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Yearly Archives: 2012
Though conventionally thought of as an explorer, Columbus might more accurately be described as an enormously influential (and lucky, perhaps even failed) entrepreneur. He pursued an unconventional idea, took a risk, made a huge miscalculation, got lucky, and parlayed all that into wealth from product lines he hadn’t anticipated.
More importantly, his journey fueled the eternal sunshine of the entrepreneur’s mind, writ large. If he were Steve Jobs we’d say he ‘created a platform’ for others to dream and build and change the world.
Here’s how Samuel Eliot Morison put it in his 1943 Pulitzer Prize biography, Admiral of the Ocean Sea: A Life of Christopher Columbus:
At the end of 1492 most men in Western Europe felt exceedingly gloomy about the future. Christian civilization appeared to be shrinking in area and dividing into hostile units as its sphere contracted. For over a century there had been no important advance in natural science and registration in the universities dwindled as the instruction they offered became increasingly jejune and lifeless. Institutions were decaying, well-meaning people were growing cynical or desperate, and many intelligent men, for want of something better to do, were endeavoring to escape the present through studying the pagan past. . . .
Yet, even as the chroniclers of Nuremberg were correcting their proofs from Koberger’s press, a Spanish caravel named Nina scudded before a winter gale into Lisbon with news of a discovery that was to give old Europe another chance. In a few years we find the mental picture completely changed. Strong monarchs are stamping out privy conspiracy and rebellion; the Church, purged and chastened by the Protestant Reformation, puts her house in order; new ideas flare up throughout Italy, France, Germany and the northern nations; faith in God revives and the human spirit is renewed. The change is complete and startling: “A new envisagement of the world has begun, and men are no longer sighing after the imaginary golden age that lay in the distant past, but speculating as to the golden age that might possibly lie in the oncoming future.”
John Greathouse extends the analogy at Forbes, describing Ferdinand and Isabella as early venture capitalists who looked for “surprisingly similar characteristics” as modern investors do. He advises entrepreneurs not to pitch their ideas to venture capitalists:
Ideas are infinite, and in the absence of competent execution, they are worth nothing. Nada. Zip. Zero. Conversely, money in pursuit of outsized returns is plentiful. Thus, if both ideas and money are abundant, what is the scarce constraint in the fundraising equation?
Trust… If you are fortunate to pitch a sophisticated investor in person, assume they already believe in the veracity of your idea, the market and the underlying technological trends. Unless an investor specifically asks you to educate them regarding your space, focus your pitch on why you and your team are uniquely qualified to exploit the opportunity and turn the idea into a lucrative, self-sustaining business…
The second time Christopher Columbus pitched Ferdinand and Isabella (two years after his initial presentation – raising money has always taken patience and persistence), he did not need to convince them that locating a shortcut to the spice routes of India was a good idea. Rather, he had to belie their primary concerns: was he honest, tenacious and competent enough to execute the journey?
While we do retain some interest in hearing about the idea – the details in the pitch reveal important things about the entrepreneur – we agree about the primacy of some of the intangibles in a good long-term partnership. To cite just a few about which we’ve written: integrity, transparency, trustworthiness, enthusiasm and tenacity, self-awareness, and flexible persistence.
The Wall Street Journal recently reported on the splash made by BoE Director of Financial Stability Andrew Haldane at the Federal Reserve’s annual policy conference in Jackson Hole, Wyoming. Haldane argued that regulations become less effective as they become more complex and likened it to a playing Frisbee with a dog. Despite the complexity of the physics involved, catching a Frisbee can be mastered by an average dog because he has to keep it simple:
The answer, as in many other areas of complex decision-making, is simple. Or rather, it is to keep it simple. For studies have shown that the Frisbee-catching dog follows the simplest of rules of thumb: run at a speed so that the angle of gaze to the Frisbee remains roughly constant. Humans follow an identical rule of thumb. Catching a crisis, like catching a Frisbee, is difficult. Doing so requires the regulator to weigh a complex array of financial and psychological factors, among them innovation and risk appetite. Were an economist to write down crisis-catching as an optimal control problem, they would probably have to ask a physicist for help. Yet despite this complexity, efforts to catch the crisis Frisbee have continued to escalate. Casual empiricism reveals an ever-growing number of regulators, some with a Doctorate in physics. Ever-larger litters have not, however, obviously improved watchdogs’ Frisbee-catching abilities. No regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight. So what is the secret of the watchdogs’ failure? The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control. In financial regulation, less may be more.
Haldane warned that “fundamental limitations of the human mind” thwart increasingly complex (and sometimes frivolous) attempts at regulation. Most involve the limits of data or modelling or even the nature of knowledge itself:
This belief is new, and not helpful. As the authors note, “Many of the dominant figures in 20th century economics—from Keynes to Hayek, from Simon to Friedman—placed imperfections in information and knowledge centre-stage. Uncertainty was for them the normal state of decision-making affairs.”
A deadly flaw in financial regulation is the assumption that a few years or even a few decades of market data can allow models to accurately predict worst-case scenarios. The authors suggest that hundreds or even a thousand years of data might be needed before we could trust the Basel machinery.
Despite its failures, that machinery becomes larger and larger. As Messrs. Haldane and Madouros note, “Einstein wrote that: ‘The problems that exist in the world today cannot be solved by the level of thinking that created them.’ Yet the regulatory response to the crisis has largely been based on the level of thinking that created it. The Tower of Basel, like its near-namesake the Tower of Babel, continues to rise.”
We once made the same point in the context of what makes great boards great: boards who over emphasize the process of good governance, including measures implemented in the wake of previous meltdowns, often fail to foresee the next crisis:
Presumably, those companies and regulatory bodies have boards comprised of accomplished and highly intelligent members with personal wealth at stake. [They were] paying attention and paying consultants; [they had] ethics codes, audit and compensation committees, Independent Directors, regular meetings, well constructed board packages… It’s conceivable that a board member here or there could be corrupt or asleep – but entire boards? Across multiple companies and regulatory agencies? Unlikely. It’s more likely that they were following the current and best practices for strong and effective board oversight. So, if *all* boards have similar formal systems in place, something else must be at work.
A strong board relies on the ‘robust social systems’ among its members – the informal ways in which they trust and challenge each other – to look beyond formal legal and fiduciary responsibilities and proactively assess the shifting regulatory risk environment.
The end of every boom-bust cycle includes a fin de siècle scandal: insider trading punctuated the ’87 crash, accounting irregularities (Enron, Worldcom) helped pop the tech bubble of the ’90s, and “rolling the dice” at Fannie & Freddie inflated the housing market with disastrous consequences. Each scandal led to an avalanche of new regulations atop the snowpack, which never entirely melts away and – more importantly – doesn’t prevent the next crisis.
Haldane summed it up nicely: “complex and detailed rules lead regulators and financial institutions alike to manage to the rules, tiptoeing right up to the hot red line at which a crisis can be triggered.”
We recently came across two short items that illustrate a favorite theme of ours: business conditions may ebb and flow, but good managers adapt.
A few of the stories of these companies’ origins may ring a bell (DuPont began as a manufacturer of gunpowder, Berkshire Hathaway of textiles) but more than a few will likely surprise you: Avon started as a book seller, Nokia in wood pulp, Wrigley in soap and baking powder, McDonald’s as a drive-in BBQ, 7-Eleven as an ice house, and Coleco made shoe leather (Connecticut Leather Company) long before it did Cabbage Patch Kids and video games. Another interesting bit of trivia: the original site of the first Burger King remains unknown.
A favorite theme and critical to the long-term success of entrepreneurial ventures, here are a few related posts at NVSE:
Tim Harford – author of Adapt: Why Success Always Starts with Failure – describes the incremental, adaptive ways by which success is achieved (three principles for failing productively).
James Dyson, British inventor, argues innovation often grows in unexpected directions and that watching or even playing with mistakes is productive and exciting because you notice unexpected things.
Saras Sarasvathy, professor at the Darden School of Business, teaches that great entrepreneurs thrive on contingency and improvise their way to an outcome that only feels ordained in retrospect.
The BPV team was very pleased to host a meeting last week with Kevin Burgoyne, the new Executive Director of the Florida Venture Forum, at our offices in St. Petersburg. It was an enjoyable and wide-ranging conversation about how to continue to build the entrepreneurial ecosystem in Florida, including new efforts to attract corporate participation, broaden FVF participation in North and South Florida, and raise FVF’s profile with key constituencies in the State.
Kevin’s energy, intellect, and background should serve us all very well as he pursues the goals of building the FVF brand, increasing membership, and strengthening our start-up community in Florida. He is a Gator and has an MBA from the University of Chicago. He grew up in Fort Myers, FL and previously worked in marketing and management roles in the media, technology and investment fields in Tampa, NY, CA, and Miami.
Please join us in welcoming Kevin and supporting him as he assumes this critical role. He can be reached at 305-343-0617 and email@example.com
Astronaut Neil Armstrong passed away Saturday, and The Wall Street Journal reported something the pioneer once said about the success of the 1969 Apollo 11 mission – the odds of which he had placed at 50/50.
Mr. Armstrong described the required reliability of each component used in an Apollo mission – statistically speaking 0.99996, a mere 4 failures per 100,000 operations – and pointed out that such reliability would still yield roughly 1000 separate identifiable failures per flight. In reality, though, they experienced only 150 per flight. What explained the dramatic difference?
I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that’s setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, “If anything goes wrong here, it’s not going to be my fault, because my part is going to be better than I have to make it.” And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance. And that’s the only reason we could have pulled this whole thing off. . . .
When I was working here at the Johnson Space Center, then the Manned Spacecraft Center, you could stand across the street and you could not tell when quitting time was, because people didn’t leave at quitting time in those days. People just worked, and they worked until whatever their job was done, and if they had to be there until five o’clock or seven o’clock or nine-thirty or whatever it was, they were just there. They did it, and then they went home. So four o’clock or four-thirty, whenever the bell rings, you didn’t see anybody leaving. Everybody was still working.
The way that happens and the way that made it different from other sectors of the government to which some people are sometimes properly critical is that this was a project in which everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing. And whenever you have those ingredients, whether it be government or private industry or a retail store, you’re going to win.
Interested, dedicated, fascinated by the job – Armstrong’s explanation could serve as an excellent description of the esprit de corps we find in good private growth companies. Not too long ago we quoted Ben Dyer, president of Techdrawl, about how entrepreneurs need to inspire all the members of their team to share the founder’s drive in the early stages of a company:
All those textbook methods of performance reviews, pay incentives, etc. will come in handy when you get to the 50th or 100th employee, but right now you’ve got to be the one out front – with inexhaustible energy, enthusiasm, creativity, and a clearly articulated vision.
Cohesion and esprit de corps are even more intangible. Where teamwork is built on the willingness of individual team members to subsume their own interests in favor of group interests, esprit de corps is built upon the willingness to sacrifice oneself, if needed, for the interests of the group. This is a level of commitment that few organizations in business achieve.
Mr. Armstrong described himself (with characteristic humility) as: “I am, and ever will be, a white-socks, pocket-protector, nerdy engineer.” Perhaps that, and a bit more, Sir. Godspeed.
Inspired by the “electric response” to Teach for America, former attorney Andrew Yang created Venture for America to help start-ups – the primary source of job creation in our economy – recruit the skilled graduates they will need to grow their enterprises.
Small high-growth companies lack the resources and brand equity to compete for the best talent against the big banks and management consulting firms. Even though positions with the latter do tend to pay better, Teach for America has shown that it’s not strictly about compensation. Many graduates want more career options but are unsure how to find and value the experiences they’d garner in an entrepreneurial work environment.
Mr. Yang does a nice job of extolling the benefits to the economy at large of his brainchild:
“We’ve got the best universities in the world,” Yang says. “We have the talent. But our best and brightest are being absorbed by what I call ‘the meta economy.’ They’re heading into professional services and transactions and optimizing but not into direct value creation. If you can imagine a country where the equivalent wave of talent currently heading to professional services was heading to fast-growing companies, think about what that would do for job creation.”
Perhaps it’s a sign of the times that enticing Ivy League graduates to work at a for-profit business can now be sold as a way to “give back” to the community — on the grounds that the job isn’t in finance or management consulting and isn’t in New York or Boston. Yet that’s Yang’s pitch. “Let’s say you were to place 20 teachers in Detroit,” he says. “That would be a great thing. But if you could place 20 entrepreneurs in Detroit and have each start a business, that would also be incredible for Detroit. These regions need our top people helping to build businesses and create opportunities.”
The article linked to above (from The Washington Post) closes with this quote from a recent Ivy League graduate about the different sense of value creation found in different endeavors :
As for Mike Mayer, he’s finished with Wharton and heading to New Orleans to work at a small software company. “There is a sense of creating something, of creating real tangible value,” he says. “A big bank does create value for our economy, but as a first-year analyst among 80 or 90 peers, you’re not seeing it. At a start-up, you’re seeing it every day.”
In honor of “jOBS” – the upcoming Steve Jobs biopic led by Ashton Kutchner – in which J.K. Simmons will portray legendary venture capitalist Arthur Rock, we want to share a “Golden Oldie” from Mr. Rock himself on strategy, tactics, and people.
From a 1987 piece in Harvard Business Review, Strategy vs. Tactics from a Venture Capitalist:
The problem with those companies (and with the ventures I choose not to take part in) is rarely one of strategy. Good ideas and good products are a dime a dozen. Good execution and good management – in a word, good people – are rare… I will continue to look for the best people, not the largest untapped market or the highest projected returns or the cleverest business strategy. After all, a good idea, unless it’s executed, remains only a good idea. Good managers, on the other hand, can’t lose. If their strategy doesn’t work, they can develop another one. If a competitor comes along, they can turn to something else. Great people make great companies.
This reflects our approach as well: we invest first and foremost in entrepreneurs with experience, vision and integrity. We often back the same entrepreneurs in more than one business, and view honesty and consistency as critical to success over the long term. We also put a premium on transparency, as it’s easier to remember the importance of being honest when everyone involved in a business relationship can observe how decisions are being made. That transparency also helps when, inevitably, things don’t go according to plan. At that point how you react will define the relationship.
While we’re on the subjects of golden oldies and the importance of quality partners, here are a few from our own more recent past:
- When business promotes honesty
- Empirical evidence: power corrupts?
- The Seven Habits of Spectacularly Unsuccessful Executives
- Fail the right way
- It’s easier to rationalize than to be rational
Troy Wilson, Former CEO of Intellikine, compares biotech to Hollywood in order to explain how its approach to innovation differs from tech entrepreneurs in general:
What separates tech from biotech is that tech has the potential to break even or become profitable relatively quickly, and it can become self-sustaining. I have yet to see a drug development program that can become self-sustaining. It’s not to say that it can’t be done, but it’s just a different business model. Biotech is much more like making Hollywood movies or oil drilling in the sense that it takes large amounts of money, and when you hit it, you hit big. It’s a very discovery-based business model and one that can be highly profitable if you set it up correctly. In that way, it’s a little different than tech, software or networking. In biotech or pharma, you really only have around 15 customers and that number seems to be shrinking.
Extending the film metaphor, we once wrote, “Success may not always start with failure, but the wise man expects a cameo appearance at some point in the movie.” These two movies might have had similar elevator pitches – big budget epics about ships on the open water – but the investors fared quite differently:
As with film-making, predicting technological trends is not for the weak at heart – and that’s before one tries to protect the IP and find a way to profit from it. The road to failure is paved with innovations that couldn’t quite achieve a sustainable business model or, yes, hit an iceberg. Not everyone can count on home entertainment sales and broadcast rights to break even. (You may be surprised to learn that even Costner’s post-apocalyptic fiasco managed to eventually earn a profit.)
Andy Kessler’s piece in yesterday’s WSJ, The Incredible Bain Jobs Machine, is an outstanding exposition on how productivity increases employment – and the often dismal reporting on the topic. New technologies not only create something never before possible, they create new conditions that make other “before their time” ideas suddenly viable:
The inventor or entrepreneur who uses the invention benefits from sales and wealth and hires people to produce the good or service. We don’t hear about this. Instead we hear about the layoffs of bank tellers, stockbrokers and media salesmen. So productivity becomes the boogeyman for job losses. And many economic cranks would prefer that we just hire back the tellers and toll collectors.
This is a big mistake because new, cheaper technology becomes a platform for others to create or expand businesses that never before made economic sense. Adobe software killed typesetters, but allowed millions cheaply to get into the publishing business. Millions of individuals and micro-size businesses now reach a national, not just local, retail market thanks to eBay. Amazon allows thousands upon thousands of new vendors to thrive and hire.
The ensuing productivity gains lower costs for everyone – “$5,000 computers become $500 tablets” – and the resulting surplus capital becomes a source of both (a) demand for even more new products and (b) investment for new ideas and entrepreneurs. Kessler again:
The productive use of capital is not an automatic process, of course. It is all about constant experimentation. And it is never permanent: Railroads were once tremendously productive, so were steamships and even Kodachrome. It takes work, year in and year out—update, test, tweak, kill off. Staples is under fire from Amazon and other productive online retailers. Its stock has halved since its 2010 peak and is almost at a 10-year low. So be it.
With all the iPads and Facebook and cloud-computing growth, why is unemployment still 8.2% and job creation stalled? My theory is that productivity is always happening but swims upstream against those that fight it. Unions, regulations and a bizarre tax code that locks in the status quo.
Last February we wrote on that (“not automatic, of course”) process of productive capital allocation and its link to innovation and job growth:
Any nation that favors its large corporations will indeed see less wealth created by its small businesses. Over the long term it will see less wealth created, period. Anyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation. Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth. Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides. Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies.
Mr. Kessler is also the author of Eat People and Other Unapologetic Rules for Game-Changing Entrepreneurs. You can find a video review/summary of it here.
Last March we briefly mentioned Professor Wasserman’s book here at NVSE based only on its reviews; having subsequently finished it ourselves we have chosen to make it a permanent addition to our library.
Among the dilemmas the author tackles is the dueling motivations (wealth or control) found in most entrepreneurs, juxtaposed here as “Rich vs. King.”
He reminds entrepreneurs to remain “aware of who they are as entrepreneurs” because to know one’s strengths, weaknesses, and motivation is critical to making good decisions. In the case of raising capital for growth, Wasserman says it’s “not necessarily” wise to bring an experienced VC on board:
The Rich founder should pursue the best VCs, but the King founder should think seriously about avoiding VC funding and finding other ways to learn about the road ahead. Each type of founder has a different definition of success and varying degrees of outside influence they will and should tolerate.
Choosing (or not) partners who best fit in terms of experience, vision, reputation, and operating style requires as much rigor and thoughtfulness as any decision an entrepreneur makes. Partners who intuitively understand the right kind of support to offer over the long term can bring additional resources – financial, expert, and network – to bear when needed, and offer trusted counsel when not.