Modern Internet entrepreneurship starts with a few engineers working for nothing and carrying latops and cellphones. They coordinate with Skype and Gtalk and Wikis and Bug Tracking sytems. The company itself is snapped together with outsourced HR, cookie-cutter incorporation and even financing, and outsourced finance / payroll. Marketing is done virally, or through SEO, or SEM. Customer service is handled via the community and forums. PR and outreach through tweets and blogging. Payments come via Paypal. Ads are served up by third-party ad networks. Storage goes on Amazon. Computer goes through Amazon, Softlayer or Rackspace. Code is built upon stacks of open source, SaaS, and $10/month services.

Great post from @Naval:

The returns to scale for being smart, young, skilled, and high-energy have gone up tremendously, and that has profound implications for society. The smart are getting richer.

Investors, entrepreneurs, and radical innovators of all stripes: it's time to It's time to go big, or go home. You're happy that social gaming is worth billions. That's nice. But it's also chump change. Because the gains that can flow from better capital markets are worth trillions.

Finance — not video games, advertising, cleantech, or social nets — is where 10x+ returns lie for today's venture investors, and life-changing fortunes lie for entrepreneurs.

Here's the exchange:

Krazit: One thing we've been talking about over the last two weeks is scale in search and search advertising. Is there a point at which it doesn't matter whether you have more market share in looking to make your product better?

Varian: Absolutely. We're very skeptical about the scale argument, as you might expect. There's a lot of aspects to this subject that are not very well understood.

On this data issue, people keep talking about how more data gives you a bigger advantage. But when you look at data, there's a small statistical point that the accuracy with which you can measure things as they go up is the square root of the sample size. So there's a kind of natural diminishing returns to scale just because of statistics: you have to have four times as big a sample to get twice as good an estimate.

Another point that I think is very important to remember ... query traffic is growing at over 40 percent a year. If you have something that is growing at 40 percent a year, that means it doubles in two years.
So the amount of traffic that Yahoo, say, has now is about what Google had two years ago. So where's this scale business? I mean, this is kind of crazy.

The other thing is, when we do improvements at Google, everything we do essentially is tested on a 1 percent or 0.5 percent experiment to see whether it's really offering an improvement. So, if you're half the size, well, you run a 2 percent experiment.

So in all of this stuff, the scale arguments are pretty bogus in our view...

This surprised me because there's a fairly widespread assumption out there that Google's search scale is an important source of its competitive advantage. Varian seems to be talking only about the effects of data scale on the quality of results and ads (there are other possible scale advantages, such as the efficiency of the underlying computing infrastructure), but if he's right that Google long ago hit the point of diminishing returns on data, that's going to require some rethinking of a few basic orthodoxies about competition on the web.

I've seen a lot of hard working entrepreneurs fail, and I've come to the conclusion that working hard, while never a bad thing, is not really the magic thing that leads to great inventions or successful outcomes. Edison, of the "Genius is 1% inspiration and 99% perspiration" quote, tried thousands of materials looking for the right filament for the electric bulb. That might have been hard work, and the fact that he persisted through many failures is key to making something work, but he was also working on the right problem. So often people are working hard at the wrong thing. Working on the right thing is probably more important than working hard.

In a business culture that likes to talk up big innovations, we may be lacking appreciation for the beauty of the small idea. Outsized ambitions can set you up for failure in a big way when you spend most of your time rejecting your own thinking. No one bats a thousand at coming up with big, disruptive innovations, so you need to explore all your ideas to find the great ones. Not only that, most really big ideas often look small to start. In their book The Granularity of Growth, strategy theorists Patrick Viguerie, Sven Smit, and Mehrdad Baghai note that most billion-dollar business ideas look like $200 million ideas at the outset. Big growth happens when a lot of little things catch fire together.

via fastcompany.com

Successful entrepreneurs have the ability to ask for things relentlessly. In the face of rules that stand in their way they find a way to change the rules. (To an entrepreneur comments like, “you need an MBA, we don’t fund companies like yours, we don’t buy from start-ups, you have to go through our vendor selection committee” are just the beginning of a negotiation rather than the end.) Entrepreneurs are fearless, persistent and uninhibited about asking – whether it’s asking to assemble a team, get financing, sell customers, etc. or whatever is necessary to build a company.   If you are on the path to be a successful entrepreneur, hopefully you are already asking for things you want/need/aspire to.  If not, don’t wait.  Get started asking.  It is a skill you need to either have or develop.

The proper move when someone wants something you own badly is to  invest more in it. “Oh, you like my house and you’re willing to pay double what I paid for it? Did I mention I just redid the kitchen, bought the lot next door and put in a newHVAC system?” How much is it worth to you now? That’s gangster CEO-level poker playing. You raise and raise while you develop your hand and increase its value.

Stop reading blogs so damn much
Every once in a while, I’m busy enough that I don’t read any blogs for a week or so at a time, and you know what? The world doesn’t end Obviously it’s useful to keep up with how the rest of the tech industry is moving, and where the markets are developing, but clearly there’s a diminishing returns to the minutiae around the startup word.

Have a strong vision that’s flexible yet specific
Another issue is how easily small companies are swayed when the vision is not clearly defined and understood. It’s easy, when internal values and vision haven’t been set, to follow the customer to wherever they would like to go. Or to fast-follow whatever is the darling startup at the moment, or to be swayed by competitor moves. So you need something that’s specific enough to figure out how much external data to incorporate, but also be flexible enough that if you hit contrary data, your entire startup’s core thesis doesn’t fall apart. The tension of the two is what makes this a challenge!

Ignore the competition
For most startups, the market is not clearly defined enough to also have clearly defined competition. In most cases, you’re better off focusing on your customer and learning from them both quantitatively and qualitatively, rather than emulating what your competitors are doing. And in particular, if you are extracting a ton of interesting knowledge about your customer, you may end up with a unique set of insights that would beat whatever you’d get from copying anyway.

Forgo short-term opportunities if they are clearly short-term
One very difficult challenge is that along the road to success, there will be many tempting rabbit holes to go down. Many ideas are hard to scale into larger businesses, but make a ton of sense at a smaller scale. Many ideas are also unsustainable, as a hole closes in the market, or because customers don’t get enough long-term value. Of course, sorting out long-term from short-term is the difficult part here.

Be skeptical of opportunities that are both hot, and easy
The most interesting opportunities I hear are ones that appear to be easy revenue, and I hear about them from multiple sources. Many of these opportunities are the equivalent of windows of arbitrage that appear in the stock market – they’ll quickly be closed, and never appear again.

Remember that you only need one big success
The final point I’ll make is that at least as far as startups go, you really only need to find one awesome line of attack on a market, and that’s it. Maybe that takes a month to find, or maybe it takes years. But ultimately, if you are making forward progress on your business and you reach a huge market eventually, it doesn’t matter much what happens between now and then. In this way, having a great deal of patience is very useful if you can systematically discover high-quality, long-term opportunities. This may be harder than the short-term stuff, but it also creates the ability to become a category-defining company.