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Thursday, November 14, 2013

A bird in the hand...

The morning paper reported that Snapchat CEO Evan Spiegel turned down an (all cash) purchase offer from Facebook for approximately $3 billion.

My Snapchat-addicted teenager was relieved, saying "that means we're probably not going to get ads". (I had to break it to her that ads are inevitable, no matter who owns the company).

There is an interesting comparison to other pre-revenue startups
  • Snapchat, two years old, refused $3 billion offer from Facebook
  • Instagram, two years old, $1 billion purchase in 2012 by Facebook
  • YouTube, 18 months old, $1.65 billion purchase in 2006 by Google
  • Pinterest, valued at $3.8 billion in last month’s VC round
  • WhatsApp turned down $1 billion from Google in April, and one analyst Wednesday estimated its value at $11 billion (based on Twitter’s $24b market cap after last week’s IPO)
Obviously, these are exceptional exit opportunities, but still there are lessons for other firms considering the timing of their exit.

The New York Times suggests that its offer for Snapchat suggests desperation by Facebook:
Facebook’s Snapchat bid shows triple the desperation. The social network paid $1 billion for no-revenue Instagram a little over a year ago. Now, it’s said to be dangling as much as $3 billion to lure a mobile app that sends self-destructing digital images. Facebook’s apparently escalating need to buy off marauders at its moat suggests its defenses may be scalable.

Coming just months before its initial public offering, Facebook had obvious reasons to buy Instagram. Consumers were spending more time on mobile devices, instead of desktop computers. This was listed as a “risk factor” in its prospectus for its initial public offering as the social network still hadn’t figured out how to make money on mobile advertising. More important, it faced the risk that users might migrate to a rival optimized for smartphone usage.

Snapchat has similarly astounding growth. In September, its users were sending 350 million photos a day, up from 200 million in June. …

Still, there’s a disquieting element about a company spending billions for a simple application it could almost certainly have replicated for next to nothing. Facebook’s acknowledgment that teenagers are using its service less on a daily basis may signify the social network is losing its edge among the ranks of new technology adapters. That it is also now willing to shell out $3 billion to snuff out a rival in its infancy brings with it a whiff of desperation.
Writing on Sunday, Blogger Ben Evans asked where Facebook should draw the line:
Is FB going to buy Whatsapp, Snapchat, Line, Kakao and the next ten that emerge as well? Sure, some of those will disappear, but it doesn't look like FB will crush the competitors the way it did on the desktop. On mobile, FB will be just one of many.
From the standpoint of the entrepreneurs, Business Insider reports on those claiming that Instagram sold too early and too cheap:
Now, 18 months later, industry people are starting to believe that [CEO Kevin] Systrom was wrong to accept that deal. They believe that if Instagram had stayed an independent company, it could be worth between $5 billion and $15 billion today.

This morning, activist investor Eric Jackson tweeted: "Systrom has to be feeling like he totally missed this wave. Instagram likely worth $15B today minimum." Jackson told us he came up with that valuation figure by looking at Instagram's total active users, about 150 million, and Twitter's, around 236 million. Assuming that Instagram's user base is more U.S.-weighted, and therefore more valuable, he figures Instagram's market cap as an independent company would be at least half of Twitter's $30 billion.
To me, this is the question of the value of a bird in the hand. Instagram’s continuing success is not guaranteed. Like any stock, the value could go down, not up. (NB: Digg, MySpace, AOL). Since they’re pre-revenue (let alone having positive cash flow), no one has any idea what these companies will be worth.

It seems unlikely that Spiegel (or Systrom) will have another comparable exit opportunity. If (as Wikipedia says) Systrom owned 40% of Instagram, 40% of $5b-1b is $1.6b (pretax) left on the table. For the founders, it’s the difference between never having to work again, and having enough pocket cash to change the world, whether by buying/selling companies or eradicating malaria.

Mark Zuckerberg refused a Yahoo purchase offer and delayed his IPO, and now is #20 on the list of US billionaires with a worth of $19 billion, the richest American under 40 years old. Timing is everything: Zuckerberg is worth far more than the widow of Steve Jobs, who accomplished far more over a longer period (but IPO’d early and sold his Apple founder’s shares in the 1980s).

Key employees with stock options will be similarly conflicted. With another 5x rise in valuation, some may never work again. On the other hand, some have enough money to buy a house (even in Los Angeles) today, and they won’t if the company never concludes a successful exit. The more sophisticated realize they, too, may not have another opportunity: a childhood friend had stock options from seven Silicon Valley companies, and none ever produced a sizable ($100K+) return.

The existence of a Chinese VC valuing Snapchat at $4b is giving Spiegel a concrete reason to turn down the Facebook offer. Still, new capital is not liquidity. Also, as Tech Crunch notes for Pinterest, the ever-increasing valuation may make it impossible late investors to profit from acquisition — making the exit IPO or nothing.

So does turning down a $3 billion exit mean a $10 or $15 billion one? Or a $500 million one? Spiegel isn’t panicking, but instead is leaving all his chip on the roulette wheel for one more spin.

Saturday, October 26, 2013

Buy, don't start a company

In doing research for my first (journal) article on 3D printing, I found an interesting article that suggests young entrepreneurs should consider buying a small growth business rather than start one from scratch.

The story (from the October 28 dead tree edition of Forbes) is about Stanford alumnus Rob Cherun and a course he took that changed his career goals from McKinsey consultant to one-man LBO artist:
Cherun’s inspiration was a little-known but increasingly popular course at Stanford called “Strategy 543: Entrepreneurial Acquisition.” This second-year elective is a fast-paced, two-week primer on how to become a one-person version of KKR or Blackstone Group, carrying out your own tiny takeover and installing yourself as chief executive officer. …

Every year second-year Stanford students like Cherun stampede into S-543 to learn the essentials of raising money, finding an acquisition target and closing the deal. Instructors Peter Kelly and David Dodson–two longtime entrepreneurs and investors themselves–take only 40 students per session, and that doesn’t come close to satisfying demand. Months before this autumn’s class began, every slot was claimed, and another 26 students hovered on the waiting list. Frustrated aspirants will get a second shot in the spring, thanks to a new scheduling expansion.
Columnist George Anders cites a study of “search funds” that concluded that the occasional home run (100:1 return) produces a pretax IRR of 34%, even allowing for a 50% failure rate.

In Cherun’s case, money was the easy part: after four Stanford instructors ponied up, Cherun and a partner raised more than $500k for their search and a promises of equity funding for an actual deal.

The entrepreneurs bought 90% of a Canadian company that monitors construction sites for thefts. The 35-year-old founder remained as a minority partner and got to spend more time with his wife and kids without having to travel across the country. The new owners have doubled revenues to $10m (loonies?) annually.

However, these Stanford students face a sizable opportunity cost. In almost the same issue, Forbes proclaimed Stanford the “best” US business school, based on the difference between pre-MBA salary ($80k) and post-MBA ($221k) salaries that (net of tuition and lost wages) left them on average $100k richer after five years. The generous salaries for the elite graduates of the Stanford class of 2008 were aided by placements at Apple, Google and the top consulting firms (Bain, BCG, McKinsey); these were 5 of the 6 employers most preferred by MBA students (#4 on the list is Amazon).

Three other schools (Chicago, Harvard, Wharton) also had $200k post-graduation salaries. My undergrad school, MIT, ranked 12th -- just ahead of UCLA, Berkeley and Virginia; my grad school, UCI, ranked #62 (up from #69 in the last ranking).

It takes great confidence to walk away from the certain cash to run a small company. (Stanford students are nothing if not confident.) The risk is probably lower if (as in Cherun’s case) the company has a track record and (as recommended by Stanford) can be bought for 6x EBITDA.

Except for the last point, this looks like a win-win, providing a liquidity opportunity for entrepreneurs who can’t take the company to the next level. Still, having a residual equity stake (and a meaningful management role) makes it a lot more attractive for founders who might have trouble letting go of their baby.

Saturday, August 24, 2013

Cleantech entrepreneurs thinking big

Cross-posted from Cleantech Business

As an MIT alum interested in clean energy, I subscribe to the free semiannual magazine Energy Futures.

The purpose of the magazine is to tout MIT advances in energy technology, but since MIT (with the MIT Energy Initiative) is one of the world's cutting-edge energy research labs, I find that it is often a provocative look into a possible future that may or may not* come to fruition. (*The technology may not work, it may not scale, it may not be cost effective, something better may come out, etc. — such are the risks of technology entrepreneurship).

In the spring issue, one article describes the work of Prof. Vladimir Bulović, recent PhD grad Miles Barr and ex-postdoc Richard Lunt to create transparent solar cells. The cells absorb energy in the UV and near-infrared, but only about 30% of the visible light. This would allow the PV cells to become just another layer on a building’s windows, and could also use the window class to protect the (currently fragile) layers from the elements.

[Spectral response]

Right now, the efficiency is only 2%, but are hoping to get the efficiency up to 10-12%.

As with any BIPV (Building Integrated Photovoltaic), integrating the PV into windows would eliminate most of the installation cost; it would also mean that the PV is not an obstacle in use of the existing roof, interfere with drainage, need to cope with snow accumulation, etc.

The big win seems to be for large commercial buildings. The article claims that a 5% efficient PV cell could generate 25% of a building’s electricity. Absorbing near IR would reduce cooling in the summer (but increase heating in the window). With such a cost-benefit, the builder of a new commercial building would invest in such efficiencies (even ignoring the LEED bragging rights) while a consumer might worry about increasing the price of a house $20-50k (and would also tend to have more shading problems). If every new skyscraper had such BIPV, it would both generate a lot of energy and also be a big market.

To exploit the opportunity, the three men formed a company called Ubiquitous Energy, where Barr is president and CTO, and the other two are on the scientific advisory board. They have a $1m in seed funding and $375k in SBIR funding so far.

Like any tech startup, it’s a gamble — but this seems one with a big payout if they can solve all the challenges.

Saturday, June 8, 2013

Risk-taking and risk aversion

The cover of the Wall Street Journal† Monday proclaimed:
Risk-Averse Culture Infects U.S. Workers, Entrepreneurs
By Ben Casselman

Three long-running trends suggest the U.S. economy has turned soft on risk: Companies add jobs more slowly, even in good times. Investors put less money into new ventures. And, more broadly, Americans start fewer businesses and are less inclined to change jobs or move for new opportunities.
The VC story isn’t quite as compelling as promised. Some of the story is already known — that VCs keep hoping for another Internet bubble that won’t return (but spawned excess entry). At least one measure — share of VC for seed capital — the trend isn’t monotonic, but shows peaks and valleys.

The concentration of VC in Silicon Valley can be read two ways: VC only wants Silicon Valley entrepreneurs, or entrepreneurs know they should move to Silicon Valley to get funding. And as everyone knows, the companies that VCs fund are only a small fraction of the nation’s startups.

And while Casselman reported new specifics, we know that the last four years has been a jobless “recovery.” Citing the work of Maryland economist John Haltiwanger, he wrote:
In the eight recessions from the end of World War II through the end of the 1980s, it took the U.S. a little more than 20 months, on average, for employment to return to its pre recession peak. But after the relatively shallow recession of the early 1990s, it took 32 months for payrolls to rebound fully.

After the even milder recession of 2001, it took four years. Today, nearly four years after the end of the last recession, employment has yet to reach its pre crisis peak.
No, what was really troubling is what the story said about America’s entrepreneurial culture. This is what made America successful over the past 150 years, and the envy of the world. (It is also why, as some have argued, the country needs a new frontier to keep entrepreneurial processes alive).

Instead, Americans are changing cities often, changing jobs less often, and working more for big companies than for small companies. Even family businesses are not being passed down, as the children of entrepreneurs opt for the safety and comfort of corporate jobs.

As a natural consequence of this cultural shift, young companies account for a declining share of both the population of companies and national employment. This is terrible for the country, because we know (especially from Prof. Haltiwanger’s research) that young companies account for all the net job creation in this country. These little companies are finding it harder to compete against established incumbents.

I wish I had an answer. The country has become more regulated and bureaucratic, and it’s taking a toll on entrepreneurial intentions. Thirty years ago, we had an effort to reset the country’s attitude towards risk taking and free markets, but the tide has been inexorably coming in ever since.

† It’s to the Journal’s credit that they devoted so much space to the topic. Twenty years from now, we’ll hold this out as an example of why newspapers were once a good thing and tragic that they all died.

Wednesday, May 22, 2013

Research on startup teams and startup success

At the ACAC lunch today, Kathy Eisenhardt summarized her decades of research on tech startups. For an academic conference (the Atlanta Competitive Advantage Conference), Prof. Eisenhardt literally needs no introduction: as host Bill Bogner of Georgia State said, “Kathy Eisenhardt needs no introduction: if she does, you didn't pass comps.” (Academics would know her paper that has 20,000+ cites, while tech entrepreneurs might know her as co-director of Stanford Technology Ventures Program or her many STVP videos).

Eisenhardt's focus was on the importance of a startup’s management (“Top Management Team” in strategy jargon) in determining the success of a small or young firm in a highly uncertain environment. She identified three factors that explained that success
  1. Optimal management team
  2. Optimal strategic decision process
  3. Matching strategy and structure (at “the edge of chaos”)
1. Management Team

We know that successful teams need to be larger, diverse and have prior work experience together (and thus trust). However, there is an interaction effect between the team and the sort of opportunities they pursue. As scholars who study tech startups will tell you, firms tend to be veterans of an industry who start firms in that same industry that they know.

Her 1990 paper with Kaye Schoonhoven showed that the best firm growth came where a top team caught a great opportunity. A great opportunity was a market that’s at the takeoff phase of a growth market: at least $20 million of industry revenue and 20+% annual growth. In California-speak, Eisenhardt said this is a great surfer catching a great wave.

In specific domains, she cited the recent research of Anne Fuller and Frank Rothaermel on star faculty entrepreneurs as well as various papers by Sonali Shah on user entrepreneurs. As she noted, Chuck Eesley of Stanford (an MIT alum) who estimated when experience is more valuable than talent, based on a survey of entrepreneurs from among the 100,000+ MIT alumni.

2. Strategic Decision-Making

Her old studies on TMT decision making showed that for fast choices in highly uncertain environments, managers need more information and more alternatives, as well as a decision process that is midway from managerial fiat and (a hopeless search for) total consensus. She also noted later work of researchers who examined improvisation and bricolage.

Her former student, Sam Garg, has studied how CEOs manage their boards. The best CEOs constrain the interactions with the board and don’t give up their power over leading the company, using it to make decisions (not generate ideas), by using a divide and conquer strategy.

3. Strategy and Structure

Summarizing her research with Chris Bingham of UNC, she noted that young firms were most successful when they could use their experience to generate heuristics. Experience was valuable when it created “simple rules” that firms could apply over and over again: such rules were both quicker and often better in solving problems in conditions of high heterogeneity and high uncertainty.

Eisenhardt noted that firms (like parents “raising your teenager”) face a dilemma between too much and too little structure. In a simulation with Bingham and Jason Davis, they found that in a highly unpredictable or turbulent market, too little structure is more dangerous than too much. (This also sounds like raising a teenager).

Finally, in cases of high ambiguity (e.g. nascent markets), success is more determined by luck than skill. Therefore, skillful managers want to reshape the market to fit their skills — rather than leave the outcome to dumb luck.

Wednesday, May 8, 2013

The multi-dimensional 3D printing revolution

At @KeckGrad today, our graduate students are doing their year-end project presentations. In watching the presentation by mechanical engineering students gave me insight into how 3D printing is going to change entrepreneurship.

There are at least three different dimensions of how 3D printing is creating entrepreneurial opportunities. In each case, there are parallels between personal computers almost 40 years ago — and smartphones today — and how they gradually displaced mainframe computers. This is a classic Clay Christensen “disruptive innovation”.

Some of the emphasis on the impact of 3D printing has focused on the 3D printing companies. In fact, Scott Shane published a 2000 research paper on how a variety of companies licensed the original 3D printing technology from MIT. This has been the subject of news has also been on some of the larger and more successful 3D printer manufacturers, whether public companies such as Stratasys or 3D Systems or startups such as Shapeways.

A second opportunity — the one that captures the attention of the popular press — is the print-on-demand business.This nicely fits the mass customization vision of Silicon Valley marketing guru Regis McKenna and German innovation scholar Frank Piller. An example of this is Layer By Layer (@LayerByLayer3D) a company formed by Harvey Mudd students who are graduating next week, who proposed to custom-print iPhone cases.

An advantage of the 3D printing model is easier customization and lower setup costs. However, for now it’s slower and more expensive per unit, and has limitations in product reliability.

However, at the KGI presentation today, I saw a third category of opportunity. This seems like a much broader and more immediate application of 3D printing: changing the process of industrial design.

Among our Team Masters Projects, a team of KGI and Harvey Mudd students spent the academic year to create a mechanism for evenly coating seeds. As in previous projects, they used SolidWorks to design the mechanical components, and had some bent or machined metal components.

However, it became obvious to the team that the default prototype fabrication approach is the 3D printer. The students created two seed picking components that could be sized and shaped to fit whatever requirements they had. Once they had the design, they set the printer going and hard their part ready in the morning.

This reminds me of my first computer experience (pre-PC), when computing job turn-arounds took 10 minutes to several hours. To improve on batch computing, we eventually obtained timesharing — quick but expensive — and then desktop personal computing and handheld computing. Over time, as computing became quicker and cheaper, it allowed computing to permeate and enable every aspect of engineering, science, business and government.

So if 3D printing becomes cheap, ubiquitous and quick, what will that do to physical design? The marginal cost may not become as low as software products, but it will certainly close the gap and thus converge the innovation processes between physical and intangible goods.

Friday, May 3, 2013

Some tech startups are more high-tech than others

In the business press, academic teaching and research, there’s often a discussion of the unique characteristics of “tech startups”, “technology entrepreneurship” and “technology-based firms.” Such startups are the focus of this blog.

Often the distinction between high- and low-tech startups is measured by the proportion of technical employees — such as fraction of R&D employees or fraction of R&D spending (i.e. R&D intensity).

Still, tech startups are not homogeneous. Some of the distinctions that have been draw are science- vs. engineering-based startups, or industry-specific startups like IT, cleantech, or biotech.

This week I attended two business plan competitions here in Claremont: Wednesday’s business plan competition at the Keck Graduate Institute (which I organized) and today’s Kravis Competition across all the Claremont Colleges.

Judges at KGI 2013 Business Plan Competition: George Golumbeski, Stephen Eck, Bob Curry. Not shown: Liam Ratcliffe, Paul Grand
Our KGI business plans (from my ALS 458 class) were all about commercializing patented (or patent-pending) biomedical technologies (therapies, diagnostics, devices) developed by top research institutions such as Caltech, City of Hope, and USC. The Kravis competition included several IT concepts, some low tech businesses, and AccuMab, a cancer diagnostic company from my KGI class.

In comparing the KGI plans to the other Claremont projects — or those in our textbook — it seems to me that — at least from a financial standpoint — there are three types of companies: high tech, medium tech and no tech.

What is dramatically different about our students projects was that (with one exception) is that they’re highly capital intensive, requiring $5 to $50 million in outside funding. For example, the winning team — using technology from Children’s Hospital Los Angeles to repair Shortened Bowel Syndrome — estimated it needs $20 million in equity and $5 million in government grants to get to market. This project — like many others — is building on millions of dollars of NIH/NSF/foundation grants already received to develop the basic science. There is a certain minimum scale required to get FDA approval and thus generate first revenues.
2013 winning KGI team — Hadi Mirmalek-Sani, Porus Shah, Shrina Shah, Rajesh Pareta —
with Bob Curry, chair, KGI Board of Trustees
Think about the story of Mark Zuckerberg, who launched The Facebook in early 2004 and took its first outside investment (of $500k) later that year. (Yes, they didn’t monetize initially, but still they created a compelling product and reached a million subscribers using the founders’ money). The iPhone app startups were launched for tens of thousands of dollars: Rovio had 40 million Angry Birds users before they took their 2011 Series A investment.

Over the years, entrepreneurship researchers (and practitioners) have demonstrated that any new company or product has highest uncertainty and risk up until first customer sale. So from a practical standpoint, I suggest a new metric: how much R&D spending do you need before launching a product? How big a bet — with what scale of outside investment — does it take until the entrepreneur finds out whether (s)he has a viable business?

By this measure, the difference is not the % of the money that goes to R&D but the size of the R&D bet that’s needed to test the marketing hypothesis.

A company that takes 5+ years and $50+ million is fundamentally different from one that can ship a 1.0 (or revenue-generating beta) for less than $1 million. By that standard, after biotech the biggest bets required are for renewable energy. You can start dozens (or hundreds) of software companies for one fully mature biotech, biofuels or solar company.

Friday, April 26, 2013

Developing science and engineering majors

Last month I participated in the San Diego Festival of Science & Engineering, which touched more than 50,000 K-12 students interested in technical careers. In some ways, it was like a personal homecoming since the key event was the annual Greater San Diego Science & Engineering Fair, where I got my start as a pre-teen computer scientist and served for 12 years as a judge.

The supply of science and engineering college graduates is crucial on multiple levels. These are the students who grow up to be founders of high-tech startups — whether young entrepreneurs before or during college (as in Gates, Zuckerberg, Wozniak) or those that start a company after a few years of industry experience (as I did). You also need the engineers and scientists that work for these startups.

To follow up on one of the talks, I found an excellent resource for preparing K-12 students for science careers. But sending children to STEM college majors is not enough, as two articles demonstrated. One, in the New York Times, was entitled “Why Science Majors Change Their Minds”. A sequel, “Why Engineering Majors Change Their Minds,” was published at the Forbes website.

The upshot of these recommendations? Engineering is hard, the grades are lower than for easy majors, and the competition is particularly ruthless at the top school. (Berkeley comes to mind as a place that particularly likes to wash out engineering majors). They also note the deferred gratification: several years of lower division prep followed by the interesting stuff as a junior or senior.

To address this, Berkeley had my niece take a freshman engineering seminar to give her the big picture of what she was studying. I recall that my favorite (STEM) course freshman year — when I was still intending to be a EE — was taking the sophomore intro circuits class my first semester at MIT from a great teacher who later went on to be a IEEE Fellow.

A friend's son is hoping to join a top engineering program in 16 months, and so I’ve been giving his parents suggestions of how to think about picking a college and a career. One is to consider the top engineering teaching schools, like Harvey Mudd, Cal Poly, Olin or the military academies. (Or, if he goes to a top engineering research school, to join a professor’s lab as soon as possible). Other ideas include getting a summer job that involves working alongside engineers. Or, to do as my daughter is doing, attend a summer engineering program for high school students such as UC’s Cosmos.

Certainly what top students (and would-be entrepreneurs) need is an understanding of the technology and a curiosity to think about what that technology can do. For example, some Harvey Mudd students used their understanding of 3D printing to create a startup that makes custom iPhone cases (that can be self-printed or shipped).

Still, even with well-laid plans, there are plenty of opportunities to go astray, for the reasons identified by the NYT and Forbes. My friends who succeeded in engineering found a good job out of college (or as a summer job during college) that validated their choice and allowed them to reap the rewards of their long hard work.

In this era where the “new normal” is 8+% unemployment overall and 12+% for recent graduates, it seems more important than ever to find schools that find high demand for their graduates in the marketplace. Yes, some of this is a self-fulfilling prophecy — top schools attract top students who place well — but as a parent (or student) we want the best path to success. It’s great for students to take a direct path into entrepreneurship, but no one’s ROI on college investment should assume that lightning will strike during a four year window.

Finally, I advise every engineering student to do a business or econ minor (or even double major) — which will pay dividends in companies both big and small. I was blissfully unaware of business as an undergraduate, and had to do remedial education in night school to have a clue as to how to run my company. For business, I would recommend marketing, accounting, finance and general management. For econ, I'd recommend micro, if possible skip macro, and take managerial topics such as industrial/organizational econ, decision theory, law and economics or even econometrics or game theory.

Friday, April 12, 2013

Will high growth bring a failed marriage?

Everyone knows being an entrepreneur is stressful, particularly for a high-growth startup. Often entrepreneurs pay a high personal price — whether or not their firm is successful.

Still, last week I was surprised to read a New York Times blog posting that suggested that the outcome is predetermined. The article was written by a former entrepreneur who runs an entrepreneurial training program in suburban Atlanta:
Balance? Don’t Believe the Hype
By Cliff Oxford

“How can fast-growth entrepreneurs lead a more balanced life?” is one of those agonizing questions that I am often asked. The good news is that there is a rather simple answer: “You can’t.” Save your money, and don’t waste your time on the books and coaches who want to sell you advice. Here is why.

Fast growth is a 24/7 proposition. It is not just the hours you put in at work; it’s that it owns your head. You think about work in the shower and on vacation, and you get lost in all of the ideas while you are sitting at dinner. It is exciting and dangerous. Of course, the collateral damage on the big three — family, health, and faith — can be disastrous.

Now I work with hundreds of fast-growth entrepreneurs who struggle to find the balance they read about in airplane magazines as they zip off to see the next customer, and I see these tragedies happen over and over. I tell fast-growth entrepreneurs not to get married while they are in fast-growth mode. They always do.

I thought I could help entrepreneurs understand that balance is a fantasy — a good fantasy but still fantasy. … I have been told that this is about the same success rate for heroin users in rehab.

Here is the deal: Fast growth means all-in, 24/7 for the mission and success of the company. Balance is snake-oil that says it can all be pretty and nice. It can’t. But I think setting boundaries can help.

Boundaries are trade-offs, and entrepreneurs are good at negotiating trade-offs. Balance is propaganda that sells well but is a cruel hoax that will continue to write tragedies.
The author’s viewpoint seems to be strongly colored by his own divorce and regrets over his loss of time with his (now adult) daughter. I have my own regrets over poor work-life tradeoffs, but (perhaps with more distance) am less inclined to generalize.

Oxford correctly notes that Bill Gates held off on the marriage and kids thing until he was starting to wind down his Microsoft role. Similarly, I would note that Steve Jobs didn’t get married (or have his last three kids) during his original Jobs I period, but in the NeXT interregnum before the Jobs II era. Both Larry Page and Sergey Brin got married in 2007, when Google was nine years old and worth billions.

Still, there’s a difference between an increased risk and a deterministic outcome. I asked one friend who works with Silicon Valley entrepreneurs, and he strongly disagreed because, as he said, “Have seen people able to do both.”

Instead, I think it’s the personality of those who become entrepreneurs — not just the single-mindedness, but the insurmountable ego. It’s not just (as Oxford suggest) the single-mindedness of pursuing The Next Big Thing, but also the know-it-all confidence (aka arrogance aka hubris) and need for control that inevitably leak over from business into one’s personal life.

So the lesson is not one just for entrepreneurs, but a broader lesson for driven, successful people who do need that sort of balance in their life. Perhaps as Oxford suggests, boundaries can provide a way out for those who’ve lost all sense of perspective.

Sunday, April 7, 2013

The opportunity cost of entrepreneurial education

A friend tonight tweeted a column about why entrepreneurs shouldn’t get MBAs. The Wall Street Journal column last Monday says “I no longer advise startups to hire M.B.A.s and I discourage students who want to become entrepreneurs from doing an M.B.A.” and a follow up Friday on LinkedIn makes similar points.

The author, Vivek Wadhwa, is a former entrepreneur who’s made a point of being an iconoclast on trade, immigration, education and a variety of other topics since taking his first adjunct position in academia at Duke back in 2005. Having seen some strong opinions in areas where I have direct knowledge, I’ve always tended to take his postings with a grain (if not a kilo) of salt.

The LinkedIn column identifies some important risks for entrepreneurs. The first is the cost ($100+K) of getting an MBA, which tends to push MBA graduates towards corporate rather than entrepreneurial opportunities. (This problem has gotten more severe as state-subsidized MBAs have gone away: a Haas or UCLA MBA that 20 years ago cost $10K in tuition is now over $100K). Related to this is the opportunity cost, i.e. two years out of the workforce: if you have the next Facebook, you should be starting it rather than getting a degree.

Wadhwa also questions the relevance of MBA programs for new and small companies — a point I observed when taking MBA classes (during my PhD) back in 1994-1996. Still, this is a terribly broad brush, given the wide range of programs around the country, and the number of serious entrepreneurship faculty (such as Tom Eisenmann) trying to provide real entrepreneurial insights in the MBA classroom.

I’d agree with Wadhwa that a good one-year specialized master’s is a reasonable compromise. I don’t know much about his own program at Duke, but certainly could recommend the engineering management programs at Berkeley or Stanford’s highly influential part-time program.

However, I find some of Wadhwa’s advice more than a little contradictory:
I believe very much in the value and importance of education and consider the bachelors degree to be a basic requirement for success in business — whether you are working for someone else or starting your own. If you don’t have this, you are at a severe disadvantage because you have too many gaps in your knowledge and you have not had a chance to develop important social and learning skills.

My team at Harvard and Duke looked into the backgrounds of tech entrepreneurs found that, on average, MBAs start their companies 13 years after graduating. Subsequent research revealed that what makes entrepreneurs successful is their experience — including previous successes and failures; management teams; and luck. Next on the list are professional networks and education. 
Yes, it’s redundant for someone with a good undergraduate business degree to get an MBA — whether trying to be an entrepreneur or not. Those with undergraduate business degrees may be well-suited at starting a franchise or retail firm, or (after many years’ experience) of being the finance or marketing cofounder of a tech startup.

However, the advice to avoid an MBA is problematic for would-be tech entrepreneurs. How do you get a bachelor’s in business when you’re majoring in engineering or computer science (or molecular biology) at a top school? The normal route — the one I have long advised — is for would-be entrepreneurs to get an undergraduate tech degree and a graduate business degree.

And just because you got your degree 13 years before you start your company, doesn’t mean it wasn’t valuable. A good degree from a good school admits you into a good firm, good experience, and good professional and social networks. Without some sort of business training, 13 years later an engineer or scientist will still be (“just”) an engineer or scientist.

I never got a formal business education before starting my company, but I did have a few UCSD Extension courses that helped tremendously. I would have done much, much better if I’d understood VC, entrepreneurial exits and consumer marketing before co-founding a company in a burst of excess (and unjustified) optimism.

Overall, these columns show the problem with black-and-white, one-size-fits-all advice. On the one hand, getting an MBA has a cost, and sometimes the cost is too high. On the other hand, tech entrepreneurs have almost insurmountable disadvantages if they don’t understand the basics of business — which might be solved by an MBA, a dual major, a business minor, or a well-trusted relative who will look after their interests when they are starting their firm.

So if the point is to say that entrepreneurs should never get an MBA, that’s clearly an exaggeration to make a point. If the point is to caution would-be entrepreneurs to carefully assess the risk-benefit of an MBA before starting, I’d say Amen! — but that would also apply to anyone getting a graduate degree, whether an MBA, a Professional Science Masters’ or a PhD.

Friday, February 15, 2013

The customer is always right

One of my most vivd memories of our first major software development contract, to support HP’s first color printer for the Macintosh, came with celebratory banquet. We all got little plaques, and mine said: “Keep ’em happy.” (I still have that plaque in my closet.)

To the customer, this was probably a good thing. However, the slogan (volunteered by a subordinate) reflected a tension in our 18-month-old company — between the marketing slime (me) and the engineers (everyone else) over how far we were willing to bend to keep the customer happy.

The reality is that for a small, young and underfunded (particularly self-funded) company, revenue is everything: you won’t keep the doors open without it, and it’s only going to come from one place: the customer.

When we founded the company in 1987, I’d never taken any business classes. However, as the only one who fully understood our financially precarious position (not a good idea), quickly worked to implement the old maxim: the customer is always right. (Admittedly, where possible I would say “you're right, it needs that feature, but that’s not part of this version: let’s put it in the next version that you buy.”)

If you’re venture funded, you have a different imperative: grow fast or die trying. Sometimes that means getting early customer wins, but in other cases it means building as complete a product as quickly as possible — without regards to initial feedback — to have something that will be best-in-class and pre-empt the inevitable competitors.

Apparently, if you are a centimillionaire with an ambition and ego that is out of this world, even these rules don’t apply. How else can one explain the quixotic attacks by Tesla CEO and co-founder Elon Musk on the New York Times, who had the nerve (the nerve!) to publish an article last week describing a long-distance test drive gone horribly wrong. All week, he has been mounting a jeremiad against the newspaper and its reporter, accusing them of lying, lack of ethics, falsifying and just about everything short of kicking a dog and abusing children.

Perhaps — as with a political candidate — he’s trying to dispel any doubts in his base, rather any attempt to appeal to the average buyer. Still, it seems to be a counterproductive strategy; as Nicholas Thompson, a New Yorker editor wrote today:
It seems there are a few things we can learn from this:
  • Never escalate a fight about a negative review, unless you're certain to win. The debate has driven a lot of people to Broder's initial review. And there's nothing in that review, or the rest of the debate, that's going to make anyone want a Tesla car.
  • Twitter is a temptation. Musk's fierce initial response is artful. The first sentence is clipped and sharp. But, even when he first put it out, did he think that "fake" was the perfect word? Or was it just that it's shorter than, say, "flawed"?
  • If your company has a celebrity CEO, use him carefully. Musk has a lot of power, in part because of his position of social media. But by personalizing this battle, he's done real harm to both his brand's and to Tesla's.
But then Musk has a habit of shooting the messenger, exaggerating and even lying in his attacks on reporters who disagree with him. A VentureBeat reporter wrote nearly three years ago:
I don’t believe Musk twists the truth out of malice. Rather, at this point, it may well be out of habit. He’s so used to getting his way that future possibilities just seem like present realities to him. And pragmatically, it’s worked. Whenever Tesla has been in a bind, Musk has spun his way out of trouble.

It’s a character trait of which elements are found among many successful entrepreneurs: the compelling presentation of an alternate reality in the hopes that so many people will sign on to the vision that it comes true. Apple CEO Steve Jobs, for example, is so masterful at this that people speak of his reality distortion field. But Musk may have taken distortion to extremes.
The old Steve Jobs (Jobs I) was like that: a good friend went to work for Jobs (at NeXT) and told me that everything I’d heard about “reality distortion field” was true.

However, in the Jobs II era, Steve had grown up: it was all about surpassing all customer expectations. After firing (or dressing down) the person responsible for such a fiasco, he would have set his minions to work on fixing it. For the sake of the Tesla employees, let’s hope that (despite the bluster) that’s what California’s leading car company is doing.

Meanwhile, for us mere mortals without VC (or personal) millions and a celebrity reputation to save us, there’s only one choice: treat the customer right. Or else. That goes double for reviewers and other opinion leaders to whom our customers turn to for advice.

Thursday, January 3, 2013

Zipcar: it's hard to create a stand-alone business

Zipcar sold itself Wednesday to Avis for a half a billion dollars. While that's a hefty premium over final close last week, Dennis Berman of the Wall Street Journal notes that it’s only about half of what the company was worth two years ago at its IPO. The company has $55 million in cumulative losses, but was unable to cost-effectively acquire new customers.

With its greater scale, scope and buying power, Avis hopes to succeed where Zipcar failed. Avis-Budget-Zipcar will be competing with the two other major rental car conglomerates, Hertz-Dollar-Thrifty and Enterprise-National-Alamo-Vanguard-Tilden.

In other words, while Zipcar invented a new business model, it didn’t invent a new industry. It was a failure for public investors and as a stand-alone company. Even several of its venture investors — whether seeking a bigger pop or perhaps having some shred of ethics — hung in with the public investors, hoping for a turnaround that never came.

I think this is symptomatic of a larger problem, which is the difficulty in creating new stand-alone companies that will last. Facebook (and Amazon and Google) will survive, but will LinkedIn and Twitter and Yahoo?

Dan Henninger in the WSJ this morning suggests that the hostile business climate of the past four years is contributing to the problem, but my sense is that it’s hurting low margin businesses — ones that have little margin to spare when faced with higher taxes or regulation. I suspect that the high margin home-run companies work whether the top personal and Subchapter S marginal tax rate is 35% of 2012, 41% in 2013 or 54% now in California).

Instead, I think the issue is whether firms can create new industries, like personal computers, networking, e-commerce, Internet services, social media, biotechnology and the like. The PC and Internet services seemed to catch the incumbents sleeping, and the nature of the e-commerce transformation is overwhelming the incumbent industry more quickly than it could have imagined.

However, Google is meeting the social media challenge more quickly and vigorously than most incumbents. Meanwhile, the long lead times (and huge risks and capital requirements) of the pharma industry have made it difficult for new biotechnology companies to enter without competing with existing biotech or finding Big Pharma is now demanding a high price for access to its channel.

Overall, exit by acquisition rather than IPO is the norm — one more data point that the go-go 1990s were an aberration. Even for companies that do IPO, many of them (like Zipcar) will find their real growth in the bowels of a large, bureaucratic, cash-flow positive enterprise.