Introducing Auctions in Unexpected Places

Google didn’t become the behemoth that they are by having the best technology. They didn’t invent a faster computer to retrieve the most accurate search results in .15 seconds. They became the leader in search and online advertising by being creative – and they did it through auctions. Yes, Google is the world’s largest auction company.

Have you noticed the advertisements that come up whenever you do a common Google search? They show both on the top and side of your search results (see image) and match incredibly closely to what you are looking for. Have you ever thought about how Google decides to place the accurate ads? Behind the scenes a genius little auction is held for every search that takes place.

Advertisers place bids for what they would be willing to pay to show up next to search terms that they believe are close to their product. Google also ranks the relevance of the ad using a complex algorithm. These two pieces of data are combined to rank each potential advertisement. Then a Vickrey auction is held to determine the price each advertiser must pay and the order of the ads. I highly recommend this extremely concise explanation from Wired magazine (only 226 words).

Well that isn’t so complicated, how much money did they make with that idea? Sure one step of the process is technologically complex, but even if their relevance ranking was created in one day, it would be able to get the job done. The real genius is applying an automated auction system to online advertising, optimizing for price and relevance while allowing the advertiser a high degree of control. So that begs the question – where else can I apply an efficient auction process that will make me billions of dollars?

Of course there are a lot of reasons Google is where it is today, I don’t mean to oversimplify things. But this simple auction is a good chunk of the $24 billion in revenue they made last year.


  • Descending-clock auction for electricity – Trade Electricity Like Pork Bellies
  • Terrific full Google article in the Wired magazine issue – Secret of Googlenomics: Data-Fueled Recipe Brews Profitability

Is Outsourcing Jobs Overseas Really a Problem? Depends Who You Ask

Photo: Till Krech

Thousands, if not millions of Americans have lost their job overseas. Due to the recently flattened world, companies are now able to find workers in remote countries eager to work longer hours for significantly less pay.

Why do companies outsource jobs?
It’s simple – money. Companies have the goal of making money, not employing the most Americans as possible. Sometimes these conflict. If the business can make more money by laying off unnecessary workers or outsourcing jobs overseas, we have seen time and time again that they will.

Is this wrong?
No, it is not wrong. The company is simply responding to incentives – specifically, the management of the company is responding to incentives. The more money the company makes, the more money the executives make. These executives are often extremely removed from the lowest paid individuals who see their jobs outsourced – the management sees the pros but not the cons.

What is the result?
A report by McKinsey showed for every $1 of labor outsourced overseas, the United States receives $1.12 back (in addition to 33 cents retained by the country that does the work). So by outsourcing we are able to boost our production 12% without actually working!

Overall this sounds like a win for the United States, but in reality maybe it’s not – those simple numbers do not tell the whole story. Instead of $1 being dispersed amongst the poorest, $1.12 goes into the pockets of the richest! Outsourcing is a very efficient way of redistributing wealth – the poor in the US lose $1, the poor outside the US gain 33 cents, while the rich in the US gain $1.12!

Why outsourcing will not be stopped
Corporate executives are the ones who make the decisions for the business. They are also the ones who benefit the most from outsourcing jobs. If we expect outsourcing to stop, we have to change the incentives so that the negativities of outsourcing are felt.

Of course, the people who have the ability to change economic incentives are politicians – politicians that are buddy-buddy with the corporate big wigs and the associated lobbyists. Thus, until outsourcing becomes a compelling issue, nothing will change.

Translating a Free Online Education into a College Diploma

Photo: wohnai

Over the last couple years an exciting new trend has emerged amongst universities across the country – they are providing courses online for free! Harvard, Yale, Stanford, MIT, UC Berkeley, Columbia, UCLA, and John Hopkins are just some of the schools that have lecture videos of entire courses online.

Why the heck are these schools doing this?
It is the free information movement. Just like there was a free love movement in the 1970’s, there is a similar free knowledge movement in the early part of the new century. Wikipedia is the epitome – its free information has become a part of the way we research just about everything. Another manifestation of this is the huge open source software movement providing free software to the masses. Examples are the Linux operating system, Mozilla Firefox web browser, and Android phone operating system. It is a cultural and economic phenomenon that deserves much more attention than a few sentences, but there is not room in this post so I will refrain – just be sure to take advantage of it!

What exactly are they offering?
It varies widely from school to school and even class to class. The organization OpenCourseWare currently has 200 schools with 13,000 courses offered online – some just have the lecture videos, while others also have the assignments and exams complete with solutions. Beyond what is posted you are on your own – there are no help resources such as teacher assistants or other class members to contact.

Keep reading …

An Alternative to Traditional Venture Funding

Photo: Wally Gobetz

Yesterday I explained the pitfalls of too much venture funding. Whenever posting about a problem I will always attempt to follow up the next day with a potential solution. My idea is a Venture Capital funded bank account to be used by the startup where every X dollars spent translates into a percentage point of equity. The beauty in this model is that the startup receives the funding they need, but are incentivized to keeps their costs under control and become profitable in a hurry.

Let’s imagine a fictitious hot new internet startup looking for series B funding to take them to the next level. The offer they receive from KPCB is $10 million in exchange for a 40% in the company. Sounds great right: a ton of money from one of the best venture firms at what the founders feel is a generous valuation. Wrong! Take that same valuation but avoid the trap of taking more money than you need. Here is a potential counter offer:

  • $2 million immediately for an 8% stake
    • This amount will certainly be needed before becoming profitable.
  • The VC firm opens a bank account / line of credit for up to $8 million more where every $25k is 0.1% of equity
    • Forces the startup to watch their expenses rather than quickly burning through money without consequences
    • Protects startup from equity dilution (an excellent explanation) by only granting equity to the VC for funding used

If things start to go downhill for the startup there must be some protection from the VCs simply closing the account. Here are some potential rules:
Keep Reading …

Too Much Venture Funding – When More Money is a Bad Thing

Photo: Go Go Ninja

One pitfall for startups is taking on more funding than they need in exchange for a huge chunk of the company. It is obvious that the reverse is a problem — not enough funding means the young company has to be instantly profitable and will not be able to rapidly bring in new talent. Not as apparent but almost as dangerous is taking too much funding.

The examples are endless in the dot com boom. Webvan, Kozmo, RealNames, eStyle, Upromise, Priceline WebHouse Club,, Autolines, and are some companies that had north of $100 million in funding and went out of business. After that debacle venture capitalists are more weary to hand out that kind of money. Only a handful such as Twitter, Facebook, LinkedIn, and Zenga have crossed a $100 mil. A further sign of caution is that in these latest examples the money often came well after the company had proven themselves with millions of users or by already being profitable.

Despite the regression in funding since the dot com bust, there still is too much money flying around for internet startups. Websites that are a good idea but lack a monitization strategy can raise tens of millions of dollars with good connections and a little luck. These aren’t large-scale manufacturing companies that need to purchase machinery or brick and mortar stores that need to purchase expensive inventory, they are websites that only need to buy a few servers. They have no need for tens of millions.

What happens when a startup receives more funding than they need?

  • It removes the sense of urgency to become profitable.
  • It makes it appear like the funding is a win, when really it is just a step in the process to having a profitable company, not the end goal.
  • The founders may become paper millionaires and lose focus.
  • The company loses control in the form of pressure from a VC firm with a huge vested interest.
  • The company owns less by selling equity for money they don’t need.
  • They spend the money foolishly because they can.  There were famous dot com heyday parties that cost over a quarter million.
  • They blow money on marketing. Obviously marketing is important, but cash strapped companies are forced to be creative with their marketing and still get more results than a Super Bowl commercial.
  • Overaggressive expansion. Expanding before having a plan leads to unnecessary employees without direction.

Now that we all agree that too much venture funding is a bad thing, what can we do about it? Check back tomorrow for my idea.

Here is the second post “An Alternative to Traditional Venture Funding.”

The Smart Mathematics of Credit Cards

Photo: Andres Rueda

You most likely use credit cards daily, but have you taken the time to consider how they work? Let’s examine one of the most obvious aspects of the credit card: the number. Credit card numbers are 14 to 16 digits long and link your purchase back to your account at the bank. But what do they mean?

The first digit is reserved for specifying what type of card it is. 3 = Travel and Entertainment card (34/37 = AMEX, 38 = Diner’s Club), 4 = Visa, 5 = MasterCard, and 6 = Discover. Each type handles the next 12 to 14 digits differently. They are used to identify the account number, bank number, whether it is a business or personal account, and/or the currency. Check out these sites for a more in depth coverage of how each credit card provider uses these digits.

One thing all credit cards have in common is a check digit at the end which is used to verify that it is a valid credit card. The check digit uses the Luhn algorithm, also known as the modulus 10 algorithm, to “check” the rest of the numbers. It’s goal is to not prevent counterfeit, but rather to protect against the accidental mistyping or mistransmission of the number.

The algorithm:

  1. Double the value of every second digit moving from right to left.
  2. Sum the value of every individual digit.
  3. If the total ends in zero it is valid, any other number it is invalid.

Let’s take a simple example: 47142

  1. 2×4 = 8, 2×7 = 14. Therefore we have 4(14)1(8)2
  2. 4+1+4+1+8+2 = 20
  3. 20 ends in zero so the number is valid.

Keep Reading …

How Would You Like Continuous Direct Deposit for Your Paycheck?

Photo: Andrew Magill

I receive a monthly paycheck. No I’m not bragging, quite the opposite, I am complaining. This sounds great to those who are unemployed, but why do I have to wait an entire month before being payed? The work that I do on March 1st I will not actually receive any compensation for until April 1st, 31 days later. To put it another way, 0.1% of my life later. Now does it seem like a bigger deal? I would much rather have the instant gratification of immediately receiving the wages of my hard day’s work.

Before big corporations came about I imagine everyone got paid at the end of the day. Today we sign agreements to give the company the right to only pay us once a week, bi-weekly, or even monthly regardless of whether you are paid by the hour or on salary. And of course there is no interest paid even though they are holding what is rightfully your money. My solution I call continuous direct deposit.

In the workplace money is never physically handed to the employee by their boss, it is all done by either check or direct deposit. Direct deposit allows for the transferring of funds from one bank account to another without dealing with cash or checks. Continuous direct deposit would transfer money from the employer’s bank account to the employee’s at infinitesimally short time periods — time periods that would make my monthly paycheck look like an eternity. Anyone with a salaried position can determine how much money they make any given minute, second, or even millisecond. This can be boiled down into an equation to be used to continuously deposit your paycheck into your account.

In theory you should be able to head to your bank’s website, repetitiously hit refresh, and watch you balance slowly tick up. Altering the equation could ensure that money is only deposited weekdays or during work hours.

Keep reading …