Most popular posts
- What makes great boards great
- The fate of control
- March Madness and the availability heuristic
- When business promotes honesty
- Due diligence: mine, yours, and ours
- Alligator Alley and the Flagler (?!) Dolphins
- Untangling skill and luck in sports
- The Southeastern Growth Corridors
- Dead cats and iterative collaboration
- Empirical evidence: power corrupts?
- A startup culture poses unique ethical challenges
- Warren Buffett and after-tax returns
- Is the secret to national prosperity large corporations or start-ups?
- This is the disclosure gap worrying the SEC?
- "We challenged the dogma, and it was incorrect"
- Our column in the Tampa Bay Business Journal
- Our letter in the Wall Street Journal
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Yearly Archives: 2015
‘Twas the Overnight Before Christmas: The Merry Tale of How Air Cargo Deregulation Led To Amazon
Professor of Public Policy at George Mason University Kenneth Button shares the story of how air cargo deregulation in the 1970s paved the way for low-cost, reliable overnight shipping, which in turn allowed for groundbreaking new e-commerce businesses like Amazon and eBay.
A startup culture poses unique ethical challenges
In the WSJ, Kirk O. Hanson writes that “Startup culture poses a host of temptations—and resistance is hard.” He asked a panel of Silicon Valley entrepreneurs and venture capitalists to identify the greatest pressures and temptations they’ve faced, and where they think some entrepreneurs frequently fall short.
There are unavoidable ethical dilemmas in every profession and industry, of course, but the dilemmas entrepreneurs face are more formidable and more difficult to manage. Some entrepreneurs stay the ethical course. But they seem at times to be the exceptions. Startups generally have no infrastructure to address ethical challenges, and frankly, entrepreneurs have little time or focus for monitoring their own behavior. Their energies are elsewhere.
4 of the 10 questions addressed by the panel dealt with honesty: do we lie to (1) the funders to get cash, (2) the customers to get revenue, (3) the public investors for a higher IPO valuation, or (4) to hit our numbers. Of course the answers in all four cases – each with its own color of temptation – is ‘No.’
We’ve often touched on this subject ourselves. From Observing Honesty in Business:
You can’t always count on oreos to let you know if someone’s telling the truth…
In our business dealings (as opposed to a poker table) we 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.
This research gives us an opportunity to revisit the subject of when business promotes honesty. Three years ago we cited this article from The Independent Institute, which argues that businessmen are more honest (or less dishonest) in their dealings than preachers, politicians, and professors.
Business promotes honesty, we argued, because of the importance of long-term relationships:
In our experience, the business case for honesty (the moral case is another discussion) can often be based on the fact that many businesses rely on repeat business. So although dishonesty may improve the profit or advantage in a single transaction it would result in less success over the long term.
In that same post we quote Will Harrell of CapCo Asset Management:
The upside from being perceived as a reliable, consistent, trustworthy, &etc. vendor of certain kinds of goods and services is simply huge. Costco’s CEO has a line I love: “No easy hits on the customer.” Honesty is just a sub-category of this thesis, which in many cases has more to do with product quality or user experience than honesty per se: McDonald’s consistency, the taste of a Hershey bar, etc. It’s also not limited to customers – similar considerations apply to suppliers, capital sources, and employees.
We once wrote on this subject in a quarterly letter, On Being a Good Partner: “But however great or small a company’s advantages, it is our observation that their durability is usually directly related to how good a partner the company is to those with whom it does business.”
It may strike some as corny and simple, yet is exactly what game theory predicts will transpire between participants in repetitive transactions. What’s surprising is that the effect is not more dominant, and that trustworthy players don’t completely squeeze out untrustworthy ones.
By the way, we mention above that the moral case for honesty is another discussion, and it is. But we don’t want to leave the impression that the case for ethical behavior is purely a practical one. We also try our best to act with honesty and integrity both within our firm at BPV and with our entrepreneur partners because we believe deeply that it is the right thing to do. And we look to partner with entrepreneurs who share that view. That approach may not always lead to a tangible win in business terms, but it defines who we are as people and allows us to sleep at night.
The Dignity of Innovation, part II
Innovation was once a dirty word because it upset the established order; now the word is a form of high praise. It’s also, as we’ve often argued, the source of virtually all of the improvements that make our lives happier, healthier, and more convenient.
In The Great Enrichment, Deirdre Nansen McCloskey writes that “contrary to the conviction of the ‘clerisy’ of artists and intellectuals,” entrepreneurs are “pretty good” and responsible for the “gigantic improvement” in life since roughly 1848, when society as a whole underwent “a startling revaluation of the trading and betterment in which the bourgeoisie specialized.”
(T)he modern world was made not by material causes, such as coal or thrift or capital or exports or exploitation or imperialism or good property rights or even good science, all of which have been widespread in other cultures and other times… [and it] cannot be explained in any deep way by the accumulation of capital, despite what economists from the blessed Adam Smith through Karl Marx to Thomas Piketty have believed, and as the very word “capitalism” seems to imply.
The word embodies a scientific mistake. Our riches did not come from piling brick on brick, or bachelor’s degree on bachelor’s degree, or bank balance on bank balance, but from piling idea on idea. The bricks, B.A.s, and bank balances — the “capital” accumulations — were of course necessary. But so were a labor force and liquid water and the arrow of time. Oxygen is necessary for a fire, but it does not provide an illuminating explanation of the Chicago Fire. Better: a long dry spell, the city’s wooden buildings, a strong wind from the southwest, and, if you disdain Irish immigrants, Mrs. O’Leary’s cow.
The modern world similarly cannot be explained by routine brick-piling, such as the Indian Ocean trade, English banking, canals, the British savings rate, the Atlantic slave trade, coal, natural resources, the enclosure movement, the exploitation of workers in Satanic mills, or the accumulation in European cities of capital, whether physical or human. Such materialist ways and means are too common in world history and, as explanation, too feeble in quantitative oomph…
The magnitude of the improvement stuns. Economists and historians have no satisfactory explanation for it. Time to rethink our materialist explanations of economies and histories…
(W)hat mattered were two levels of ideas: the ideas for the betterments themselves (the electric motor, the airplane, the stock market), dreamed up in the heads of the new entrepreneurs drawn from the ranks of ordinary people; and the ideas in the society at large about such people and their betterments — in a word, liberalism, in all but the modern American sense. The market-tested betterment, the Great Enrichment, was itself caused by a Scottish Enlightenment version of equality, a new equality of legal rights and social dignity that made every Tom, Dick, and Harriet a potential innovator.
Tips for pitching a venture capitalist
To help celebrate Back to the Future Day, we’re re-posting our popular piece on How Not To Pitch a Venture Capitalist. From January 2012:
Precisely two years ago we blogged about a VC Dispatch article on tips for pitching a venture capitalist. The hook was that it would take not 1 but 7 cocktail napkins – Pitch, People, Pain, Product, Players, Projections, Proposition.
In December’s Inc.com Josh Linkner reminds that (in Silicon Valley) “only one in 300 pitches to a venture capitalist gets funded” before offering 11 insider tips. It’s a good, if somewhat cheeky, list with a decidedly early-stage feel: “Don’t take yourself so seriously. We sure don’t! In fact, we’ll probably make fun of you the minute you leave.” (Ouch!) Even so, it does include good advice, like #9:
Tell us the “hard part.” Picking out cool colors for your new digs will be fun, but easy. All businesses have a “hard part”. Getting customers to pay a premium or attracting top talent. We’ll have fun together with the easy stuff, but we want to understand from you what the biggest challenges will be. We can plan the holiday party later.
Once you’ve digested all those tips, please enjoy this demonstration of how not to pitch a venture capitalist – also available at our YouTube channel.
PDMS-BPV relationship featured at Florida Venture Forum Boot Camp
Yesterday at the Florida Venture Forum Boot camp event at the Citrus Club in Orlando, Josh Brown (PowerDMS CEO), Cathy McKenna (PowerDMS’s auditor for Vestal and Wiler), Jeremy Sloane (PowerDMS’s counsel from law firm Sloane and Johnson), and I had a chance to do a panel discussion moderated by Steve Castino of Vestal and Wiler on the topic of Ballast Point’s investment in PowerDMS in April of 2014 and lessons learned thereafter.
To no one’s surprise, Josh did a great job in laying out the reasons for his company’s success to date and his rationale for choosing Ballast Point as an investment partner. Josh focused on issues of team-building and empowering employees, even mentioning the famous line from the Founders’ Dilemma as he said that he had to make the decision “Do I want to be rich or king?” He made the point that he could have tried to build a lifestyle business where he could have been “king,” but he saw the market opportunity and the company’s positioning and made the conscious decision to build an exciting, high-growth company.
To do that, he needed to invest in his team in a big way and bring on a trusted investment partner who could really help him on the team-building and network side. He had to relinquish some control in order to accomplish these goals of building an exciting, venture-backed company, but he was able to get comfortable with this decision by making a conscious effort on the relationship side to hire people with the highest ethical standards and choose an investment partner that he knew would support the company in good times and in bad.
Josh has let his talented employees flourish in a way that has driven PowerDMS’s growth beyond what he could have accomplished on his own, and that growth has once again landed PowerDMS on the Inc. 5000 list of fastest-growing private companies. We at Ballast Point are thankful that Josh and the team at PowerDMS chose us as his investment partner, as we have joined them on this exciting journey to build a high-growth, SAAS company in central Florida.
The Ultimate October Blueprint
Our regular readers know that we often cogitate over the roles both skill and luck play in sports and business. The eve of the baseball postseason feels like a good time to revisit the subject.
Especially since we’ve found new data, even in an admittedly a small sample size.
In The Ultimate October Blueprint, David Schoenfield studies the past 5 post seasons (“when the strike zone started increasing in size and offense began to decline“) and draws a few tentative conclusions:
- Don’t strike out – even though you’re facing better pitching!
- Contact trumps power, although “the weird thing is that home runs in the playoffs have matched the frequency of home runs in the regular season.” But none of the teams who led all playoff teams in HRs – in either league – have won the World Series in the past 5 seasons.
- Use your bullpen, early and often. Starting pitchers don’t fare as well as they start going through the lineup a second and third time, so don’t let them lose a game in the middle innings. “Go to the bullpen. Hope they do the job.”
However… all of the past 10 World Series teams had a starter step up in the postseason:
The thing is, sometimes that starter is a Bumgarner or Verlander or Lincecum, but sometimes it’s an untested rookie like Wacha, a veteran having a so-so season like Lester (he had a 3.75 ERA in 2013) or a mid-rotation starter like Vogelsong. And sometimes it’s Colby Lewis…
The last team to lead the majors in starters’ ERA during the regular season and win the World Series? The 1995 Braves. In other words, having a season’s worth of gems from your rotation guarantees nothing in October — maybe bad news for all five NL playoff teams, who rank 1-5 in the majors in rotation ERA.
But here’s an indicator that may help: In looking for which pitchers may come up big in October, it appears a strong finish is important.
The data also suggest that velocity is overrated. “Maybe when the chips are down, it’s those crafty veterans throwing in the low 90s and situational relievers who win you World Series.”
Schoenfield summarizes advice for when the contest isn’t long enough for the Moneyball math to work:
[The playoffs are unpredictable but] there are a few strategies that seem to work: Battle pitchers with two strikes and put the ball in play; turn the game over to your bullpen in those middle innings; rely on one starting pitcher if you have to; get some big home runs from unlikely heroes along the way. And maybe hope you have a starting pitcher who can throw five innings of relief on two days’ rest in Game 7 of the World Series. [As Madison Bumgarner did for last year’s Giants. – ed]
The fan inside us is fascinated by the prospect of advantages gained in the short term, but over the long term our conclusion remains the same:
While big data may help make accurate predictions or guide knotty optimization choices or help avoid common biases, it doesn’t control events and can be undone by cluster luck. Models are useful in predicting things we cannot control, but for those in the midst of the game – players or entrepreneurs – the results have to be achieved, not just predicted.
Introverted traits are undervalued in the business world
In “Do I put off a human vibe to you?” (January 2014) we wrote that while the “extrovert ideal” may capture the public imagination, our experience with quiet and cerebral entrepreneurs has demonstrated that one doesn’t have to be an extroverted leader in order to run a successful high-growth company.
Writing in yesterday’s Wall Street Journal, Elizabeth Bernstein makes the same argument, in longer form, citing unique skills that introverts offer:
– a propensity for balanced and critical thinking
– a knack for quietly empowering others and less interest in personal glory
– the ability to focus for long periods and to use solitude to think originally and create something out of nothing
– a more focused mindset to their leadership style
– better at dealing with setbacks (because they need less external validation)
– more realistic when listening to feedback or analyzing information (because they do less public promotion of themselves)
Bernstein then argues that the different styles work under different circumstances. From “Why Introverts Make Great Entrepreneurs“:
An introvert’s desire to put the spotlight on others and really listen—and to model this skill for others—will be a huge advantage to his or her company, in sales, management, partnering and just about any other aspect of the business, Ms. Buelow says. “The best businesspeople aren’t necessarily the best talkers, but the best listeners, the people who ask the right questions,” she says.
That was borne out in a study reported in the Harvard Business Review in December 2010. Adam Grant, a professor at the University of Pennsylvania’s Wharton School , and his colleagues found that when employees were proactive, introverted leaders generated better performance and higher profits than extroverted leaders did.
Why? Extroverts are better at leading passive employees who need a lot of direction, says Dr. Helgoe. “But if you have a very creative, self-motivated staff, introverts are better at channeling that talent and staying out of the way—listening, taking in ideas, helping employees shine.”
This article from last month’s WSJ makes a similar point about “ambiverts,” those with both introverted and extroverted traits, neither dominant, who adapt their individual leadership styles to the situation:
[Ambiverts] have more balanced, or nuanced, personalities [and can] move between being social or being solitary, speaking up or listening carefully with greater ease than either extroverts or introverts. “It is like they’re bilingual,” saysDaniel Pink, a business book author and host of Crowd Control, a TV series on human behavior, who has studied ambiversion. “They have a wider range of skills and can connect with a wider range of people in the same way someone who speaks English and Spanish can.”
In practice we need each other. The best teams typically will have some of both who play to each other’s strengths. But it doesn’t have to be the extrovert in the entrepreneur- CEO’s chair. Here’s how Bernstein closes her piece:
Of course, introverts do have some qualities that aren’t that well-suited for entrepreneurship: They can be too internally focused and sometimes shun networking. Extroverts are natural networkers and certainly know how to rally the troops.
But it’s time to recognize that introvert traits have long been undervalued in the business world—and it may be time for extroverts to try and be more like introverts.
PowerDMS named one of Florida’s best companies
For the 2nd year in a row our portfolio company PowerDMS has been named one of Florida’s best mid-sized companies by Florida Trend magazine. (They’re up to #3 this year.)
The news comes on the heels of May’s news that the company had been named one of Central Florida’s 2015 Best Places to Work by Nebraska-based Quantum Workplace, and June’s big event: the company’s relocation to the Church Street Exchange Building as an anchor tenant in the newly repurposed technology hub. The iconic building, built in 1988, was a shopping, dining, and entertainment destination for theme park tourists until the parks caught onto the idea and built their own. The rebirth of “The Exchange” took partial inspiration from how downtown Chicago’s “1871” building became a hub for start-ups.
We’re very proud of what Josh (Josh Brown, CEO) and his team have built, which is, in addition to being a great place to work, a visionary technology platform and the leader in the ECM/GRC (Enterprise Content Management/Governance Risk Compliance) space.
From Florida Trend:
To identify Florida’s best employers, Florida Trend partners with the Best Companies Group, which surveyed firms that chose to participate. Any firm with at least 15 employees in Florida, including firms based outside the state, could participate at no cost.
The first part of the survey involved a questionnaire about company policies, practices and demographics. The second part went to a randomly selected group of each firm’s employees, who responded — anonymously — to 72 statements on a five-point agreement scale.
The survey also included two open-ended questions and seven demographic questions. The questions focused on eight themes: Leadership and planning; corporate culture and communications; role satisfaction; work environment; relationship with supervisor; training and development; pay and benefits; and overall engagement.
The roles of skill and luck in sports and business
The 2015 baseball season is demonstrating that when it comes to untangling the roles skill and luck play in sports and business, luck may play a greater role than we’d like to think.
With technology and best practices so widely and easily articulated and disseminated, the difference between the best competitors and the worst is less than in the past. So a hot stretch of cluster luck can make the difference.
Case in point: so many teams currently hover close to .500, in contention for the 10 playoff births, that the trade market has been slow to develop. Teams can think in terms of limping into the playoffs and then getting hot, and so take longer to choose whether they’re buying or selling assets.
The pre-season projected standings predicted such parity, with only 23 projected wins separating the leaders from the laggards entering this season and only 2 teams projected to finish with 90+ wins. Welcome to MLB’s 2015 Projected Standings, Where Everyone (and No One) Is a Winner:
Projection systems tend to forecast more conservative winning percentages than we’re used to seeing in the final standings. That’s because projected win totals reflect the most common outcomes of thousands or even millions of simulations, whereas a single season, with its wild fluctuations in luck, offers ample opportunity for teams to significantly exceed or fall far short of their true talent levels… As Phil Birnbaum and Neil Paine have noted, there’s an absolute limit to the accuracy of baseball projections. Even if we were omniscient when it came to team talent levels, we wouldn’t be able to predict luck. And luck has large effects: As Birnbaum wrote, “On average, nine teams per season will be lucky by six wins or more.”
It’s not only harder to separate yourself from the pack, there’s also less incentive to do so:
Last August, Birnbaum wrote that in a rational market, an expanded playoff field should make bad teams more willing than before to spend on free agents, and good teams more willing to tighten their belts. “With more teams qualifying for the post-season, there’s less point making yourself into a 98-win team when a 93-win team will probably be good enough,” Birnbaum wrote. “And, even an average team has a shot at a wild card, if they get lucky, so why not spend a few bucks to raise your talent from 79 games to (say) 83 games, like maybe the Blue Jays did last year?” That’s exactly what we’ve seen. … (However) as soon as it sinks in that not all “postseason” spots have equal value, teams might start prioritizing division titles over coin-flip wild-card games and aiming, once again, for greatness instead of good-enough-ness.
Somewhat ironically, the team suffering the most from bad luck so far this season is the very same team who invented “Moneyball.”
Billy Beane actually built a competitive team, but one that’s had an absolutely brutal run of luck. By BaseRuns, the A’s have played .596 baseball, good for a 51-34 record that would make them the second-best team in baseball. In reality, though, the A’s are a wildly frustrating 38-47 (.447), leaving them a whopping 13 games behind their expected record. No other team in baseball is more than five games below its BaseRuns-expected record. Oakland is 6-21 in one-run games; that .222 winning percentage would be the worst figure over a full season in 80 years.
The A’s will have more luck in one-run games. And they’ll play more like the .596 team than the .447 team over the rest of the season. If anybody in baseball has faith in trusting that longer view of performance, it’s Beane. The problem, of course, is that they may be buried too far in the standings to catch up.
Power Score – Your Formula for Leadership Success
I don’t typically read “business books” on vacation, but I made an exception for “Power Score – Your Formula for Leadership Success”.
Power Score is the new book by Geoff Smart and Randy Street, the authors of “Who: The A Method for Hiring” (with an assist this time from their colleague Alan Foster). “Who” has been required reading in our shop for several years and informs a lot of the questions we ask (and how we ask them) in our “people due diligence” when we are considering partnering with an entrepreneur or helping one of our portfolio companies hire a new senior executive.
So I was excited to read Power Score, which utilizes the data from 15,000 management interviews over twenty years that the authors and their team have done on behalf of corporations and private equity firms at their consulting company, ghSMART. I love data, and I was impressed with how they mined their unique database to come up with a formula that facilitates successful leadership.
As it turns out, successful leaders get three things right:
1) Priorities – ensuring that they have priorities that are correct, clear and connected to their mission,
2) Who – making sure they have diagnosed their teams strengths and risks, deployed their people against the right priorities, and continually developed their people, and
3) Relationships – working to make sure that their culture and incentive structures support teams that are coordinated, committed and challenged and promote strong relationships with both employees and external constituencies.
The formula seems fairly simple (simple is good on vacation), but the execution is very hard, and very few leaders operate at consistently high levels in all three areas.
The authors offer a scoring system that challenges leaders and their teams to rate themselves on a 1-10 scale in each of the three areas and then multiply the scores (PxWxR) to see how they compare with the best proven leaders in the ghSMART database. (Hint: 500+ is pretty good but 9x9x9 = 729 is the Holy Grail!) More importantly, they describe how to increase your Power Score by continuously improving in each area, and they also offer a lot of helpful real world examples of how great leaders do it.
The book is written in an easy to digest question and answer format and it won’t take long to finish, though I found myself rereading various sections throughout the book and applying them to companies I have been involved with over the years. Much like they do in “Who” for identifying and recruiting outstanding talents, the authors offer a process that can’t help but enhance leadership success if executed faithfully. And, again, unlike most business books it’s backed up by a lot of great data and research on what makes for a strong leader.
I highly recommend the book and plan to send copies to our entrepreneur partners at Ballast Point Ventures, all of whom are looking for that extra leadership edge in their quest to build great companies. We’ve added it to “The Library in St. Pete” for books we highly recommend. You don’t have to take Power Score on your next vacation, but then again haven’t you watched enough movies on your iPad during those long flights?