How much revenue can you generate from a seed investment of $5 in two hours?
What is your product and how do you derive its maximum value? The Stanford Experiment by Tina Seelig
The year: 2009.
Tina Seelig, Professor of Management Science and Engineering, at Stanford University, organises an interesting exercise for her engineering students.
She divides her class into 14 groups and gives each group an envelope containing $5 as a seed investment.
The groups are told that they have five days to plan for a project. Their task is to apply entrepreneurial skills, and come up with an innovative idea on how to generate the maximum revenue from the five-dollar seed investment.
The kicker?
While they have five days to think about the plan, they would only get 2 hours to execute and raise the funds the moment they opened their envelopes. All teams would then get three minutes to present their idea and report on the revenue raised in front of the entire class.
The teams disburse.
Ideas abound on what one can do in two hours with five dollars to raise funds. There is competition in the air. Suffice to say, margins of error are small and constraints heavy, for students to craft their concepts. It's an extremely specific problem with a time-bound output. The product-market fit of any solution has to be perfect within those constraints.
Thinking varies. And so do the outcomes.
Some teams think of ideas that can generate quick returns to keep to the two hour deadline. They don't delve deeper into the value equation of the problem. Some teams come up with value ideas that don’t align to the time directive.
One team purchases low-cost items from a discount store and resells them for a profit.
This is a weak idea on multiple fronts
You can only buy that many items from a discount store with $5
You can only resell so much within the time left after the purchase (which would be less than two hours after subtracting the time needed for purchase)
It's hard to find a targeted customer base and create awareness about the idea, within that time
Another team sets up a stall in front of the student union and offers bicycle tire inflation services. They start with a fixed price of $1 but iterate quickly to a donation based model, which has an outsized impact on revenue acceleration immediately.
This is a great idea because
The team creates an idea where the location and the service are aligned to real-time customer footfall who need bicycle air inflation services (ie targeted customer base)
There is product market fit because a large majority of this customer base uses bicycles (the location ensures that) and the service directly offers value to all those users
By moving to a donation model, the team quickly compounds the value proposition of their service. They trigger a sense of instant gratification coupled with surprise (finding a rare service in a place least expected) among customers. So customers are happy to offer more on their own (because of the perceived sense of philanthropy)
Another team buys seats in popular dine-ins and restaurants and resells them for a profit to those who want to avoid the queue.
Nice idea with quick execution
Specific, aligned to a customer's need at the point of sale
Solving for a known customer pain point. Waiting.
But the team that wins it, flips the question completely on its head by redefining their core product. Instead of solving for what they can raise by investing $5 in two hours, they conclude that the best product they have to sell is the time they have, to present their case study to the entire class.
Yes, those three minutes.
How so?
By completely redefining their value proposition and thereby their market, target audience and customer.
They realise that an entire engineering class of Stanford students is of high value for companies looking to recruit tech talent. Especially local firms who do not have prominence in campus recruitment drives.
They thereby auction their three minutes of presentation time to the company with the highest bid to be able to present their recruitment pitch to the entire class. Without any surprise, this idea generates the highest revenue.
Precisely $650 on a seed capital of $5 (ROI - 12000%)
This is a perfect example where entrepreneurs execute on First Principle while showcasing non-linear thinking
The team realise that any traditional idea of raising funds with $5 in two hours cannot yield outsized returns
Instead of looking at what they can do with $5, they focus on the core objective - raise maximum funds in the shortest amount of time. They remove all other distractions from their decision-making
They redefine who can be the buyer and what they can sell to raise maximum returns
By selling time, they redefine their customer. They search for customers who will pay for time as the commodity
By mapping scarcity to perceived value (the ability of local firms to get access to a captive audience of Stanford engineers)- they create a market situation that can command a premium
By positioning this as a one-off (since this is a one-off experiment) they also create exclusivity
They identify a priceless asset that is unnoticed by others and exploit it
In our everyday life and decision-making, we almost always get caught up in distractions. Data points, incidents, and inferences that miss the bigger picture. It leads us to optimise for the minima and not the maxima.
This can be avoided if you follow Aristotle's framework of First Principle
In Aristotle's philosophical framework, a First Principle refers to the fundamental starting point or foundation upon which all other knowledge and understanding are built. It is the ultimate truth or basic premise from which all other truths can be derived.
In this case, the "First Principle" was to raise the highest amount of revenue in two hours. By aligning to this, the winning team was able to change their starting point and connect all decisions to that sole outcome. They bypassed preconceived notions to identify the most crucial resource.
They realised that it wasn't the $5 or two hours that was their most priceless asset, a deceptive perception that some teams succumbed to. It was three minutes of access to an ideal audience which a business desperately wanted to reach out to.
They achieved success and a non-linear outcome through innovative lateral thinking which shows that the best strategy often involves simplifying a concept to its fundamental core and then reasoning from that point.
So what can we learn from this?
When faced with a challenge or a problem, minimise the noise or distraction to get to the simplest and most effective metric of success (eg Saved time, increased earnings and so on)
Irrespective of the question asked and the parameters given, focus on what can make that metric work. Then connect everything else to that output
If you cannot find a good answer to the question asked, ( which solves for that metric), change the question
Be prepared to change the market, value proposition, and audience - aligned to that one core metric of success
In my day job, I work for Google across a host of things. In my spare time, I write to learn and build products. You can follow me on Twitter/X at HacrkLife