Yearly Archives: 2014

Why do pioneers tend to fail?

c-columbus-1Gerard J. Tellisv, in The Columbus Effect in Business, writes that “Pioneering is glorious, but later entrants are often the ones who see the true potential of discoveries.”  We made a similar point on Columbus Day two years ago:  though conventionally thought of as an explorer, Columbus might more accurately be described as an enormously influential (and lucky, perhaps even failed) entrepreneur.  Not only did he fail to achieve a blow-out IPO, he couldn’t even get the results of his project named after himself.  Here’s how Tellisy puts it:

Christopher Columbus will be feted in many places on Monday as an intrepid explorer, reviled in others as the spearhead of European colonization. But the Genoese ship captain who in 1492 sailed west to parts unknown might be best considered today for what he can tell us about ourselves. The man who successfully pioneered direct cross-Atlantic navigation also died dispossessed and embittered. In this respect Columbus represents a type, not an exception: failing pioneers.

Many scholars believe that pioneers are highly successful, have a high market share, and are long-term leaders of the markets they pioneer. Yet historical analysis shows that pioneers mostly fail, have a lower market share and rarely lead their industries. Long-term market leaders seldom are pioneers. Rather, they are ones who appreciate the discoveries of pioneers, envision the mass market and exploit it profitably.

Columbus might have fared better had he worried less about the idea and more about the execution.  As John Greathouse once put it (in the May 2012 issue of Forbes):

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?

The same is true of entrepreneurs and their backers:  we want to hear about the idea – the details in the pitch reveal important things about the entrepreneur  – but the intangibles in a good long-term partnership are primary:   integritytransparency, trustworthiness, enthusiasm and tenacity, self-awareness, and flexible persistence.

Tellisy makes another point that is a favorite of ours:  business history is full of surprises.

Today’s market leaders in many categories didn’t pioneer those categories. Microsoft didn’t pioneer personal-computer operating systems (QDOS came before) or word processing (WordStar and others came before). Amazon didn’t pioneer online books stores (Books.com came before). Apple didn’t pioneer mobile music, the smartphone, the tablet ( Sony , BlackBerry and others came before). Google didn’t pioneer Internet search (AltaVista, among others, came before). And Facebook didn’t pioneer online social networks (Myspace came before).

Here’s how we covered the topic in Outcomes that feel ordained only in retrospect:

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.

The common theme to all these Origin Stories?  Business conditions may ebb and flow, but good managers adapt.  Tellisy, again:

Why do pioneers tend to fail in the long run? For the same reason that Christopher Columbus didn’t flourish despite his initial success: Pioneers too often cling to their initial intuition, just as Columbus clung for too long to the notion he had reached India. Pioneers focus on the small initial market, failing to envision the vast mass market that they just opened up. Pioneers stick with the initial product even when the market demands relentless innovation. All the while, a surge of later entrants learns from mistakes of pioneers, envisions opportunities and rides on the explosion of new superior technologies.

 

A eureka moment or a slow hunch?

Great review of Steven Johnson’s How We Got to Now in the Wall Street Journal.  The author details what he calls the “six innovations that made the modern world” in chapters titled “Glass,” “Cold,” “Sound,” “Clean,” “Time,” and “Light.”     

Theories of innovation and entrepreneurship have always yo-yoed between two basic ideas. First, that it’s all about the single brilliant individual and his eureka moment that changes the world. Second, that it’s about networks, collaboration and context. The truth, as in all such philosophical dogfights, is somewhere in between…  Johnson has become one of the most persuasive advocates for the role of collaboration in innovation.  [His] method is to start with a single innovation and then hopscotch through history to illuminate its vast and often unintended consequences…

Of the six interesting chapters/innovations we’ll highlight “Cold” because it harmonizes well with things we’ve written about entrepreneurship.

In the chapter on “Cold,” he opens with the story of Frederic Tudor, an entrepreneur from Boston who “took three things that the market had effectively priced at zero—ice, sawdust and an empty vessel—and turned them into a flourishing business,” using the sawdust to keep the ice insulated while transporting it from the northeastern United States down to the Caribbean. Then we are on to the naturalist Clarence Birdseye, who noticed when ice fishing with the Inuit of Labrador that some fish froze immediately in the cold air after being pulled out of Arctic waters and that they tasted much better when cooked than fish that had been frozen more slowly. Add years of scientific noodling and you have a revolution in frozen food.

Mr. Johnson writes: “It was not a sudden epiphany or lightbulb moment, but something much more leisurely, an idea taking shape piece by piece over time. It was what I like to call a ‘slow hunch’—the anti-‘lightbulb moment,’ the idea that comes into focus over decades, not seconds.” Rather than an icy epiphany, Birdseye’s insight was an agglomeration of his experiences, his inquisitiveness and the availability of industrial technology at that time, which allowed him to build a production line to reproduce natural flash-freezing.

Entrepreneurial inspiration can come in different forms and from different sources.

Frederic Tudor was a contrarian value creator who saw economic value where others saw heaps of nothing, and who defied conventional wisdom with determination.  Some of the best entrepreneurs are distinguished more by their ability to achieve the impossible than by the originality of their thinking.  You don’t need to be a geek or a conventional innovator.

Clarence Birdseye let his unconscious mind process information in the background and saw meaningful combinations where others did not – in other words he let serendipity work for him.  Different than simple luck, and a close cousin of creativity, serendipity can be encouraged by an “optimal degree of wastefulness.”  Birdseye’s “slow hunch” and “agglomeration of experiences” could be dismissed by some as directionless activity.  But trillions of frozen peas might say otherwise.

A disquieting combination of disproportionate importance and exceptional unpredictability

That title may sound a little like early stage investing, but it comes from a description of October baseball.  The Super-Rotation Rivalry explores the data behind the decision-making of two teams with very recent playoff history:  the Detroit Tigers and Oakland A’s.  (In both 2012 and 2013, Detroit eliminated the A’s because their ace – Justin Verlander – dominated in the final deciding game of the series.)

Both teams acquired aces at the trade deadline based on the theory that Moneyball may deliver results over a 162-game season, when the math has time to work, but in a short playoff series a team can be undone by a dominant pitcher or by cluster luck.

Royals_Athletics_Base_Brow1_t670At the time it appeared as though those teams were likely to meet in the playoffs for a 3rd year in a row, so there was an element of game theory layered on top of the data analysis.  However the A’s swooned and landed in a single-elimination Wild Card playoff tonight in Kansas City.  Up 3 games on August 7, they went 18-30 to lose the division to the Angels by 10 games.

So we’ll have to wait to maybe see the game theory play out between the Tigers and A’s, but we will gather one more datum on the Moneyball-in-a-short-series argument.  (In this case, a very short series…)

Can stockpiling aces reduce playoff unpredictability?  It turns out the theory is hard to prove:

It’s possible there’s something to the “pitching wins pennants” hypothesis, but if so, it’s hard to see it in the stats. In 2012, Colin Wyers — then the director of research at Baseball Prospectus, now a “mathematical modeler” for the Astros — and I looked for evidence that teams with strong no. 1 starters outperformed expectations in the playoffs. We identified the ace of each playoff team from 1995 to 2011, rated each one using a normalized measure of ace-hood, and then checked for any correlation between the strength of each ace and the difference between his team’s regular-season and postseason winning percentages. There wasn’t one, which suggests that once you know a team’s regular-season record, knowing how good its best pitcher is doesn’t add any predictive power. Nor could Colin find any evidence of an effect after rerunning the analysis using the entirety of a team’s playoff rotation instead of its ace alone…

So why doesn’t the quality of a team’s top three starters or its ace register as significant? For one thing, the differences between teams are compressed in the playoffs, relative to the regular season: Teams with terrible staffs don’t make it to October, so the gulf between the best- and worst-pitching playoff teams isn’t as stark as we’re used to seeing during the season’s first six months. Perhaps more importantly, there’s more than one way to win baseball games, and even under an expanded playoff format, teams don’t get to October without doing something well. A team with an inferior pitching staff often makes up for its weakness on the mound by being better on offense.

If there’s no clear evidence that pitching acquires extra significance in the postseason, why is the belief that it does so persistent? It might be because it’s so hard not to notice the extent to which scoring is suppressed in the playoffs. There’s no question that playoff games tend to produce fewer crooked numbers: Last season, teams scored an average of 4.17 runs per game during the regular season, but in the postseason, their output declined to 3.78 runs per game, a 9.4 percent reduction. That figure fluctuates from year to year — in 2012, teams scored 19.2 percent fewer runs per game in the playoffs — but the direction of the difference is usually the same: down. During the 1995-2013 wild-card era, the gap has been exactly one run per game (half a run per team), or 10.6 percent.

Weather explains some of that effect; playoff games can be cold, and the lower the temperature, the less far the ball flies. Defense also plays a part, since playoff teams tend to be better than average at converting balls into outs. The bulk of the decline in scoring, however, stems from the difference in the postseason pitcher pool. … The pitchers on a given team’s postseason pitching staff are generally about half a run better than the same team’s full regular-season staff, and teams generally score about half a run less per game in the playoffs. The postseason scoring mystery is solved: It’s not that hitters lose their mojo once the calendar flips to October, it’s that they face superior opponents.

So in a sense, pitching is better during the playoffs, in that a team’s worst arms generally aren’t invited.

As it turns out, there are a few other hard-to-prove baseball theories that may be false:

Because October baseball subjects fans to a disquieting combination of disproportionate importance and exceptional unpredictability, it’s a fertile breeding ground for suspect narratives that attempt to explain small-sample postseason success or failure. Over the next few months, you might hear, for instance, that teams that “back into the playoffs” after a September slump are at a disadvantage against teams that end the regular season on a high note. Not so. You might be told that teams that rely on the home run can’t score in the playoffs, when small ball rules. In fact, the opposite is the case. Surely momentum matters? Uhuh. And we all know that there’s no substitute for postseason experience — except for a lack of postseason experience, which works just as well.

 

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Sitavig revolutionizes treatment for cold sores

sitavigInnocutis’s product – a novel delivery system for a well-established drug (acyclovir) – was recently featured on the cover of Dermatology Times and could help the scores of millions of people suffering from cold sores in the U.S.  Herpes labialis is an extremely widespread condition, with between 20% and 40% of the adult population suffering from recurrent cold sores.

Sitavig® is a tablet which adheres to the gum above the incisor tooth on the side of the lip that is infected with a cold sore, providing sustained release of acyclovir – a drug that has been around for 30 years.  This safe and effective delivery system results in fewer, shorter, and less severe outbreaks because the drug is released locally for 12-15 hours – during the period when the virus is attempting to replicate.

“There have been obstacles to overcome to ensure the optimal use of acyclovir and optimal healing,” says Stephen Tyring, M.D., Ph.D., principal investigator of a phase 3 double-blind, placebo-controlled trial on Sitavig (50 mg acyclovir, BioAlliance Pharma). “Compliance was always an issue when it was used five times a day in the oral form. We began recommending that patients use it three times a day and double the dose. In the case of the topical use of the medication, patients need to constantly reapply it. With this type of application, they simply put it in the right place and it stays there.”

About Sitavig®

Based on proprietary Lauriad® technology and patented until 2029 in the major territories, comes in the form of a mucoadhesive tablet which the patient places on the gum and which delivers a high concentration of acyclovir directly to the lip, the site of the cold sore infection. In addition to its efficacy, Sitavig® offers the major advantage of a particularly unobtrusive and simple formulation with a single application for the episode’s entire duration, particularly adapted to patients suffering from recurrent herpes sores.

About Innocutis

Innocutis is a pharmaceutical company specializing in the development and commercialization of therapies focused on medical treatment of dermatological conditions, with a portfolio of established branded prescriptions. Innocutis meets growing unmet medical needs is this specialty and with “best-in-class” therapies, provides clinicians with improved solutions for the management of daily challenges experienced in their practice.

The NFL reporting machine

adamInteresting piece from the Washington Post about ESPN reporter Adam Schefter, whose tireless work ethic and gift for cultivating personal relationships has made him “the most prolific news-breaker in America’s most popular sport.”  His network is so strong that he’s achieved that success even though (as the article claims) he doesn’t attend games and rarely talks to athletes face-to-face.

Schefter, the sports network’s ever-present NFL news-breaker, had a BlackBerry in his right hand — his “texting” phone — and the iPhone to his ear.

From a media standpoint, the NFL is covered unlike anything else in American sport, and somehow Schefter’s reporting rises above the din. He’s perfected the formula perhaps better than any NFL reporter who’s ever preceded him…

“He’s crucial because he basically has become sort of this omnipresent guy who seems to know everything,” said [veteran Sports Illustrated writer] Peter King.  “And if he doesn’t know everything, it takes him only 10 minutes to find out what he doesn’t know.”

The obvious parallel in our business is how our extensive network gets put to work on behalf of our entrepreneurs, providing “been there, done that” advice regarding specific industry or growth-related issues, informed thoughts on how particular industry segments are developing, and key introductions to other industry players or potential partners.

LinkedIn co-founder Reid Hoffman was once asked what advice he’d give the younger version of himself.  His short and sweet answer?  “Build a network.”

 

 Related stories:

 

What color was Dorothy’s dress?

imagesCAT4D4FP

Oh my.

In honor of the 75th anniversary of the release of The Wizard of Oz, we offer three thoughts about a movie whose plot was once humorously summarized as:  “Transported to a surreal landscape, a young girl kills the first person she meets and then teams up with three strangers to kill again.”

1.  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.  The evolution of color film is an excellent example.

Emeralds, gold, poppies

Emeralds, gold, poppies

The Wizard of Oz is often erroneously thought to be the first color film.  Not so.  The first true color still image was produced in 1861 (based on the same RGB principle in use today), and the first instance of color recorded in film was in 1910.  Technicolor was invented in 1917 but it wasn’t until the introduction of their three-color camera in 1934 that the first viable full-color system came to the movies.

Instead of using a single piece of film, the three-color camera used bulky optics to split the image so that it could be recorded simultaneously on three strips of film.  This meant that Technicolor had to be shot with a special camera that weighed several hundred pounds.  It also required much more light than black and white cameras.

The lights on the set of Oz were so bright that Dorothy’s blue and pink (!) dress appears blue and white.

2.  Success often depends on external dependencies within the business ecosystem.  Despite good reviews and 6 Academy Award nominations, the film took roughly a decade to turn a profit due to the astronomical budget ($2.7million) and the low ticket price ($0.25).  It was re-released in 1949 & 1955, but it was a new technology – broadcast television – that took a marginally profitable film and turned it into an institution and source of countless pop culture references.  The initial broadcast in 1956 drew 45 million viewers.

Dude...

Dude…

3.  The Dark Side of the Rainbow (Aka The Dark Side of Oz or The Wizard of Floyd) might be the most entertaining example of chemically-enhanced BS confirmation bias we’ve come across.

At some point in the ’90s, word went around that Pink Floyd’s 1973 album “Dark Side of the Moon” synced up with the movie in eerie ways, producing moments where the film and the album appear to correspond with each other.  E.g.,

  • “The Great Gig in the Sky” meshes well with the tornado.
  • The scarecrow dances during the track “Brain Damage.”
  • The heartbeat at the album’s close coincides with Dorothy listening to the Tin Man’s torso.
  • The old Side 1 of the album ends just as the sepia-colored portion of the movie does.  Some also believe the iconic dispersive prism of the album’s cover purportedly reflects the movie’s transition from black-and-white Kansas to Technicolor Oz.

~ ~ ~

N.B. – Our research for this piece turned up a few additional charming bits of film history:

1910 silent film

1910 silent film

  • Although it lost the Best Picture Oscar to Gone With the Wind, it won for Best Original Score and Best Original Song (Over the Rainbow).  The studio had come within an eyelash of cutting that song from the movie because the scene “dragged.”
  • The 1939 film was the 4th time L. Frank Baum’s story was adapted to the screen:
    • The first was a 13-minute silent version entitled The Wonderful Wizard of Oz released in 1910.
    • In 1925, a young Andy Hardy – later of the Laurel & Hardy comedy duo – played the Tin Woodsman in another silent version.
    • A nine-minute animated version was released in 1933. Though produced in color, the short was released in black-and-white because the production did not have the proper license from Technicolor.
  • Casting notes:
    • 20th Century Fox had wanted Shirley Temple to play Dorothy, but her singing chops posed a problem.  Fox ended up losing the film rights to rival MGM and a young contract player at the studio named Judy Garland got the role.
    • Actor Buddy Ebsen was initially cast as the Tin Woodsman and completed some scenes, but had to bow out due to an allergic reaction to the silver makeup.
    • Margaret Hamilton, who portrayed the (old) Wicked Witch of the West, was only 36 at the time.
  • Trivia:
    • Burt Lahr’s Cowardly Lion costume was knitted from actual lion fur and weighed nearly 100 pounds.
    • Dorothy’s dog Toto was paid $125 per week while the actors playing the residents of Munchkinland only received a reported $50 a week.
    • The movie had two directors:  Victor Fleming handling the Technicolor scenes set in Oz, and King Vidor overseeing the bookend black-and-white sequences set in Kansas.

The roots of unhappiness

A new working paperMW-CN870_happy__MG_20140718112128 from the National Bureau of Economic Research says NYC is the Most Unhappy City in America.

The study includes a national map of happiness in which it’s easy to see that our region is the most happy and its pockets of (relative) unhappiness are happier than other region’s least-happy pockets.  The researchers claim to have struggled to establish any patterns in the data:

The trio [of researchers] found that significant differences in happiness levels persisted even after they controlled for factors such as income, race, and other personal characteristics. The differences in happiness are significant, but not huge.

We have our own theories, expressed occasionally here, most recently in April 2013:

New evidence from the dismal science confirms what social science has already shown: the love of taxes is the root of unhappiness.

The original social science, from the December 2009 issue of Science, indicated that states with the highest taxes also have the least happy residents.  Residents of high tax states not only have less money to spend on other things that make them happy, they don’t enjoy many benefits in exchange for all their hard-earned tax dollars.  Roads, schools, and crime are no better (and in many cases worse) while their state governments borrow even more and spend disproportionately on public employee pensions and entitlement programs.  Their needs ignored at the expense of entrenched special interests, taxpayers get unhappy.  And then they get out.

From this one might argue causation; high taxes = unhappiness.  While we are certainly sympathetic to that point of view, we also have to wonder if it runs vice-versa, or at least cuts both ways: unhappy people like to raise taxes.

We are… happy.  And happy to report that’s true for our region as well.  NVSE readers already know that the Southeast’s advantages extend well beyond the matter of taxes and include lower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

3 BPV portfolio companies listed on the Inc 5000

imagesThree of our portfolio companies have been named to the Inc. 5000  list of the fastest growing private companies in America: one a communications company, one a business services/SaaS company, and one a healthcare company – all in Florida.

Congratulations to Orlando’s PowerDMS (4th year in a row), St.Petersburg’s  Tower Cloud (2nd year in a row),  and Miami’s TissueTech (1st year).

 

Dead cats and iterative collaboration

Today is Erwin Schrödinger’s (he of the famous half-dead cat) 127th birthday.  We found this terrific excerpt from his 1933 Nobel Prize address:

If I am to have an interest in something, others must also have one. My word is seldom the first, but often the second, and may be inspired by a desire to contradict or to correct, but the consequent extension may turn out to be more important than the correction, which served only as a connection.

Though the tone of that quote echoes Sheldon Cooper of The Big Bang Theory. the content echoes a topic we like to cover here:  iterative collaboration.

From Hayek Was Right – Why Cloud Computing Proves the Power of Markets:

Many things about our company turned out differently than we had expected… The Hayekian knowledge problem is not a mere abstraction. Our innovations that have driven the greatest economic value uniformly arose from iterative collaboration between ourselves and our customers to find new solutions to hard problems.

Success is often achieved in incremental, adaptive fashion – with failure counted on to make a brief cameo at some point along the way. We love the collaborative imagery of a “correction” being a “connection” to the “extension” of an idea. Perhaps the great scientist ought to have received a Nobel for nerd poetry to go along with the one in physics.

Here is an explanation of his “thought experiment” that does, and doesn’t, kill a cat:

 

For more on the topic of iterative collaboration, please see:

A geographic analog to the process of creative destruction

The growth corridors of the high-tech South enjoy several advantages familiar to NVSE readers: growth-oriented tax policieslower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

Additional proof now comes courtesy of the CATO Institute:  millions of Americans and trillions of annual income have migrated among the states, to the benefit of our region.

 

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Money walks because opportunity talks.

 

This migration of economic clout within the US has been more subtle than the California Gold Rush or Irish Potato Famine but is just as significant.  Some states are chasing away their earners, workers, and entrepreneurs; this is their tax base.

Daniel Mitchell (of CATO) picks one example (California) from the Tax Foundation’s map and concludes it’s a “slow-motion economic suicide.”

Voting for a tax hike isn’t akin to jumping off the Golden Gate bridge. Instead, by further penalizing success and expanding the burden of government, California is engaging in the economic equivalent of smoking four packs of cigarettes every day instead of three and one-half packs… In the long run, though, people can move, reorganize their finances, and take other steps to reduce their exposure to the greed of the political class.  In other words, people can vote with their feet … and with their money…

The state is going to become the France of America—assuming Illinois doesn’t get there first.  California has some natural advantages that make it very desirable. And I suspect that the state’s politicians could get away with above-average taxes simply because certain people will pay some sort of premium to enjoy the climate and geography.

But the number of people willing to pay will shrink as the premium rises.

In The Spread of Start-up America and the Rise of the High-tech South, Richard Florida, senior editor of The Atlantic combined Joseph Schumpeter‘s theory of creative destruction with Mancur Olson‘s theory for the rise and decline of nations and concludes that the Southeast would have a mercantile-like advantage but for the fact that employers can (and do!) simply move and join its attractive business climate:

Leading nations as well as leading regions, he (Olson) concluded, decline as a result of one overwhelming factor that he dubbed “organizational sclerosis” — a hardening of institutional, economic, and cultural arteries that leaves them incapable of dealing with a new and rapidly changing economic environment. Sound familiar? Practices, patterns, and norms of organizing and doing business that once worked so well become a constraint, a fetter, an obstacle to further progress. Decline sets in as once-dominant places get locked into the past and are unable to adapt to new circumstances, new technologies, and new conditions. A geographic analog to the process of creative destruction takes hold as new technologies, new business models, new values and norms, new industries and ultimately new institutions, and new ways of organizing economic activity shift to new places.

In Olson’s view the United States was fortunate, because it is a big country. While previous epochs of economic and geographic change tended to jump from country to country — moving, say, from Holland to England and later from England to the United States — America is so large that this process of rebirth and remaking can occur within its own boundaries.

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