Subject: Re: gross margins, R&D, S&M, G&A, and all that
From: "Stephen J. Turnbull" <turnbull@sk.tsukuba.ac.jp>
Date: Tue, 9 Oct 2001 22:18:01 +0900

>>>>> "Tom" == Tom Lord <lord@regexps.com> writes:

    Tom> That's not at all the plan I'm suggesting.  I'm simply
    Tom> suggesting explicit non-determinism in both technology and
    Tom> business model planning.  Non-determinism is not the same
    Tom> thing as relying on just "hope": it's just a more realistic,
    Tom> more robust, and ultimately lower cost way to approach both
    Tom> problems.

Non-determinism simply needn't exist in economics.  At least in
theory.  ;-)  Cf. L. Savage, The Foundations of Statistics, or any
modern game theory text for economists.  The point is that if there is
a sufficiently complete set of decision problems and you are
consistent in choosing your behavior in all of them, then your
criterion can be modeled in terms of utility of outcome and
probability of various events.  Furthermore, from the choices you
make, both your utility function and your probability measure can be
deduced.

Admittedly, it's a big leap from "a large set of consistent decisions"
which we all know we can make :-) to rules for assigning utility and
probability indicies to various situations (something only backgammon
and card players can do reliably).  However "profit" is easy to
calculate, so "utility" for business outcomes is not too unrealistic.
And PERT, for example, asks you to judge "worst plausible, best
plausible, and modal outcomes", and then assigns probabilities like
.2, .6, .4 to them to compute expected values.  More complex cases of
multistage plans are straightforward to compute on the basis of some
independence assumptions, and only somewhat harder with more complex
assumptions about interdependence.  If it _really_ matters, you make
statistical models and gather historical information to assess
likelihood instead of using guesstimates for probabilities.

Furthermore, the process is subject to recursive refinement.  So you
can put as much effort into the profit scenarios and probability
assessment as seems appropriate for the stage of discussion and the
degree of risk involved.  You don't have to blow your entire first
funding installment on the business equivalent of the 49ers' playbook.
"We got the pass, we got the run, we got drop back 15 and punt" should
be enough in initial stages.

A good VC with experience in your field should walk you through that
recursive refinement process, though.  (I don't know any VCs
personally.  I do know several flavors of consultant, and they can and
do do this for their clients.  I do know what my strategy and finance
colleagues teach their MBA students.)  I wonder why your potential
sponsors didn't.  (Maybe it's because they were going to hand you
money, instead of vice versa in the case of my consultant buddies.
But I would think it would be worth their while.)



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