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Monday, December 27, 2010

Biz plan contests: more are better?

The LA Times this morning ran a story on the business plan competition at the USC Greif Center for Entrepreneurship. On the front page of the business section (which today is not its own section) and with an obligatory picture of the latest winner, on one level the story was a fairly conventional reporter’s response to a college press release.

However, what caught my eye is that USC is not content to have one business plan competition, but seems to have four: the (original?) Greif competition, a New Media competition (“Crunch”?) at the Annenberg School of Communication, a newer New Media competition planned for the business school, and then a competition at the Viterbi engineering school

I know at SJSU, we’ve tried to make our business plan competition be an all-campus event, and that seems to be the philosophy at Stanford and MIT too.

There are occasional exceptions. When I was researching tech entrepreneurship programs at the top 25 business and engineering schools in the US, I noticed that Purdue has a separate Life Sciences Business Plan Competition.

There are pros and cons of each approach: The bigger all-campus competitions should be able to offer bigger prizes: MIT now offers $100k to its top winner, as well as more visibility. The smaller contests are probably going to be capped at around $10k top prize money (the three winners at Greif were awarded $12,500 each.)

On the other hand, the more focused competitions will be easier to judge, because the competitors are more homogeneous and it’s easier to get judges who can span this narrower domain. The size of the competition is kept more manageable. And perhaps more importantly, I think the organizers and judges can provide better feedback to the contestants.

The LA Times article notes — as any contestant or organizer would tell you — that the value of competing goes beyond the money to include the practice, the feedback and the connections made. My hunch is that where a campus can support multiple, college-specific competitions, the students will learn more and get a better career boost than the all-campus Inventapalooza that would otherwise ensue.

Tuesday, December 14, 2010

Seeking a judicious decisiveness

Coming to the end of his second journal editorship, economist (and Yahoo researcher) Preston McAfee reflected on the thousands of decisions he had to make — rejected 90+% of the submissions.

His views on decision-making seem directly applicable to the core problem of an entrepreneur: making decisions quickly based on incomplete information:
When Paul Milgrom recommended me to replace him as a co-editor of the American Economic Review, a post I held over nine years [1993-2002], one of the attributes he gave as a justification for the recommendation was that I am opinionated. At the time, I considered “opinionated” to mean ‘holding opinions without regard to the facts,’ and indeed dictionary definitions suggest ‘stubborn adherence to preconceived notions.’

But there is another side to being opinionated, which means having a view. It is a management truism that having a vision based on false hypotheses is better than a lack of vision, and like all truisms it is probably false some of the time, but the same feature holds true in editing: the editor’s main job is to decide what is published, and what is not. Having some basis for deciding definitely dominates the absence of a basis. Even if I don’t like to think of myself as “obstinate, stubborn or bigoted,” it is valuable to have an opinion about everything.
In his resume, there’s little evidence of any entrepreneurial bent, and in fact he was the economist helping the Federal Trade Commission attack the creative (if controversial) Rambus business model.
I do see one problem in applying his model to a startup. The editor of an elite journal has hundreds of very bright minds to draw on. Yes, half of them may say “no” when asked, and some have personal agendas. But still, this is a tremendous pool of knowledge that can correct egregious errors by the leader.

No such pool of knowledge is available to the tech startup, which raises the risks of overconfidence by its leaders. Certainly scientists (and to some degree engineers) tend to have the view there is one “right” answer. When it comes to the merits of an idea, some overconfident leaders tend to assert “this idea is wrong” when really “this idea is wrong for us.”

Open Innovation: The New Imperative for Creating And Profiting from TechnologyHenry Chesbrough famously noted that in innovation, firms often control for false positives (Type I errors) and predictably end up creating too many false negatives (Type II errors). This is one of the reasons he came up with “open innovation” paradigm — both to remind firms to avoid Type II errors, and to suggest specific mechanisms for profiting from good ideas that don’t fit.

Still, a judicious decisiveness is essential for any entrepreneur or entrepreneurial management team. From my own experience, it’s clear that postponing decisions often makes the decision for you. The key is that if it’s important, the startup can’t afford to “watch and wait” but instead must aggressively investigate to obtain the missing information.

R. Preston McAfee, “Edifying Editing,” American Economist, 55, 1 (Spring): 1-8.

Hat tip: pointer to McAfee essay via blog of Greg Mankiw.

Monday, November 22, 2010

Child entrepreneurs II

One of my dilemmas on this blog is how much it’s about engineering and how much it’s about entrepreneurship. I solve that by sometimes combining both, sometimes focusing on one or another.

Distinctly on the engineering side is the First Lego League, a program for kids 9-14. After experiencing FLL as a coach, the past three years I’ve served as a judge — including last Saturday at St. Lawrence Middle School in Santa Clara. The first round tournament was one of 22 organized this month by NorCalFLL and Playing at Learning.

With a St. Lawrence teacher, I was evaluating the efforts by half of the 18 teams to solve this year’s puzzle: find a biomedical solution to a human health problem. (The project is completely independent of most exciting element of the FLL competition: making a Lego robot to run the maze.)

In the end, our evaluation criteria seemed fairly similar to what an engineering school would use for a business plan competition (or idea fair) for these same kids a decade later:
  • A good idea, well researched
  • Professional, polished presentation and visual aids
  • Balanced team roles in the prepared remarks and Q&A
  • Enthusiasm and creativity in engaging the audience
Except for the content, the best teams were as good as the undergraduate teams that I’ve seen in my business school teaching for almost a decade.

The big problem we had in judging was balancing creativity vs. realism in their idea for a biomedical product. Some teams had fanciful ideas that were utterly infeasible. Others had utterly prosaic ideas that were so practical that someone either is implementing them already or will be soon. The best came up with something that might not be feasible today but could be soon.

If I had one piece of advice to give the kids (or parents or teachers) of how to balance this, it’s this: do more research. Understand your problem, customer, competitors better; understand the technology better; think through more details of implementation.

As it turns out, that’s not that different than my advice to b-school seniors for their business plans. Or, for that matter, what many entrepreneurs wish they’d done before they launched their companies.

In other words, this program for developing elementary and middle school engineers is a good predictor of skills they’ll need in college or even the real world. That‘s an impressive testament to the leadership of the FLL program, including founder Dean Kamen (creator of the Segway) and retired MIT professor Woodie Flowers (who essentially created the robot competition at MIT).

I wonder if researchers will follow up on the FLL (or FRC) competitors to see if they are more likely to entrepreneurs 10 or 20 years later.

Note: Although this is my second posting in a week on childhood entrepreneurship, it doesn’t reflect a new emphasis of the blog, just my personal interest in entrepreneurship and K-12 STEM education.

Thursday, November 18, 2010

Really young entrepreneurs

Normally we think of tech entrepreneurs as starting in their late 20s — earlier if their name is Jobs or Zuckerberg — but after they have an education and perhaps some work experience.

Tonight I heard a talk by an entrepreneur who thinks every kid should do a startup (or similar creation effort) before graduating from high school — because he began his own journey in 4th grade — and was shipping his first product through Amazon at age 14.

Anshul Samar spoke a K-12 event of the MIT Club of Northern California, a speaker series that I co-chair. His is an interesting story of technical entrepreneurship that involves science, consumer products, and outsourcing. It’s also a story — unlike child actors — of pursuing his dream part-time while keeping his education as the primary goal.

It was a little surreal having a high school student lecturing a room full of MIT grads (including a couple of PhDs) on entrepreneurship and science education. But he's clearly grown from his entrepreneurial journey and his many speaking opportunities.

Elementeo Chemistry Card GameThe short version is that the once-devoted Pokemon player wanted to make an educational card game. Before having a real chemistry class, he settled on the elements as providing both real science and a basis for strong characters. The result was Elementeo, which is Pokémon-meets-Periodic-Table.

The idea was clearly novel, novel enough that well-meaning grownups eventually introduced him to Peter Adkison, founder of Wizards of the Coast (think Magic and Pokémon cards) who gave him manufacturing advice. Along the way, Anshul spoke at the various conferences: California Association for the Gifted, TiEcon Silicon Valley and the American Chemical Society.

Like any first-time entrepreneur, Anshul had to learn a lot on the job. He knew almost nothing about chemistry when he started, but fortunately library books on the elements were not very much in demand. He had the usual epiphany about financials, PR, logistics, cash flow, distribution.

One 21st century lesson was the power of outsourcing. To make his game look professional, he needed professional artwork, which he was able to outsource using a website and email to create PDFs that were iterated until they were ready for 4-color printing.

He also learned the value of 3F money — dad works at Oracle — rather than professional investors. While VCs approached him after TiEcon, he realized that “If you end up taking the VC money, it’s like 60 hours/day: work work work”.

Instead, he’s going to school, working on the game in the summer and vacations and doesn’t feel guilty about occasionally watching TV. He also plans to go straight to college in 20 months. Unlike Jobs or Zuckerberg or Gates or Dell, he’s not going to put his education aside to pursue his entrepreneurial passions. (Although Woz eventually finished college.)

His story suggested two aspects of the nature of entrepreneurial opportunity. First, users can have creative insights as to their own needs (a user innovation argument) that have not previously been realized. Secondly, although not a dime a dozen, entrepreneurial vision is far move common than entrepreneurial success: the difference is ability to obtain and effectively apply resources to realize that vision.

Monday, September 20, 2010

Execution matters

The first event of the SVCE fall speaker series was entitled “Getting off the Ground: Ideas and Execution.” The panel consisted of an entrepreneur, two early-stage C-level execs and an intrapraneur:
  • Steve Erickson, VP and GM, Audio Products, Creative Labs
  • Matt Ready, VP, Sandforce (SJSU ’81)
  • Paul McGrath, CEO, Ridespring
  • Steve Olson (SJSU ’83), CFO, Ridespring
The one common thread was that the idea was (at best) a small contributor to the ultimate success of the startup venture. I don’t know that this is heresy around these part — in the land of big idea tech startups — but certainty it is contrary to the popular mythology. Given the excess entry (often funded by VCs) and inevitable shakeouts in local tech industries, the opportunity for having a unique idea seem pretty rare.

After taking sales positions at 12 different companies since he graduated from SJSU nearly 30 years ago, Ready said that he evaluated a career opportunity the same way that local VCs do, by looking at the market, the technology and the team

In particular, he looked at the new firm’s market, technology, team. He advised entrepreneurs: “if you come up with a new idea, you have to vett it against all three of these vectors.” The biggest problem that he saw was the first one, specifically the Total Available Market. If the company was going after a large enough market, it didn’t matter how good a job it did.

Not surprisingly for a finance exec, Olson was even more blunt in favoring operational excellence: “it’s less about the idea than the execution” because success is “90% execution and 10% a great idea.”

His advice to entrepreneurs was twofold. First, the entrepreneur has to be tenacious, finding creative ways to overcome the inevitable obstacles and surprises. Secondly, (s)he has to have a startup team that share that philosophy — one that is flexible and willing to roll up their sleeves to get things done.

The latter point reminds me of my longstanding observation that beyond entrepreneurs and non-entrepreneurs, many employees seem better suited for startups. Perhaps it’s because they thrive on chaos, perhaps it’s because they prefer being generalists — or maybe they just prefer an environment that provides the freedom to be creative.

As a board member of various startups, Erickson also agreed execution is what separated the winners from the losers. Without directly criticizing his employer, he noted that one of its employees created a hard disk-based MP3 player two years before the iPod . We all know who won, although getting their first brought Creative a $100 million royalty payment from the big A.

Even the one CEO offered only qualified support for the importance of the big idea. In particular, McGrath has given up on the idea of hoarding his ideas and keeping them secret for fear someone will steal them Instead, he encouraged entrepreneurs to “be brutal with your own ideas” and share them widely, encouraging others to identify any flaws.

He was blunt in encouraging entrepreneurs to get honest criticism sooner rather than later:
It’s painful if you find out your idea sucks, but it’s a lot more painful if you sink a lot of money into it.

Wednesday, September 1, 2010

10 easy steps to entrepreneurship failure

On the WSJ website, Rosalind Resnick offers a list of “10 Mistakes that Start-up Entrepreneurs Make:”
  1. Going it alone.
  2. Asking too many people for advice.
  3. Spending too much time on product development, not enough on sales.
  4. Targeting too small a market.
  5. Entering a market with no distribution partner.
  6. Overpaying for customers.
  7. Raising too little capital.
  8. Raising too much capital.
  9. Not having a business plan.
  10. Over-thinking your business plan.
This is a reasonable list, a cautionary tale that can be offered to any entrepreneur. The under-emphasis on sales and distribution is a long-known problem, particular for product-focused tech entrepreneurs.

On the other hand, there is always a problem with one-size-fits-all advice. In particular, her advice on business plans — yes they’re always needed — is a biased and oversimplified summary of a much more complex and nuanced decision that entrepreneurs must make. There is rather extensive research on business plans, which is not referenced: for example, it’s clear that not all entrepreneurs need a detailed business plan.

So I’d certainly give the list of gotchas to entrepreneurs, but note that these are potential problems they should look out for, not necessarily guidelines for what they should or should not do.

Tuesday, August 17, 2010

It's not what you know…

The morning papers report the news that Hulu hopes to IPO this fall and raise $2 billion. (The story was first reported in the NY Times on Monday.) As with a lot of tech IPOs, the company is seeking to go public without a lot of revenues.

The company is not a tech startup in the normal sense. Its raison d’être is not its technology, but its connections, specifically its corporate founders — Disney, NBC Universal and News Corp. (who later sold a minority stake to a private equity firm.)

In other words, anyone could have done the technology: what mattered was that it had direct access to three of the four major TV networks: ABC, NBC and Fox. Hulu succeeded — in true Web 2.0 style as measured by traffic rather than profits — not because of its entrepreneurial spunk, but because of its guanxi. (This seems appropriate since supposedly the name was chosen for its Chinese rather than Hawai’ian meaning.)

Because of its connections, Hulu got favorable content deals as the anti-Apple, the distribution channel that Hollywood loves to hate. It is a lot like Orbitz, founded in 2000 by five of the biggest airlines to compete with Travelocity (a venture of the Sabre reservation service) and Expedia (founded by Microsoft).

In these sort of oligopolistic (or oligopsonistic) industries, the opportunities for success are based on industry connections — or in this case, entry by intrapraenurship rather than entrepreneurship.

Still, no alliance is forever. Some wonder if NBC content will remain on Hulu once it’s acquired by Comcast, which would like to destroy the open Internet (at least for video content) and lock everyone into their premium cable TV subscriptions.

Finally, Hulu’s business model has always been hamstrung by the competing goals of the media giants: take market share away from portals they don’t control (iTunes, YouTube) while not cannibalizing the existing TV offerings. As with newspapers, the online per-user revenues are a fraction of the 20th century traditional distribution channel.

So in the end, what will retail shareholders be getting? Is this more or less secure than the IPO of a pure startup like Tesla or Facebook or some solar panel maker? Thanks to its great connections, there is only one Hulu, but that’s no guarantee it will be able to come up with a viable revenue odel.

Wednesday, August 11, 2010

VCs and green entrepreneurs

At the Academy of Management (#AOM2010) conference this week in Montréal, one of the more lively sessions was a “caucus” on Monday entitled “ Venture Capital Investments in Cleantech: An Act of Passion or Another Bubble In-The-Making?”

As the title suggested, the audience of about 30 academics argued about the rationality of VC investments, how they might be studied by academics, and of course the underlying industry dynamics.

It was an interesting albeit disjointed discussion. Imagine 15 smart (but perhaps undisciplined) people having a series of a stream of consciousness monologues (while the other 15 sat and watched). Still, this was probably the most concentrated grouping of management academics interested in cleantech entrepreneurship anywhere at the conference. Since most of the VC (at least by $) has gone to solar, this was also a RE/EE discussion.

Not all of the discussion was about VC. (Since I don’t personally study VCs, I only think about them in the context of the availability of funds for startups.) Some of the discussion was about more basic questions of studying cleantech startups.

My own question was about how SIC/NAICS doesn’t capture cleantech industries — the so-called “cleantech sector” — nor will it until the next revision of NAICS. (Cleantech seems no more a sector than nanotech.) The answer seemed to be that various “experts” have made databases by hand that they claim capture the entire industry. (Desiree Pacheco of Portland State seemed to be the most knowledgeable here, and had clearly been down this road before.)

The session was organized by Eva Yao (Colorado), Antoaneta Petkova (SF State), Sanjay Jain (Santa Clara) and Anu Wadhwa (EPFL). They have an (in progress) study that shows that high status VCs invested first in cleantech, and the room offered a bunch of possible explanations (such as the bigger VCs have more scale, more status and more slack).

In addition to Toni and Sanjay, the Bay Area was also represented by Geoff Desa of SFSU, Gregory Theyel of GreenVisions and CSU East Bay and of course yours truly. Colorado is a hopping place for renewable energy entrepreneurship, but my hunch is that overall California has the rest of the country beat.

Monday, July 26, 2010

Training entrepreneurial engineers

As an engineer who went to business training almost the minute I took my first job, I appreciate both the value and limitation of a business education for engineering professionals. Of course, I appreciate it even more now that I’ve started a copy, made tons of mistakes, got a formal business education and now teach at a business school.

Five elite US engineering schools got really nice press Tuesday in the Financial Times for their Master’s in Engineering Management program. With a little digging, it was clear they have a website and a “consortium.”

The FT article puts the best case forward:
Joseph Helble, dean of the Thayer School, says Mem programmes are “for engineering grads who know they don’t want to spend their entire careers in design or in a lab. They want to do broader, systems-based engineering, by identifying promising new product lines. They want to create a vision for the technology in the broadest business sense.”
As someone who once thought he would teach in engineering management, I’m all in favor of having more such programs.

Many engineering students have taken my technology strategy class, but without a business core, they get glimpses of insights, not the way to build upon a firm footing in accounting, finance, marketing and organizations. So an integrated master’s degree combining technical and business topics is a great way to address this.

However, when looking at the MEM consortium, I’m not quite clear what makes these five schools different. Do they have explicit standards? Is it the shared “MEM” brand? Or are they a members-only club? For example, the list excludes two of the top engineering schools in the country: Berkeley has a top-flight interdisciplinary Management of Technology program, while MIT has its System Design and Management program, jointly run by Engineering and the Sloan School.

And then there’s the question of how much any school prepares an engineer to be an entrepreneur. Plenty of engineers became entrepreneurs without formal preparation and did quite well. (Hewlett & Packard, Bose, Jacobs & Viterbi, and the list goes on...)

I don’t think a class or a business plan competition is going to help a 23-year-old engineering student create the next HP. Interning with a young company (as I did) would help, as would working for a top-flight company in the same industry. But nothing beats going to work in Silicon Valley, Boston or one of the other regions where you are immersed entrepreneurship, venture capital, startup infrastructure and a startup culture.

Saturday, July 10, 2010

Egos, ethics and "no"

Many entrepreneurs get ahead because of their brash confidence, unwillingness to settle for second best or accept limitations that have daunted their predecessors.

Is there such a thing as too much ego? Steve Jobs was legendary for his tyrannical treatment of direct reports, but also turned the company around by making swift, clear and (largely) correct decisions since his return 12 years ago.

And then there is Elon Musk, the co-founder of Tesla Motors, SpaceX, SolarCity and PayPal. Any one of those would be considered a highly visible entrepreneurial effort and (in the latter case) even a financial success. He has success I can only dream of.

However, at times he seems to have the ethics of a used car salesman. On Friday, Owen Thomas of VentureBeat enumerated various examples of when he said Musk was less than totally truthful.

I personally first noticed Musk when he called a college professor (and coworker of mine) a “douchebag” for challenging his claim to public subsidies for his electric cars. Anyone who takes taxpayer money should be open to public scrutiny — if you can’t stand the heat, get out of the kitchen. The whole incident reflected badly on Musk and his ability to handle criticism for his weaknesses or mistakes.

Some of Thomas’s allegations border on SEC violations, particularly related to his recent (and briefly underwater) Tesla IPO.

I try not to judge people I’ve not met, but sometimes there’s a clear enough picture from secondary evidence. From his exaggerations to trading in the 30-something mother of his five children, he seems to have gone through life without anyone ever saying “no.”

This is a dangerous way to be in business: yesmen will help you drive the car right off the cliff. (It is always possible that the brash public persona hides someone who’s willing to be thoughtful and analytical with trusted advisors in private, but I’ve not seen any reports either way from former lieutenants.)

However, the general pattern of the last decade reminds me of an old, old saying:
For what shall it profit a man, if he shall gain the whole world, and lose his own soul?
Bill & Dave: How Hewlett and Packard Built the World's Greatest CompanyThat’s not everyone’s guiding principle, but it’s certainly been mine. I was fortunate to work with other scrupulously honest entrepreneurs — even when they did something I didn’t agree with, they were honest about it and even reasonably predictable. I was also inspired by several role models, including Bill and Dave, and the memoir of Paul Hawken.

I realize that forced to choose between honesty and financial returns in a CEO, most VCs would go with the latter. But then I’m not too optimistic about their souls, either.

Saturday, April 24, 2010

Flipping is not a business model

I’m getting ready to grade the final projects for my tech strategy MBA class. One of the projects is about a Web 2.0 company seeking a business model — a common problem.

Near the end of the presentation, one slide summarized the revenue model options:
  1. keyword advertising
  2. promotional services
  3. freemium
  4. sell the company
With the last point, I hit the roof. (Figuratively — I tried to be patient with students no matter what they say.) This is wrong, wrong, wrong!.

Sure, it’s wrong conceptually, theoretically, legally. Getting an investment is not the same as generating income.

But it’s also wrong from a business standpoint. Yes, the founders and VCs get what they want — but the founders have failed to solve the fundamental problem of their business.

Perhaps someday Google will be able to monetize the $1.7 billion they paid for YouTube; there are certainly going to be cases where the acquiring company has economies of scope (or distribution channels or negotiating leverage) to pull off business models that wouldn’t work for a stand-alone company.

But for every YouTube, there’s a MySpace (bought by Fox), Bebo (AOL), or Skype (eBay).

On the one hand, it’s hard for stand-alone tech companies to get established and compete against diversified and integrated tech giants — whether Apple, Cisco or Nokia. On the other hand, the idea that entrepreneurs should seek an exit prior to creating something of lasting value is part of the “born to flip” mentality that was briefly in vogue during the past decade.

So I think there are a few students in one MBA course at one university who are getting the message. Let’s hope that others do, too.

Wednesday, April 7, 2010


TiE Silicon Valley is hosting a session next week on what it calls “Ultra-bootstrapping”:
Wednesday, April 14, 2010
TiE Institute - Ultra-Bootstrapping: Building a Start-up without funding.

Event Host
Murrali Rangarajan, Director, TiE Institute

Keynote Speaker
Naeem Zafar, Berkeley-Haas Business School, founder Concordia Ventures

AG Karunakaran, President and CEO, MulticoreWare, Inc
Murrali Rangarajan, Director, TiE Institute & Managing Director and Founder, Business Accelerator, LLC
For those who don’t know TiE, it was founded in 1992 in Silicon Valley by Indian-American entrepreneurs, but now has more of a South Asian orientation (with us Euro-Americans also welcome to participate).

The description of the event doesn’t sound very “ultra”, but just the normal definition of bootstrapping:
Learn how to manage your Business Operations tightly to run on minimum cash. Lead from the front. Build your team with the right values. This session will be ideal for professionals starting out, for entrepreneurs who are at that critical growth stage and for team members.
Still, I support anything that encourages and disseminates best practices in bootstrapping to current or prospective entrepreneurs, and hope people will attend.

I probably won’t be able to make it because I’m scheduled to be traveling on business, but I’ll look for it on the TiESV video archive.

Saturday, April 3, 2010

37 years ago: Motorola’s first cellphone

A wonderful blog called “Today in History” runs a series of historic engineering firsts. (An RSS feed is of course available.)

On April 3, 1973, Motorola made the first phone call on its cell phone. The event is now remembered due to the indefatigable self-promotion of Martin Cooper, the point man for Motorola’s engineering efforts in its rivalry with AT&T. (My original dissertation topic was the development of the US mobile phone industry in the 1970s and 1980s, so this backstory is familiar territory that I captured in a book chapter.)

This example demonstrates the problem with the whole “this day in history” view of technological innovation. While AT&T began deploying mobile phones in the 1940s, Douglas Ring of AT&T invented the cellular phone idea as a way to reuse scarce radio frequencies. However, AT&T and then Motorola spent decades fighting TV broadcasters at the FCC to gain necessary spectrum.

Cooper and Motorola certainly deserve credit for envisioning the cellphone as a handset (even if brick-sized) rather than a carphone. But there were many milestones in the AT&T and Motorola demonstration systems from the 1970s until the FCC granted permission for the official launch in October 1983.

The previous blog posting also demonstrates the limitation, with April 1, 1976 remembered to be the founding day for the Apple Computer Company. The Apple I was an interesting circuit board, but the mass-produced Apple II (a complete computer with a case and keyboard) in 1977 is perhaps a more significant milestone.

The blog is inspirational to any aspiring engineer — existing or nascent entrepreneur — for summarizing major milestones in technological innovation that provide business opportunities for established firms like Motorola, startups like Apple, or even an occasional college professor like Charles Townes (inventor of the maser).

Wednesday, March 24, 2010

Yet another business plan defense

Nearly every entrepreneur has heard about the value of a business plan. Two new publications I found today — one in the Wall Street Journal, one in the Journal of Business Venturing — both reminded me of this topic and updated what I know about it.

This is not the first time I’ve considered the topic. Right now on my hard disk, I have about 15 articles from the business press and about two dozen academic articles. This doesn’t count books, including the four books I bought to teach business plans last year.

This semester, I am also helping one of our undergraduate honors consulting teams write three business plans in less than a month. Due to the accelerated schedule, we had to decide which part of the standard format to use from Jeffry Timmons’ wonderful abbreviated handbook.

Of course, I also blog about business plans here on this blog.

The Controversy

Ever since I met a job candidate several years who did his thesis on business plans, I have been following the debate in academia and the popular press about whether or not startups should do business plans.

Two of the more convincing arguments in favor of business plans are that business plans are a way to communicate with external constiuencies — like investors — and that it provides discipline to the authors. Arguments against focus on the inherent incompleteness (or obsolescence) of the plan and the opportunity cost of preparing one.

Academics — as they are wont to do — also argue about whether there’s a large N, well-controlled statistical study that shows benefits (or lack thereof) for firms that do business plans.

All of these arguments are applicable to potential high-growth startups in technology-based industries. If anything, the stakes are higher — a restaurant might start with a $50,000 capitalization while a photovoltaic company today needs more than $50 million.

Latest in the Business Press

Today the WSJ small business section ran an article endorsing business plans by a business plan consultant. The defense was framed in the negative — a list of “common misconceptions”:
  1. Business plans aren't necessary unless you're planning to raise capital from banks or VCs.
  2. Investors don't take business plans very seriously. They know that the numbers are garbage.
  3. Nobody reads business plans any more. All you need is a deck of PowerPoint slides.
  4. Nobody has a crystal ball that can predict your business's future. You're better off figuring things out as you go.
  5. Business plans aren't necessary for a company that's already up and running. They're a distraction from running your business.
Here in Silicon Valley, I have heard entrepreneurs argue that the PPT deck is more important. My sense is that the PPT deck is what it takes to get seriously considered, but then some sort of real data — whether a Word document or a spreadsheet — is necessary to get a VC investment. (Angels seem to make their own rules).

Latest Academic Research

Also recently (in academic timescales), the top entrepreneurship journal (JBV) ran an article by a German-American team reviewing the business planning literature. Alas, as seems true for some academic journals, the paper was accepted in October 2008 but not published until January 2010. (Also regrettable is the use of an unmanageable paper title length.)
As in any good meta-analysis on a mature but disputed research stream, the conclusion is roughly: “they’re all correct because there are contingency factors that explain when business plans are and are not useful.”

For example, the authors conclude that brand new startups get less value from business plans than more established startups. The former face so many uncertainties about the unknowable that (the authors argue) that the “go obsolete” argument outweighs the value of the “planning is good” argument.


In my own experience — as an entrepreneur and now as a teacher — I’ve come to three conclusions:
  • Every firm needs a business plan — but only selectively as time, information and needs allow. There is a huge benefit to some parts of the planning, but the specific needs will vary both by company and (as in the JBV 2010 study) the company’s age.
  • Business plans must have numbers, even though they are GIGO. A back of the envelope calculation allows the entrepreneur to identify assumptions, risks, and at least an order-of-magnitude sanity check of even the simplest plan.
  • Opportunity costs are relatively low for business students to write at least a simple business plan. The undergrad (or MBA) core covers all the basic skills, and thus a very rough business plan can be done by a competent business student in less than a month. (For example, we’ve had very good luck sending business students to help students from the award-winning SJSU industrial design program.)
These are not scientific findings, but these are the advice I’d give an entrepreneur or student today.

So if a nascent entrepreneur asks: “Should I write a business plan?” my answer is simple: “Yes, but…”


Jan Brinckmann, Dietmar Grichnik and Diana Kapsa, “Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms,” Journal of Business Venturing, Volume 25, Issue 1, January 2010, Pages 24-40. DOI: 10.1016/j.jbusvent.2008.10.007

Thursday, March 4, 2010

Prosaic tech startups

Commoditization — or at least the business strategies of companies in mature industries — has become the norm for many tech companies. Wednesday morning, the Merc quoted Yahoo CEO Carol Bartz as accepting Yahoo’s shift away from innovation:
On the valley's perception that Yahoo is no longer a cutting-edge engineering company:
"We did lose that. . . . The comparison we get a lot, for instance, is Google. They've got a $4 billion engineering budget, and we've got a $1 billion engineering budget. We're not going to play with phones and broadband; we've got to play in our own space."
This is something that is increasingly central as I teach technology strategy to Silicon Valley engineers. Last semester, Exhibit A was the transformation of HP from innovation leader to the Fiorina-Hurd penny pinching era.

With my MBA students tonight, it was a much smaller story, that of JibJab the online greeting card company.

Two years ago, JibJab parlayed its clever political satire and ability to milk PR on the Tonight Show to create a viral hit during the Xmas 2007 season.

Since then, I’ve used JibJab with students to illustrate business models and the freemium idea. It’s a simple company to understand, unlike enterprise software, B2C/B2B social networking plays, and other more complex stories.

Today, JibJab has acquired many traits of a company in a mature industry, starting with the fad nature of its original business. The bouncing heads were novel then but now are old hat. (It also once claimed a pending patent would protect it from rivals, but now has non-exclusive rights to a third party patent.)

The company faces the challenges of any other entertainment studio of producing compelling original content on an ongoing basis. And if it’s not differentiated, its goal may be to create loyalty to the brand and the service to keep the customers it’s already won.

None of these are bad things. But it’s yet another example that success for many tech companies is less about innovation, and more about sales/marketing (ads, PR, distribution) as well as the ongoing challenge of execution.

Friday, January 15, 2010

Key to success: offer something people want

Matt Marshall of VentureBeat has an interesting article about how VoIP provider Jajah landed a $207m acquisition (on a $33m investment) when many of its competitors were dying.

Marshall asked CEO Trevor Healy for the keys to success, and the list should be familiar to all. For example, the company decided to stick to a conventional revenue model — being paid for calls — while competitors tried to snare traffic by giving service away free.

The company also had a great engineering team (offshore in Israel), and an experienced management team. It also made employees eat their own dogfood — guess which telecom provider carried all calls by Jajah employees?

Finally, as any ICT architect will tell you, design systems that can grow into platforms for other products, rather than design point products. It worked for Cisco — while Netscape failed — and of course that’s what Facebook and Twitter are hoping to pull off as well.

The story notes that the management was not perfect — they haggled over a $300m deal because they thought they were worth more than a rival that sold for $105m. Still, nobody’s perfect.

Jajah’s exit shows that it’s still possible (if rare) to build a successful startup in this environment. Due to miserly VC investments, there won’t be many high-growth startups founded in 2009 or 2010, but let’s see how many others launched before the recession are able to grab the brass ring.