That is the title of a report compiled by Harry Markopolos in 2005 about Bernie Madoff’s fraudulent hedge fund. He lists 30 red flags and ways for the SEC to verify if these red flags were true. His report seems to have been almost completely ignored for almost four years. He states that pretty much everyone knew that Madoff was a fraud, but did not want to risk their careers. It shows the sad state of Wall Street that I talked about in my post about The Business School Way of Life. Take the easy money, don’t rock the boat, look the other way, cash your check.
Bill Gates returned to TED this year to give an update on what his foundation had been doing for the last year, along with how he thinks the world can start to solve two of the biggest problems in the world today: disease and lack of good education. Gates’ presentation can be described in one word: Optimism.
Most people would agree that our priorities are clearly misplaced. This situation is a clear example of a problem that the market cannot solve completely on its own. Poor people cannot provide the profit motive necessary for big drug companies to develop the cures necessary to eliminate malaria worldwide. The Gates foundation, other charities and some rich governments should step in to fill the void. Tax credits, grants and other incentives should be used to stimulate innovation in areas where there are not sure economic profits, but provide real social benefits.
I would also like to see a drug company cut their ad budget by 50% and use those billions to invest in a cure for malaria or another one of the treatable mass diseases, as drug companies now spend about an equal amount on advertising as they do investing in new drugs. Imagine a big drug company cutting half of its Viagra, Propecia or Zantac ad budget to focus on developing a new malaria drug.
Imagine the positive (free) press that a company could get by doing this. They could craft their new image around being an altruistic drug company and even run ads in the US touting their contributions to global health care. Even a 25% cut in advertising in the US to invest in Malaria would be substantial. This solution is probably too controversial for conservative drug companies, but it would be interesting to see.
I would also like to see one car company stop advertising completely and pass on the savings to consumers, or just keep the savings. Everyone knows cars and brands of cars, so why bother advertising? But that is another post for another time.
The second half of Gates’ talk focuses on what makes a teacher a good teacher. Through research funded by the Gates Foundation, they found that a top 25% teacher improves student performance on standardized tests by 10%. Unfortunately, the teacher’s performance is not rewarded. In fact, teachers who many not be very good, but want to learn cannot even learn from good teachers because of contracts.
Gates touts the KIPP academy in Houston, another branch of the KIPP School that I talked about in a previous post, as a model for the future. He says that the combination of giving children a chance to work hard, along with analysis of teacher performance produces results. 96% of children at the KIPP academy in Houston go to college.
I would love to see some sort of reward mechanism implemented for great teachers to help compensate them for their work. Gates says that the good teachers are more likely to leave their jobs to change profession than bad teachers, so some sort of reward system is needed. Gates is hopeful that many of these innovations can be brought to public schools in America, which will better help us compete internationally.
I just realized today that Barack Obama’s new Education Secretary is Arne Duncan, the former head of the Chicago Public Schools. He is a top notch choice who I think will do a great job.
Duncan could easily have swept the study under the rug and not allowed retesting, but he did not. Instead, he made a tough decision that was unpopular with the teachers and challenged the status quo. His choice got rid of bad teachers who were masking their poor teaching performance by cheating on tests. It would be great to see others in government make these kinds of tough choices. I think every government agency could benefit from people following Duncan’s example.
Hopefully, he can help bring some positive change to American schools with is hard work and innovative approach to public service.
Paul Graham is one of my favorite writers right now. Here’s his bio from his website:
Paul Graham is an essayist, programmer, and programming language designer. In 1995 he developed with Robert Morris the first web-based application, Viaweb, which was acquired by Yahoo in 1998. In 2002 he described a simple statistical spam filter that inspired a new generation of filters. He’s currently working on a new programming language called Arc, a new book on startups, and is one of the partners in Y Combinator.
[M]ake[s] small investments (rarely more than $20,000) in return for small stakes in the companies we fund (usually 2-10%).
All venture investors supply some combination of money and help. In our case the money is by far the smaller component. In fact, many of the startups we fund don’t need the money. We think of the money we invest as more like financial aid in college: it’s so people who do need the money can pay their living expenses while Y Combinator is happening.
For the last few years, he has written essays on life, business, startups, investing, education and many other interesting topics. Some of my favorites, which I highly recommend along with the rest of his work, are After Credentials, Revenge of the Nerds, Why Nerds are Unpopular, How to Start a Startup and Why Startups Condense in America.
1. Pick good cofounders.
Cofounders are for a startup what location is for real estate. You can change anything about a house except where it is. In a startup you can change your idea easily, but changing your cofounders is hard.  And the success of a startup is almost always a function of its founders.
2. Launch fast.
The reason to launch fast is not so much that it’s critical to get your product to market early, but that you haven’t really started working on it till you’ve launched. Launching teaches you what you should have been building. Till you know that you’re wasting your time. So the main value of whatever you launch with is as a pretext for engaging users.
5. Better to make a few users love you than a lot ambivalent.
Ideally you want to make large numbers of users love you, but you can’t expect to hit that right away. Initially you have to choose between satisfying all the needs of a subset of potential users, or satisfying a subset of the needs of all potential users. Take the first. It’s easier to expand userwise than satisfactionwise. And perhaps more importantly, it’s harder to lie to yourself. If you think you’re 85% of the way to a great product, how do you know it’s not 70%? Or 10%? Whereas it’s easy to know how many users you have.
8. Spend little.
I can’t emphasize how important it is for a startup to be cheap. Most startups fail before they make something people want, and the most common form of failure is running out of money. So being cheap is (almost) interchangeable with iterating rapidly.  But it’s more than that. A culture of cheapness keeps companies young in something like the way exercise keeps people young.
9. Get ramen profitable.
“Ramen profitable” means a startup makes just enough to pay the founders’ living expenses. It’s not rapid prototyping for business models (though it can be), but more a way of hacking the investment process. Once you cross over into ramen profitable, it completely changes your relationship with investors. It’s also great for morale.
Check out his essays at PaulGraham.com. They are worth the read if you are interested in startups, education or creativity.