July 13, 2012

The rise and fall of Digg, and what we can learn from it

The inevitable happened yesterday, the remaining parts of Digg were acquired by Betaworks for $500,000. At the top of the peak a couple of years ago, Digg was almost acquired by Google for $200 million. We have since late April suspected that Digg would fall when their engineers left the company for work at the Washington Post. Digg was the first large social news site and has the same business model as Trejdify, so this is a good time to analyze what happened, and what we can learn from it.

The rise of Digg

Let's start from the beginning. Digg was created by Kevin Rose in 2004, and soon became one of the largest websites in the world. To analyze why this happened, we can use the book Good to Great by Jim Collins.We have earlier applied that book on Trejdify and if you want to read more about the book, please read this article: Time for Trejdify to regroup. These are the steps on how to take a company from good to great applied on Digg:

  • Level 5 leadership. Was Kevin Rose a level 5 leader? He created the company from scratch, and he probably did it to make some money from it, but he also wanted to build a great product. He was the founder, and founders are often level 5 leaders.
  • First who... then what. This is hard to analyze for someone on the outside, but I think Kevin Rose only hired A players in the beginning. 
  • Confront the brutal facts.
  • Hedgehog concept. All the early features added to Digg, such as the Diggnation show, did fit within the Hedgehog concept.
  • Culture of discipline. They followed everything above during the buildup of Digg.
  • Technology accelerators. They launched various features, such as the widgets to Digg a story automatically from another blog, and the Diggnation show was possible thanks to faster Internet speed.

The fall of Digg

The author of the book Good to Great has also written the book How the mighty fall. The book is about how a once great company declines toward the doomsday. Here are the five stages of decline (it may be possible for a company in decline to skip a stage) and what happened to Digg at each stage:

  1. Hubris born of success. People become arrogant and they lose sight of the true underlying factors that created success in the first place.
    • Digg: Digg was once one of the most popular websites on the Internet, and if you are the most popular website, you may think that you can do whatever you want. After the release of Digg 4.0 in 2010, users began to leave for other websites such as Reddit. Maybe Digg got arrogant and didn't think they needed to test version 4.0 among real users before releasing it? After the release, it was impossible to bring back Digg 3.0
  2. Undisciplined pursuit of more. Companies make undisciplined leaps into areas where they cannot be great or they try to grow faster than they can hire great people. When an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall.
    • Digg: Kevin Rose said in one of the episodes of the Random Show that because Digg grew so fast, he basically hired everyone he found, a decision he said that he later regretted
  3. Denial of risk and peril. Leaders at this stage ignore negative data, and focus only on the positive data. They blame external factors for setbacks, rather than accept responsibility.
    • Digg: The users complained about the new design and that various features had been removed. You could hear users say: "I used to use Digg, but the experience, especially on mobile, just kept getting worse and worse!"
  4. Grasping for salvation. Companies at this stage tend to hire a leader that's supposed to save it, they try different bold strategies, creates products or acquires companies that doesn't fit within the Hedgehog concept.
    • Digg: Alexis Ohanian said about Digg 4.0 that the version "is cobbling together features from more popular sites and departing from the core of digg, which was to give the power back to the people"
  5. Capitulation to irrelevance or death. The setbacks starts to erode the financial strength of the company, and key persons abandons the company.
    • Digg: 37 percent of the staff had to leave Digg in 2010, Kevin Rose left the company in 2011, and the engineers left the company in 2012 for work at the Washington Post 

What can we learn from it?

  • A Digg engineer said that Digg 3.0 couldn't be brought back after the release of Digg 4.0. One lesson learned is to make sure to test a new version among real users before releasing it - or make sure that you can bring back the old version. 
  • Never think you are smarter than your users. Just because you are the most popular guy in the block doesn't mean that you soon may become the least popular.

What's the future for Digg?

  • Betaworks are about to turn Digg back into a startup, with a low budget, a small team, and fast cycles. The book How the might fall proved that it is possible to reverse a company in decline, and to do that Betaworks need to use the concepts from Good to Great. 
  • I personally think that they should focus on quality news. The reason to why we created Trejdify is that the business news section on Digg is terrible. Today you can find articles in the business section like "Which Fighting Style Kicks The Most Ass?" and "Can juicing help improve your skin?" which has nothing at all to do with business. 
  • The current largest competitor is Reddit, but Reddit also has a bad reputation among some people, because of various sub-reddits that are rather "extreme." Digg can probably find users among those who prefer a less extreme website.
  • Many traditional newspapers are struggling for their survival, and the investor Warren Buffett believes that newspapers should only act locally - not globally (The future of traditional newspapers according to different experts). Can Digg become the online newspaper who act globally aggregating content from all the local newspapers?    

Source: TechCrunch, TechCrunch, Wikipedia, Betaworks

July 11, 2012

Time for Trejdify to regroup

Trejdify has been online for about 6 months now and its now time to regroup and make sure that we are pushing Trejdify in the best direction. Many companies have the tendency to add features that doesn't fit the underlying business model, mostly because they don't have the time to reflect on what they are doing. Soon they realize that they have gone too far from the original model and are about to fall over the cliff because it's too late to change. The plan is to regroup every 6 month, since we don't want to end up in the cold water below the Golden Gate bridge.

Today, we are going to use the book Good to Great by Jim Collins to make sure we are doing the correct decisions. Good to Great is considered to be a classic, and the book is about a research project on how a company can go from a mediocre company to becoming the best company. The author has written several other books with the same theme, including how to build a company that can survive for a long time.

This image is showing a summary of the findings from the book:

Level 5 leadership. The definition of a Level 5 leader is:
"Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. It's not that Level 5 leaders have no ego or self-interest. Indeed, they are incredibly ambitious - but their ambition is first and foremost for the institution, not themselves."
First who... then what. This chapter is mostly about people. The point is to first decide who you need, before you decide where you are going with the company. It is also important to remember that employees in general are not important - what you need is A players. If you hire B (or C) players, the A players may move away to another company with A players.

Confront the brutal facts. The point of this chapter is to never hide the current truth about your company. If you notice that your customers are running away from you, you need to accept that you have a problem.
"Retain absolute faith that you can and will prevail in the end, regardless of the difficulties, and at the same time confront the most brutal facts of your current reality."
Hedgehog concept. The point is that you need to understand what you can be the best in the world at - not what you want to be the best in the world at. You also need to understand what you cannot be the best in the world at. This image summarizes the Hedgehog concept:

Culture of discipline. What you need to do is to follow everything from the points above, especially the Hedgehog concept. Ignore all the once-in-a-lifetime opportunities that doesn't fit within the underlying business model. A great company will have many once-in-a-lifetime opportunities. Also make sure that you have a "stop doing" list which is more important than a "to do" list.

Technology accelerators. What you need is carefully tested technologies - never use fads. The most important point is that the technology has to fit within the Hedgehog concept.

Good to Great applied to Trejdify
The Hedgehog concept:
  • What are you deeply passionate about? We are deeply passionate about the way people reads business news. We generally think that people are reading the wrong news: people are reading short-term news they don't really need, when they should be reading articles they can learn something from.
  • What can you be best in the world at? We can be the best in the world at delivering the best business news. We can't compete with companies like Bloomberg who are delivering all possible news, but we shouldn't either since most people don't need all possible news - they only need the best news. They don't have the time to go though all the regular news items each day after work - they get exhausted by it, so they don't read any news at all.

Culture of discipline. This is actually harder than you think. Trejdify used to have a tool section, where you found a Trading simulator and a list with links. Did they fit the Hedgehog concept? No!

Technology accelerators. What we need to do here is to test different new technologies. We have tested Twitter before with a good result, so we are going to keep the Twitter account. We are currently testing Google+, Pinterest, and Quora. One other technology that we are going to test is Machine Learning to improve the way we discover business news. The important point is that all these technologies fit within the Hedgehog concept.    

July 8, 2012

Dancing On My Own

This video was not intended as a description of the process you have to go through when you try to find new customers - it was filmed at a music festival. When you have begun the process of dragging in new customers to your company, it will be difficult in the beginning so you have to "dance on your own" for a while. But as you struggle, you will hopefully find a few customers that will "dance with you." But when you have a few customers, they will attract more and more customers. The psychological principle behind this is called social proof.
The principle of social proof was described in the book Influence by Robert Cialdini. It says that we humans determine what is correct by finding out what other people think is correct. 95 percent of us are imitators. This is a short-cut we are trained to use because when a lot of people are doing something, it is the right thing to do (not always). 
  • We laugh when we hear laughter
  • You can put some money in the tip jar to make people leave more money in the tip jar
  • Advertisers like to write: "Fastest-growing" to say that many others think the product is good
  • Create a long waiting line outside a club to make it seem more popular
  • Write fake names in a name collection

You can also use this principle to reduce your fears. If you are afraid of dogs, you can watch how other people are playing with their dogs and you will notice that dogs are not that bad after all. But remember that other people may be wrong, such as in Germany in the 1930s, so be aware of this psychological principle and use your own judgment. 

July 4, 2012

The ups and downs of the S&P 500 since the 1950s - Part 2

In the last post about the movements of the S&P 500, we found out what happened the day after an extreme movement. An extreme movement was defined as a movement of more than 3 percent in one day. I also think that it is interesting to see what happens a week after the S&P 500 has moved with an extreme movement. This is the result:

Average: 0.01% 

Average: 0.54%

July 1, 2012

The ups and downs of the S&P 500 since the 1950s

The Swedish stock market was up with 4 percent this Friday and someone asked me what happens after these extreme movements. Will the stock market continue to move up or will it move down? No-one seemed to know the answer, so I thought it was a good idea to find out. The data used is from the S&P 500 index - with data from the 1950s until this Friday (2012-06-29).

We begin with the main index. Nothing strange, 3 big peaks like the Himalayas.

The second graph shows the daily changes since the 1950s. If the market moves with 2 percent - that's a daily change. The x-axis, labeled "days", begins with 0 which is the 1950s in this case. You can clearly see that the extreme daily changes have increased since the 1950s. It is also possible to find "the Black Monday" in 1987, when the stock market fell with 20 percent in one day. The average daily change was 0.032 percent since the long-term movements of the stock market is up.   

To find the answer to what happens the day after extreme movements, we need to find out what happens after each day. What happens after the stock market falls with 5 percent? Go to the graph, and just find the -5 on the y-axis, labeled change, to find out. We can see that the Black Monday happened the day after the stock market fell with 5 percent. And what happened after that Monday? Well, the S&P 500 increased with 5 percent.

One thing I read in one of the books from the Market Wizards series was that the stock market tends to move up the day after it has moved up, and move down the day after it has moved down. Let's see if that's true. It is a little bit difficult to find out if that's true from these graphs, but we can calculate the average:
  • The stock market should move up with 0.092 percent if it has moved up the day before
  • The stock market should move down with -0.034 percent if it has moved down the day before
What this says is that a trend continues for a while.

Now we can finally find out what happens the day after extreme movements. An extreme movement in this case is defined as a change of more than 3 percent in one day. We need to calculate the averages again:
  • The S&P 500 should move up with 0.042 percent if it has moved up with at least 3 percent the day before
  • The S&P 500 should move up with 0.406 percent if it has moved down with at least 3 percent the day before
To buy when the stock market moves with extreme movements seems to be a good idea. People are positive to the stock market when it moves up and they want to buy more to not miss future gains. When it moves down, they want to buy cheap stocks. The exception to the rule was, among others, the Black Monday. The stock market fell with 5 percent the day before and fell with 20 percent the day after.

Remember that these data are not recommendations - just what has happened before. If you enjoyed this article, make sure to not miss part 2: The ups and downs of the S&P 500 since the 1950s - Part 2.