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Saturday, December 29, 2012

When entrepreneurs aren't "the next Apple"

Big company exec-turned-Forbest columnist Steve Faktor posted a funny column Friday that says “Shut Up, You’re Not Apple”.

The introduction is as provocative as the title:
At first, it was funny to hear insurers, IT firms, and startups with no revenues compare themselves to Apple. Since the iPod launched in 2001, I’ve seen hundreds of presentations that liberally use “learnings” from Apple. 1) The word is LESSONS, not “learnings”, my Hillbilly friend. 2) The comparison feels as fresh as that Michael Jackson impression your spouse has been doing since you started dating. 3) Drenching slides (or products) in an iconic brand’s juices won’t transmit innovation, like some benevolent plague. If that were possible, we’d never stop harvesting and packaging Brangelina extract. It’s time for an intervention. Here’s why brands must find their own voice (and scent)…and keep those synthetic Apple fumes from turning into laughing gas.

The ‘why you’re not Apple’ checklist:

I know I’m not alone. We’ve all been to the same Apple-laden meetings…er, orchards. How did those comparisons work out? Did that company become the most valuable in the world? Did that product become iconic and emulated by every company in Korea? Or, did it live and die in its sad PowerPoint tomb.

Using Apple as a model is the business version of ordering jeans after seeing them on Kate Upton. They might not look the same on you. Like Kate, Apple is a unicorn. It defies so many conventions that deconstructing its lessons is silly, unless it’s the last thing between you and a lonely Saturday night at Harvard Business School. To quote my friend and fellow innovator Stephen Shapiro’s book, Best Practices Are Stupid.

It’s not that your company can’t be Apple. It’s that your company absolutely, positively will never be Apple. I’m not discounting your skill or vision. I’m simply acknowledging that Apple’s success is a witch’s brew of leadership, timing, technology, and culture. All those variables can’t be replicated.
He then offers a checklist of factors that it would take to be Apple: a visionary CEO, iconic products, $50b in cash, a million fanboys, and #1 or #2 in most product categories. Yes you can mention Apple in your analysis of the industry landscape, but “as the unicorn in the room.”

As someone who’s studied Apple for almost 30 years, the reality is not just that Apple is one in a 100 million companies: it’s that Apple’s run from 2001 (the first iPod) to 2007 (the iPhone) to 2010 (the first iPad) — will never be repeated in the company’s history. (Or as Faktor put it, “Even Apple won’t be Apple forever.”)

I remember when Neil and I started our company in 1987, we wanted to be the next Hewlett-Packard. Instead, we never got more than 15 employees, a few million in revenues and lasted only 17 1/2 years. Wanting (or posing or emulating) doesn’t bring success: satisfying some need better than anyone else — in a way that’s hard to copy — is what bring success.

When they started in a Los Altos garage in 1975, Steve Jobs and Steve Wozniak didn’t imagine they would have a market cap bigger than IBM. Instead, they were just trying to bring a better PC to market than any of the other hobbyist-hackers out there. Customers didn’t flock to the Apple II, Mac, iPod, iPhone or iPad because Apple wanted to change the world, but because they had a product that no one else had.

Monday, October 1, 2012

Foolish MBA student business plans

One nice thing about teaching entrepreneurship at an independent technological university (like KGI) is the possibility of having actual science in our startup business plans. Tech startups may not create all of the shareholder value, economic growth or improved societal welfare, but certainly they play a disproportionate role in doing so.

The challenge of teaching entrepreneurship (particularly business plans) in a business school is (politely) sifting through all the restaurant, bar, website or other service businesses that are unlikely to amount to a hill of beans. Maybe the business plans of science and engineering students are equally likely to fail, but the potential payoffs are higher and they’re more likely to learn something relevant in the process.

I was reminded of this when reading a HBS case† from my intro entrepreneurship class. The case centers on four Harvard MBA students who want to start a business. So they spent a year sifting opportunities through six criteria, which included these quintessential MBA student goals:
  • “Be their own boss”
  • Invest a minimal amount of start-up capital
  • Build a sustainable and defensible business
What’s wrong with this picture? I don’t know about the Harvard boys (and they were all male), but at least our KGI students take strategy in the first year and learn about something called “entry barriers”. (Perhaps the boys slept during Michael Porter’s class.)

This goes back to the fundamental problem of b-student business plans: anything a typical MBA student can start is something any fool can start. Meanwhile, science and engineering students are working on creating something that hasn’t been done before — one that hopefully has a lucrative commercial application.

So instead of dreaming about the perfect opportunity, the Harvard students would have been better off buying drinks down at the bars near MIT for smart technologists who actually have some secret sauce.

† Title omitted to protect the guilty.

Tuesday, September 25, 2012

VC is no panacea for startup success

One of the major messages taught in entrepreneurship classes is the importance of winning venture capital. Now research by a retired entrepreneur suggests it’s no panacea, according to a report last week in the Wall Street Journal:
About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.

Compare that with the figures that venture capitalists toss around. The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns.
The latter matches the famous Bob Zider article in HBR that we entrepreneurship faculty have all used at one point or another.

Based on Ghosh’s study of 2000+ firms that received VC from 2004-2010, approximately 30-40% end in liquidation with investors losing all their money. As Berkeley entrepreneurship scholar Toby Stuart notes, failure is even harder on those who bootstrapped their company using their own or family money (rather than drawing a salary at a VC-funded startup).

Of course, the risk/reward profiles are different between the venture and non-venture backed startups:
"People are embarrassed to talk about their failures, but the truth is that if you don't have a lot of failures, then you're just not doing it right, because that means that you're not investing in risky ventures," [said David Cowan of Bessemer Venture Partners]. "I believe failure is an option for entrepreneurs and if you don't believe that, then you can bang your head against the wall trying to make it work."

Overall, nonventure-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don't have the capital to keep going if the business model doesn't work, Harvard's Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years--after investors stop injecting more capital, he says.

Of all companies, about 60% of start-ups survive to age three and roughly 35% survive to age 10, according to separate studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation.
As the article alludes, there is a larger question of why the firm failed, which could include:
  • VCs pulled the plug
  • ran out of money
  • entrepreneurs decided to fold their hand
These are often correlated, but it’s hard in a large-scale study to determine the direction of causality between them. In many cases, the best strategy is the fail fast and live to fight another day (particularly if you haven’t bankrupted yourself in the process).

Ghosh has a Harvard MBA, spent his earlier career as a partner at BCG and before becoming a serial entrepreneur founding a series of IT startups including Appex and Open Market. Alas, there’s no paper on his website to share the ful details of his study.

Tuesday, May 8, 2012

Chasing what is not yet known not to work

Today was one of the best events of the year for Bay Area cleantech entrepreneurs, with a panel discussion by three CEOs and one chairman of local biofuels companies (Amyris, Cobalt, Solazyme and LS9, respectively). I organized the event on behalf of the MIT Club of Northern California.

It was a great evening of very sharp leaders talking about how to make a successful business in a high-tech, high-risk industry based on biotech and chemical engineering. We had a standing room only sellout crowd, based in part on favorable publicity from the Merc and Biofuels Digest.

While we learned a lot from all the panelists, a unique perspective was offered by Noubar Afeyan, a Boston VC (and MIT alum) who appears to be a serial (perhaps chronic) entrepreneur. His Flagship Ventures web page says he’s “co-founded and helped build 24 successful life science and technology startups,” including roles building Applera and Celera in the biotech segment.

Afeyan is the chairman of three biofuels companies: LS9, Joule and Midori. The Bay Area’s LS9 was his firm’s 9th life science startup. As he said, “we number our companies the way that MIT numbers buildings.” (Inside joke for us MIT alumni: buildings, courses, majors are all given by numbers rather than names.)

In his opening slide, he showed an oft-quoted cartoon about the optimism of two archaeologists looking at a tiny pyramid in the desert, with the caption “This could be the discovery of the century. Depending, of course, on how far down it goes.”
This set up one of his best laugh lines of the evening, in which he said all the entrepreneurs in the industry were chasing “what is not yet known not to work.”

That seems to capture what makes high-tech entrepreneurship different: we don’t know what technologies will work and won’t work, so we invest in pursuing things that might work (or at least are not yet known to fail) in hopes of finding the one that does work. That seems almost the definition of entrepreneurial optimism: if it isn’t known to fail, it’s worth trying.

Friday, April 20, 2012

Sometimes the VCs are right

Regular readers of this blog know that I’m of two minds about VCs. There are some business opportunities (such as the biotech companies KGI alumni work for) that require venture investing. However, VCs often work contrary to the entrepreneurs’ interests — sometimes comically so.

At an algae (and biofuels) conference in San Diego last week, David Tze of the boutique private equity firm Oceanis talked about what he looks for in an investment. Some of it was specific to his fund’s focus (aquaculture, i.e. feeding farmed fish), but some of it was more generic.

In particular, he lifted (with full attribution) Sequoia Capital’s advice for entrepreneurs seeking funding for their business plans. The checklist for business plans matches what any entrepreneur might learn from a business plan class, but the “elements of sustainable companies” was a little more provocative:
Start-ups with these characteristics have the best chance of becoming enduring companies. We like to partner with start-ups that have:

Clarity of Purpose
Summarize the company's business on the back of a business card.

Large Markets
Address existing markets poised for rapid growth or change. A market on the path to a $1B potential allows for error and time for real margins to develop.

Rich Customers
Target customers who will move fast and pay a premium for a unique offering.

Customers will only buy a simple product with a singular value proposition.

Pain Killers
Pick the one thing that is of burning importance to the customer then delight them with a compelling solution.

Think Differently
Constantly challenge conventional wisdom. Take the contrarian route. Create novel solutions. Outwit the competition.

Team DNA
A company’s DNA is set in the first 90 days. All team members are the smartest or most clever in their domain. "A" level founders attract an "A" level team.

Stealth and speed will usually help beat-out large companies.

Focus spending on what's critical. Spend only on the priorities and maximize profitability.

Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower.
Of these, some are motherhood and apple (or Apple®) pie. The “frugality” and “inferno” seem ironic given the role of Sequoia (and other Sand Hill Road) VCs in fueling various bubbles over the years.

However, I think two points bear repeating — and I will repeat both in teaching my entrepreneurship class and advising would-be entrepreneurs. One is the “pain point” idea, now a part of the guidelines give for many opportunity pitch competitions.

Perhaps more interestingly — at least for tech entrepreneurs — is the idea of price-insensitive customers to buy the early expensive products until the firm learns how to make the products faster and cheaper. This is how computers, cellphones, Internet service got started, and my own research into telecom engineers shows the same effect. Since joining a biotech-oriented institute, I’ve also learned how life science companies have targeted expensive pain points, as when Genentech targeted the human insulin with its first product, Humulin.

So overall, I believe the experience of VCs can help nascent entrepreneurs prioritize their efforts — as long as they watch their wallet when it comes time for actual investments.

Wednesday, March 28, 2012

Selling out without "selling out"

In June, I heard Panos Desyllas present a conference talk (which I then blogged) on how UK biotech startups got killed after they were acquired. Today, his co-author Marcela Miozzo of Manchester Business School presented the paper here at KGI to a student audience.

To recap, the authors concluded that the acquired firm could be complementary or competing on two dimensions: technology and capabilities. If the firm is complementary on both dimensions, the odds are good it will survive; if they are competing on both dimensions, the odds are the company’s assets will be stripped and everyone “made redundant” (as they say in England).

One question I asked today was: did the entrepreneurs see this coming? Marcela made it sound like they didn’t explicitly look for this, but it sounded like they tended to be surprised.

In particular, she said the scientists were shocked or disappointed to find that their research wouldn’t be continued, and their prospective cure for a particular condition (e.g. Hepatitis) would die with the company. I think this is an area where human health research is different from other technical entrepreneurship — both the central role of scientists, but more particularly the idea of saving lives (or not, if corporate imperatives intervene).

It might be nice to say that the entrepreneurs should know better — that selling their company to certain firms would cause it to be killed — and thus when they exit, they should avoid "selling out." However, as Marcela noted, the entrepreneurs "knew that there were only 4 or 5 companies in the world that could acquire them.”

So in this constrained optimization of exit strategy — in many cases, for startup firms that have to be sold soon before they run out of money — such buy-and-kill outcome may be unavoidable. Perhaps the only bright spot is if the entrepreneurial climate is fertile enough that (in a Schumpeterian sense) the remnants of the former company can be recombined to make a new startup.

Monday, March 5, 2012

Tech startups: cross-functional people or cross-functional teams?

Today was the culmination of the business plan class (ALS 458) here at KGI, with the final presentations by 6 teams — some of whom will be going on to formal business plan competitions elsewhere. So it was the day of the year that the students, and invited guests most celebrate (and ponder) the nature of tech startups.

Our students are unusual in having both science and business training: they come with a science (or engineering) degree, they take science classes, and they take business classes. So in effect, they are cross-functional individuals, with a little bit of knowledge about a lot of things in their heads. Similarly, a company like HP used to pick their marketing staff from among engineers who later got an MBA.

This is also how schools like Stanford and Berkeley set up a mini-business school (or “engineering management” program) within their engineering school. And it’s also why MIT recently set up its Engineering Leadership Program for undergraduates.

On the other hand, a number of schools run business plan classes and programs by assuming individual specialization and deliberately mixing the various specialists. The NSF-funded Georgia Tech Tiger program is perhaps the best known such program among those of us who teach tech entrepreneurship. To some degree, this reflects the supply limitations — you can’t get enough cross-functional people so you merge silo’d programs (with silo’d students) onto a temporary cross-functional team.

Obviously any good tech idea needs to be brought to market through a combination of technology, marketing, finance and manufacturing (or other operations) skills. How do you build such a team in a real startup? And who should be in charge?

I’m an engineer who went into B2B sales and marketing, so it’s easy to guess where my sympathies lie. And at a recent MIT club event on the “Gordon-MIT Engineering Leadership Program,” I heard veteran tech CEOs talk about how it takes a technical person to lead a tech startup.

Still, there are many counter-examples. For every Larry Page, there’s at least one (maybe more) Jerry Yangs.

Steve Jobs offers another model. Sure he was a great marketer — one of the best of the 20th century — and a great CEO. However, if you look at the recent Jobs biography, it was clear that his mechanic father and his childhood electronics experiments gave him an intuition about engineering design that many practicing engineers lack. (Alas, as the original Mac 128 death march demonstrated, he also had completely unrealistic expectations about how long things should take.)

So how do you form a cross-functional team to make the next great tech startup? And how do you allocate decision rights and authority among them? How does this change over the life of the firm, the industry and the technology? And what do you do with your hybrid business-engineers (or business-scientists)? They’re not going to be CTOs or CSOs (are they?), but do you put them as VP of R&D, or division managers, or CEO?

These are all interesting questions. Perhaps someone will research these answers.

Sunday, February 5, 2012

Kauffman asks: Will it be you?

The best ad of Super Bowl 2012 didn‘t run during the Super Bowl, but before it. And it wasn’t selling a product, but a vision — or rather, an economic philosophy.

I was not the only one who loved the Kauffman Foundation’s ad “Will it be you?” The vision of the ad is: America’s economic growth comes from entrepreneurs who take a good idea into a new business and new jobs.

Latest in the “Kauffman Sketchbook” series, the ad was visually catchy , professional, and used every one of its 30 seconds to make these key points.

Unfortunately, the traffic crashed their new website, Willitbeyou.com. Let’s hope the viewers followed up when the website came back up.

The other missed opportunity was doing more to get this message in front of young people. The ideal partner for this effort is Junior Achievement, which has a network of some 400,000 volunteers teaching capitalism to America’s children in schools all over the country

Kauffman has partnered with JA in the past. However, the visibility of this message today among parents — and some teens and pre-teens — should be followed up with a special push to make this message more real (and salient) for our next generation of potential entrepreneurs.