter than others on the shelves and looked puny by comparison. Their new one is a standard eight inches tall.

They’ve also figured out a few things about the flavors. Apple and pear are too difficult to work with, so they’re on hiatus. To develop mango grapefruit took 15 tries with three different consultants over an entire year. Peppermint, though, took only two attempts.

Next year they hope to raise $3 million from an investor who might help expand their distribution and sales. “We learned over and over again in the tech world that it’s not really about the idea. It’s about how well and how fast you execute the idea,” says Theo.

It’s not really about the idea. It’s about how well and how fast you execute the idea. I guess that’s why I should have executed this idea a few years back.

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Farmyard Stills Quench a Thirst for Local Spirits

Monday, November 26th, 2007

Farmyard Stills Quench a Thirst for Local Spirits:

“I talked to banks, told them I wanted to make vodka on my farm here, and they said, ‘Yeah, right you are,’” recalled Mr. Fox, whose company went on to become the first distillery in Kansas since Prohibition. “Well, I had a million dollars in sales last year.”

“I’m the seventh generation to be in alcohol,” he said proudly. “Just the first to do it legally.”

On the heels of the microbrewing boom, new microdistilleries are thriving from coast to coast. And some of the latest and quirkiest entrants to the industry are in places like Iowa, Indiana, Illinois, Michigan and Mr. Fox’s barn.

In trying to take advantage of generations of his family’s moonshining expertise, Mr. Fox, for instance, had no business plan, no employees and about $100 in his checking account. Only his timing was rich: the national demand for high-end spirits, especially vodka, has soared over the last several years, along with the general consumer craving for products with local flair.

Meanwhile, some of the states, increasingly aware of the power of agri-business to generate tourism and tax dollars, have gradually begun loosening some of the temperance-era laws that have lingered for decades, restricting who can distill what, and where.

With its abundance of grain and fruit, the Midwest stands poised to capitalize on the confluence of trends unlike any other region and could, in time, come to rival California, currently the leader in small-scale distilling, experts said.

Small, private distilleries are opening at a rate of about 10 to 20 a year. There are about 100 across the country. Some are attached to wineries, restaurants and breweries, or, increasingly, are located on farms. Though there is no precise definition for what the industry refers to as artisanal or craft distilleries, experts say they are distinguished from mass distillers by their small scale, their use of local and often organic ingredients, and the experimental quality of some of their products, like seasonal pumpkin-infused vodka.

As a result of their individuality and regional differences, the distillers offer spirits that run the gamut in terms of quality and taste. Some are one- or two-person backyard operations; others are state-of-the-art laboratories built at great expense.

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