Engineering Entrepreneurship

How not to start a startup

2011-10-16T22:07:00.001-07:00

Xconomy San Diego offers a provocative post by Joe Chung about how not to start a startup. Below are his five bullet points and my interpretation of each:

Don’t start a company in an ebbing tide. (Find an unmet need rather than onthat's being met)
Don’t do something you know 20 other startups are already doing. (Most of these 20 will be losers.)
Don’t think too small. (You’re more likely than not to fail, so if you’re taking a big risk, shoot for a big reward.)
Don’t think too big. (Focus on something close enough in that you can see the path from here to there.)
Don’t build a product without a distribution plan. (When you pick from among multiple ideas, try to target something that has a ready-made channel.)

Of course, read the original posting for the full arguments.

As Chung notes, rules are made to be broken, but these rules will keep you away from common sources of startup failure.

Entrepreneurship means not having to own everything

2011-09-29T22:26:00.001-07:00

We had our first entrepreneur of the academic year speak today at KGI in Claremont. Eric McAfee is a chronic serial tech entrepreneur, having started two biofuels company, a solar company and a software company (among others).

I’ve met a lot of tech entrepreneurs and heard a few Silicon Valley entrepreneurs speak. Even so, I felt he made an important point about leverage and open innovation for startup companies.

For McAfee, the distinction between an entrepreneur and a manager is that an entrepreneur is someone “who allocates resources that they do not currently control,” while the manager allocates resources they control.

To me, this is the flip side of the oft-quoted Teece 1986 formulation. Teece focused on what entrepreneurs should do if they can’t control resources. McAfee’s point is that entrepreneurs often shouldn’t even try — that it’s usually better to buy or license the missing piece of the puzzle.

He explained two examples from his current biofuels company, Cupertino-based Aemetis. First, to get key bioprocessing technology he bought another company — U. Maryland spinoff Zymetis — rather than develop the technology in-house.

His reasons were completely in consonance with the open innovation paradigm. From a technology standpoint, “most companies are stuck with the not-invented syndrome,” McAfee said. “We’ve got to be the best technology company which sometimes means we have to buy other companies or license technology.”

The other approach is that they’re taking that technology and using it to improve the cost-effectiveness of existing ethanol plants — which are often stuck in a commodity business. So instead of buying and owning those plants, Aemetis partners with the existing owners and shares in the proceeds.

So if in Teece’s world of 25 years ago, the goal was to control as many resources as possible and make do when you cannot, in McAfee’s world, the goal is to control the resources that are important and partner for the rest. I think there are clearly cases when the latter approach is superior — particularly in a fast-moving industry where capital is scarce and the window of opportunity may close.

IPOs dying again

2011-08-11T13:53:00.000-07:00

I got an email from one of my former students this week who works with startup companies trying to IPO:

It's a brutal market out there! … Many companies were looking to go public in late Q3/early Q4, however, the continued demise of the stock market has many folks running from the idea of an IPO.

Her remarks brought home a nasty side-effect of this month’s stock collapse. And sure enough, MarketWatch and USA Today later reported that at least 8 announced IPOs have been deferred due to “current market conditions.”

PWC (as reported by Business Insider) notes that 2011 was shaping up to be a much better year for IPOs than 2010. Now that trend is in doubt.

As I’ve been saying for years, I think entrepreneurs should look at it the other way: the normal exit will be by acquisition, because only during certain rare (and frothy or bubble-y) periods will an IPO be available. Perhaps the IPO window will open again, but (as has been true since the dot-com crash) the opening will only be temporary.

When (and whether) to scale?

2011-07-26T01:36:00.000-07:00

My friend Tom Eisenmann (@teisenmann) has blogged for his entrepreneurship students on the important question of when (and why) entrepreneurs should ramp up to achieve scale economies. This is an issue that I usually address early when I teach entrepreneurship and also technology strategy.

Of course Tom is a leading scholar of network effects and technological innovation: he knows the material cold. Thus it’s not surprising that his advice is solid — the pros and cons of trying to be a first mover, the benefits of scale, and the obstacles that startups typically face in getting there.

In some ways it’s a more complete explanation than mine would beHe makes the point in a more quantitative way than I have, suggesting that his students are in a program that expects financial analysis throughout the program, not just in a few select classes.

There is only one thing I would add if I were using it in my own course. The posting assumes that the entrepreneur will (or must) scale, and I think it’s a choice that every entrepreneur should consider.

Perhaps it’s Tom’s audience. I can see a scenario where people who plunk down $170K for a Harvard MBA aren’t going to mess around with a mere “lifestyle business” — they’ll take someone else’s money and (ala Babe Ruth) swing for the bleachers rather go for the sure single.

However, in my class I talk to students about what causes scale economies, and how some businesses have them while some don’t — or, more realistically, can achieve minimum efficient scale with fairly modest staff and/or revenues.

Yes, I wanted to create the next HP or Apple, but I didn’t blow my brains out when that didn’t happen — nor did I pull the plug on my business and my customers. (I did cut back to part-time status and get a Ph.D., but that’s another story.)

So what I teach my students is that scale is a choice and a matter of fit to both aspirations and pragmatic realism. If you want to make a rapidly growing business that has a huge exit, 9 times out of 10 you need to attract sizable venture investments and generate the explosive growth those investors demand.

However, if you don’t want to take their money — or don’t have an idea that will generate the growth they expect — you can still start a business. The trick is to find a concept that doesn’t require such scale to create a sustainable competitive advantage.

As with any other aspect of strategy, success is a matter of aligning the goals with the reality, and then executing like hell.

Honesty makes employee incentives work better

2011-07-08T22:24:00.000-07:00

Cross posted from Open IT Strategies.

The private equity investors who flipped Skype (from eBay to Microsoft) have decided to screw some of their employees out of their “vested” stock options.

The issue came up when one Skype employee, Yee Lee, found he forfeited his stock appreciation rights when he left Skype before the acquisition. He summarized his problem on a blog post last month.

Corporate lawyer-turned-law-school-professor (and New York Times pundit) Steven Davidoff summarized the controversy in two postings at NYT DealBook. (Not yet behind the paywall).

In the first article, he noted that PE firm (Silver Lake) could have settled the controversy for less than a million bucks. He attributed the decision to a culture clash between NY financiers and SV venture capitalists. The former is not about reputation or honor, but money.

But in Silicon Valley, the community is not only smaller, the people work together again and again, and so trust and reputation are valued more highly. On his LinkedIn page, Mr. Lee alone lists more than 10 companies where he has worked. When you are going to see and work with the same people repeatedly over many years, $1 million is small change to buy their needed loyalty.

Davidoff argues that while VC has a better reputation, both sides add value equally. Of course, he is a former NY lawyer who advised big companies on their acquisitions.

But the reality is that while VCs do is equally greedy and lucrative, what they do is more rare and economically valuable. Restructuring can be (and has been) done by PE firms, managers who lead a MBO, more traditional corporate acquirers, or even in-house executives with the proper incentives. Best practice in operational efficiency disseminates pretty quickly, so very little about the PE business model (or their value add) is protectable over time.

In a second article, Davidoff concludes that employees are just as likely to be screwed by carefully hidden legal mumbo-jumbo by Google or a raft of other recent startups. (What we don’t know is how each company verbally represented this clause — did they call attention to it or did they bury).

Davidoff’s solution to both cases is that the employee should see a lawyer. (In other words, his philosophy is to create a full employment act for his peers and his students).
In a narrow legalistic sense he's right — that is if Lee were lucky enough to find a lawyer with the right kind of experience. As an entrepreneur, I lost $50,000+ on a business deal that was vetted by my lawyer; my lawyer (of many years) didn’t understand my business well enough to anticipate the scenario that played out, I didn’t volunteer it and he didn’t ask.

However, more seriously, this sort of “ask a lawyer before doing anything” causes an unaffordable drag for startups and their employees. Yes,it might only be $500 for the one consultation that spotted the problem, but it’s also $500 for all those other times where it wasn’t necessary but you paid the lawyer just in case.

There is a non-lawyer solution: we acknowledge that there are fundamentally two types of options: those that actually vest, and those that are only exercisable by current employees.

If the ideas of the incentive stock option is to incentivize employee, then the terms and conditions should be clearly articulated in plain English. If necessary, the state or federal government should require employers to spell it out. (Banning misleading practices is the one place where I believe in aggressive government action.)

I once heard ethicist Michael Josephson say on his radio segment: "Integrity means doing the right thing when nobody’s looking.” (The original author is lost, but similar remarks have been made by quarterback-minister J.C. Watts).

In Davidoff’s world, employers and employees are adversaries using lawyers to duke it out even before conflict arises. In a company with integrity — the only sort I’d put my name to — the terms and restrictions for employee compensation are clearly explained in a way that every employee can understand. As an added benefit, doing the right thing makes sure that the employees and employer have their goals fully aligned (at least until after the end of the lockup period).

Teach your children well

2011-06-17T23:13:00.001-07:00

America has been a more entrepreneurial country than most, and California a more entrepreneurial state than most. It’s not in the water, perhaps some of it has to do with institutions, but certainly culture (and traditions and norms and values) have a lot to do with it.

Entrepreneurship is normally a subject taught in college, but various data points suggest that a lot happens at the K-12 level before entrepreneurs get to college. Below are some random thoughts about how such values can be inculcated, from my own experience as both an entrepreneurial scholar and the parent of a teenager.

Traditionally, Junior Achievement was the way to get kids to think past the lemonade stand into the opportunities provided by free enterprise. My wife taught several years at the elementary school level until she shifted to become a substitute teacher. Personally I think reaching everyone at a young age opens their eyes to the possibilities, even if their actualization is much later.

This week, the WSJ “Small Business Report” (advertising section) offered advice about how to raise an entrepreneur. After interviewing experts, pundits and actual entrepreneurs, writer Barbara Haislip suggested a list of six attributes:

Adventurous: to explore and indulge their curiosity
Dependable and Stable: have high standards
Observant: have them see unmet needs
Team Player, particularly through sports
Lead by Example, from entrepreneurial parents

I have not been trying to raise an entrepreneur, but it matches pretty well what we are doing as parents. However, I think those that have done Junior Achievement will be more inquisitive and observant.

What does seem to be getting through to our daughter is the TV show “Shark Tank.” The staged confrontations don’t teach much — any more than the silliness of Idol or DWTS — but the issues that are salient certainly will stick with a young viewer. But personally, the value I see is in the ideation — some of the ideas are truly awful, but they show everyday people trying to build a better mousetrap, a few of which might actually cause the world to stand up and take notice.

Personally, I think it could be fun to combine all three. Take the WSJ checklist, do a brief lecture, watch an episode of Shark Tank and then debrief. Do this early in the year, before the JA program starts, so students are sensitized to the realworld implications of entrepreneurship (and perhaps watch other episodes, past their bedtime, to the consternation of their parents.)

The problem of being acquired

2011-06-04T08:20:00.001-07:00

(Cross posted to the Bio Business blog.)

At #IndustryStudies2011 this week in Pittsburgh, I heard an interesting talk about what happens to biotech startups after they are acquired. Panos Desyllas of the University of Manchester presented his study (with two Manchester co-authors) of UK biotech firms acquired 2006-2010 by non-UK companies.

The team studied in depth six acquisitions, interviewing executives from both sides of each transaction and also analyzing five years of trailing patent data. They also traced what happened to the key scientists after the merger by noting their affiliations in subsequent patents.

From this data, they came up with a simple (but useful) 2x2 typology: are the two firms similar in technology and are they similar in capabilities?

The firms might be exploring different technological frontiers. Or the acquired firm might have something that the acquirer does not — or vice versa — whether it be UK marketing by the acquired firm or global marketing by the acquirer. The (plausible) intuition is that complementary acquisition is more likely to create ongoing value than a more directly competing one.

The typology worked as predicted. In the case of acquisitions where both the technology and capabilities overlapped, the buyer closed the acquired company, keeping only an IP expert or two as a temporary consultant to transfer the tacit knowledge.

In discussion during and after the session, we discussed the case where the buyer bought a rival with the sole purpose of killing it. This happens all the time, and in some ways it seems like a special case with an utterly predictable outcome.

The other case I brought up was when the acquisition starts out as being complementary — but the acquired firm gets killed anyway.

In April, Cisco killed the Flip camera line that it bought for $590 million in 2009. Pure Digital founder Jonathan Kaplan was sorry to see Cisco knife his baby rather than put it up for adoption, particularly when it remained profitable.

The other example (from the life sciences industry) was Biogen Idec, billed in 2003 as a merger of equals between two biotech startups, Boston-based Biogen and San Diego-based Idec Pharmaceuticals. However, the failed merger brought the closure of the former Idec operations in San Diego last November, and the layoff of some 300 employees (including a close personal friend).

During Desyllas’ session, we discussed whether the closure was a good thing or a bad thing for the local economy. In true Schumpeterian fashion, the creative destruction makes available skilled talent to the local economy for other ventures. On the other hand, some off the displaced workers may never have a similar opportunity again.

But in the end, we agreed that the pattern proved a familiar point: companies get sold when the owners want to sell — usually when they want liquidity for an illiquid investment. Whether the founder (such as Kaplan) or the venture investors, once the company is sold all bets are off.

Death of the IPO

2011-04-29T07:39:00.001-07:00

We all know the IPO has been dying a slow death since the dot-com crash. While the liquidity that IPOs provide startups was seen as providing a major advantage to US startups, all signs point to the 1980s and 1990s as being an aberration in the long-term economy.

Earlier this month, Barry Silbert of SecondMarket spoke at the Stanford Technology Ventures Program on his new vision for capital markets.

A key 5 minute segment of that was about the “long, slow death of the IPO.” During that segment, Silbert asserted that "I don’t think a lot of people realize that over the last 10 years, the IPO market has been dying a slow death”.

(Actually, most of us who study entrepreneurship are at least dimly aware of this, as are entrepreneurs. A year ago I asked if we had seen the “end of the IPO anomaly.”)

Silbert provided specific evidence of this death. He showed a chart with the IPO rate down by 75% during this century, and almost complete disappearance of small IPOs (under $50m).
He attributes the end of the IPO to:

end of research on small cap companies due to

end of full-service brokerages (at the hands of Charles Schwab, eTrade etc.)
shift from fractional to decimal pricing and thus the end of the bid/offer spread
successful litigation against big 10 brokerages by then-NY AG Elliot Spitzer to end incentive compensation for stock researchers

Sarbanes-Oxley increase in regulation and costs
an explosion strike price class action litigation

The net result is increasing the time to IPO from 5 years to 10 years, which (as he notes) doesn’t work for angels, VCs or employees.

Of course, as the CEO of a secondary financial market Silbert has a stake in all this. The IPO traditionally achieved four goals for young companies.

raise capital
provide liquidity to investors (an exit event)
allow the stock to be used as a currency for acquisitions and employee compensation
and as a branding event

Silbert argues that the secondary markets are providing the first three. Certainly the success of Facebook suggests that this is a route available to highly visible consumer-focused companies.
The rest of the talk is, naturally, why the audience should believe in SecondMarket.

Hat tip: VentureBeat

Building a $50m lifestyle business

2011-04-20T22:57:00.000-07:00

One of the more irritating habits of the academic view of entrepreneurship is when people disparage anything other than the next Google as a mere “lifestyle business.” In this view, unless the founders are maximizing their desired exit market cap, they’re just tyros doing it for fun.

I had lunch with a friend today talking about his next startup. He’s going to bootstrap and keep it small, both so he can do tasks that he enjoys and also not spend his whole life chasing after external funding.

For the average entrepreneur, a successful IPO is a fluke in good times and nowadays like being struck twice by lightning. Still, my friend’s plan would be disparaged in many classrooms as a “lifestyle” business, because he’s planning something that he wants to do rather than purely utility maximizing.

One argument is that job creation and wealth creation comes only from these IPO-bound high growth companies. So society — whether it be academic researchers, MBA teachers or government bureaucrats — ought to focus on these IPO-bound companies.

But what if my friend grows his new firm to a $50 million/year business? Is that still a lifestyle business? Over three decades, John Beyster built SAIC into a $7 billion/year Fortune 500 company with 42,000 employees before he finally decided to IPO.

Of course, many of the “lifestyle” businesses stay small. But the majority of the venture-funded rockets crash and burn. The chances of creating the next Google are even less than achieving an IPO that allows the VCs to sell their loser to an unsuspecting public.

And is market cap the only measure of venture success? About a year ago, I got to hear fellow MIT alumnus Sal Khan talk about his nonprofit startup, the Khan Academy. Sal is going to change how we think about education — either at the margins, or perhaps the standard K-16 modality for all of North America. Is this just a “lifestyle” business?

Finally, there are the inherent efficiency and effectiveness advantages of the owner-manager business. Investors, banks, the government, even academic theoreticians go to great lengths to solve the inherent principal-agent problem of having one party provide the capital and another manage that capital. As Enron and Worldcom and Government Motors demonstrate, sometimes these controls fail miserably.

If the owners are the managers, then all that effort is no longer necessary, because there are no abuses to prevent. Who has the most incentive to run a business for its long term success? The “lifestyle” business owner. Of course, success may not be as defined by some external economist or finance professor — but does that make it any less successful?

I hope to play a role in my friend’s new business. Perhaps he (or we) will grow it to a $10m/year business, or even a $50m/year one. I feel better about recommending this model of entrepreneurial development to my entrepreneurship students than gambling on VC and a successful exit.

Experiential entrepreneurial education

2011-04-13T08:19:00.001-07:00

I am now just recovering from the weekend I spent with the three SJSU teams at the 47th Annual International Collegiate Business Strategy Competition. Our teams did very well — two firsts and a second — surpassing the total (if not the batting average) of our two 2008 teams.

The experience of coaching the ICBSC teams for the past six years has made me a true believer in the value of simulation in business education. In fact, I among several strategy faculty this month discussing how to include simulation in SJSU’s planned revision of the undergraduate B.S.B.A. curriculum.

I believe that the ICBSC experience is also a great one for prospective entrepreneurs. It’s hard for me to separate out the intercollegiate competition from the underlying software (the Business Policy Game), but from my own startup days I recognize degrees of realism in the simulation that we don’t otherwise have in the undergraduate or graduate curriculum.

The BPG backstory is not particularly entrepreneurial. The student team (typically 4-6 people) is taking over as the new executive leadership of a 2-year-old publicly traded (!) company, and you have five years (20 quarter) to growth the business and do a better job than your competitors in terms of stock price, net income. profitability ratios and other elements of what looks a lot like the “Balanced Scorecard.”

However, the way the simulation plays out is very entrepreneurial. Despite having revenues of $10 to $30 million a year, the “executives” have no staff: if anything is going to get done, it gets done by the team members.

There are also immovable deadlines: whether a decision is optimal or not, the game follows the maxim of one of my former entrepreneurial mentors: “any decision is better than no decision.” (Would that I’d followed that more often).

On Saturday, members of one of my MBA teams said that their ICBSC final presentation reminded them of working in a startup — editing the slides for their presentation literally as they walked into the room to give their required talk to the judges. (Alas, this approach was not as effective as the other SJSU team that had started their talk earlier).

However, the most important point is one that generalizes to any simulation for entrepreneurship students. I ask my students to write business plans, and I give them feedback on what parts of their plans are good and bad. But they see this as just my opinion, and sometimes they’re right.

In a simulated business competition, the computer is telling them what’s working and not working, at many different levels. Perhaps their new product is selling well, but their margins are too low due to high input costs or limited pricing power.

The simulation comes as close as we can to providing feedback of the market in terms of meeting a payroll and getting to positive cash flow. Believe me, all of the teams have etched into their heads that “cash is king” and the importance of keeping cash inflows ahead of outflows. (One rival did so badly that they had to sell both factories to cover their bills, leaving them only one quarter away from closing operations.)

Some people say that the way to educate prospective entrepreneurs is to have them run actual businesses. There’s a value to that, but I think that’s more something they should do in high school in Junior Achievement than necessarily in college.

The problem is that these student businesses are just that. Yes, you learn how to get customers and cover costs, but unless you’re Michael Dell, they’re just a student business. (Even Ralph Rubio waited five years after graduating to start his fish taco stand.)

For would-be tech entrepreneurs, the challenge is more daunting. yes you can start an iPhone app business or a software consulting business, but most tech business require more capital (and typically some seasoned management) to pull off.

After years of coaching these teams, I think there’s an event more fundamental difference: we learn more from failure than we do from success. Our teams this year made mistakes — a few huge ones — and I suspect those mistakes will stick with them a long time.

I still remember spending $250k of our retained earnings on a product that failed, taking with it the company’s retail software operations. (Fortunately, we refocused the business and got lucky when customers jumped in our lap five years later.)

Are we ready to have lots of student businesses fail, and fail big? Or will we give them so little resources that they fizzle out quietly before they can lose to much money?

In that regard, the simulation competition may distort the lessons that could be gained in a classroom setting. In the ICBSC competition, if two teams grow their company from $10m to $30m/year (with 10% net margins) only one can be a winner. In the real world, both management teams get nice houses, nice vacations and happy investors.

More seriously, the 5th place teams give up because they have no chance of winning, rather than trying to do the best by the employees, managers and investors. So in the classroom setting, I would give a bonus for winning, but in the end grade the students on how well they ran their business rather than how well they did versus competitors.

Timing, experience and focus

2011-03-02T09:50:00.000-08:00

Brewer Dan Gordon was the speaker this week at the Silicon Valley Center for Entrepreneurship speaker series. Although he talked about success in a low-tech business — the German brewery where he trained dates back to 1040 — some themes resonated with my high-tech startup experience.

Of course we had a full house for the co-founder of the Gordon Biersch brewing company and restaurant chain. (He and partner Dean Biersch sold the restaurants in 1999). This is even without adjourning to the nearby GB restaurant for product sampling.

His friend and host, angel investor (and SJSU adjunct professor) Steve Bennet introduced Dan by saying

I'm a strong believer in following your passion: do what you love and the money will follow.

Although Steve and I usually agree, I wanted to argue with him on this point — in part because of a story I read last week in the NY Times small business blog. In discussing a prospective retail startup, serial entrepreneur and NTY blogger Jay Goltz wrote something much closer to my own views:

The risk of entrepreneurship can be reduced if you understand how to take a calculated risk. But the mantra of “follow your passion” is not about calculating anything (even though it can sometimes be good advice). I have met plenty of people who went through the horrible experience of failing in business. They were passionate, too.

Instead, I synthesized Dan Gordon’s story into three general lessons:

Timing
Experience
Focus

This might not be how he outlined his story, but I think Dan Gordon would agree they were important in his case. I know they would have made a big difference in my own startup experience.

1. Timing
Gordon emphasized how his combined brewpub-restaurant was better than anything else out there at the time. Now we take for granted that a brewpub can serve good food (my personal favorite is BJ’s because they serve ale instead of GB’s German-style lagers.) But when Dan and Dean opened their first restaurant in Palo Alto in 1988, it was ahead of what would prove to be a wave of similar efforts.

He also reminded the audience that they started brewing beer when Samuel Adams (Boston Beer) was just getting started as a regional brew. So Gordon and Biersch were at the leading edge of two emerging trends of the 1990s: a willingness of Americans to pay a premium for good quality beer, and a desire for better quality food and atmosphere during social drinking.

More than 20 years later, I still remember my mentor Charlie Jackson saying: “I’d rather be lucky than good.” That is to say, timing is everything.

2. Experience
Gordon was quite emphatic about this point: being an entrepreneur (at least in restaurants or retail) is no place to learn on the job: “There should be no learning curve. It shouldn’t be the first time you’ve delved into that subject matter.”

In his case, he’d been a cook since aged 15, did five years of graduate study (in German) at TUM, studying Brauwesen at this Bavarian university. He’d also worked in machinery manufacturing, while his cofounder was an experienced restauranteur.

In tech startups, we are biased by stories of Bill Gates, Michael Dell and Mark Zuckerberg starting companies in their dorm rooms. We forget that many tech entrepreneurs (like Larry Ellison or Irwin Jacobs) were veterans in their industry, while the technical founders of companies like Sun, Cisco, Yahoo and Google were among the most technologically knowledgeable in the world (in a new and emerging industry).

As a freshman at MIT, my friend Mike Keagy told me that he wanted to start his own business but he was going to work for someone else when he graduated from college. When I asked why, he said he wanted to learn the ropes on someone else’s dime. (At 18 he was wise beyond his years.)

3. Focus
As a customer, I would like his restaurants (or his cases of beer at Costco) to include ale. I like my beers hoppy, which means some form of bitter ale. According to Gordon’s report, most of his beers have an IBU score of 18-25 while my preferred pale ales are 50+.

So during the Q&A, I asked Gordon why he doesn’t make an ale for people like me. He gave a two part answer. First, his personal tastes and experience are towards German beers (NB: See #2 above). He learned German, studied as an undergraduate in Germany, and trained in a German brewing college. So it’s not surprising that he has chosen to focus on German-style beer.

Secondly, he noted that the successful microbreweries tend to specialize in a particular type of beer. His personal favorite, the Oktoberfest-style Gordon Biersch Märzen, accounts for 68% of GB’s brewing sales. He estimated that Sierra Nevada (located in rural Chico) gets 90% of its sales from its signature pale ale, while New Belgium Brewing gets “98%” of its sales from Fat Tire ale.

Maybe if you want to be the next Cisco or HP, you’ll try to be all things to all people. But look at Qualcomm or Intel or Apple — even within their diversification, there is a clear and internal consistency to their choices. Even IBM — once the largest and most diversified firm in the computing industry — today is focused on its unmatched skills at integration and high-value services.

He also noted that GB is not a national beer brand. They were inspired for the combined restaurant/retail synergies by Ben & Jerry’s push into grocery store. However, the company is careful to only distribute its beer in regions where there are also restaurants.

All of these points tie to the coda of Dan Gordon’s restaurant career, which today is limited to attending restaurant openings on behalf of the restaurant tied to the coda. His day job is running the San Jose brewery that turns out the cases of beer while the restaurants were sold off in 1999.

Gordon tied the decision to a 1999 change to the California “tied house” law that permits brewpubs: the new law limited the beer output of a company that owned restaurants. (Answers.com says GB sold the restaurants to operators better able to expand the brand across the country.)

To hear Dan Gordon speak is to hear someone who after 25 years still loves his job, who clearly is living his passion and someone who’s continuing to seek new challenges after he long since mastered his craft. So living your passion is the dream of many entrepreneurs, but you need to have the right opportunity and know what you’re doing.

Segmentation and execution matter

2011-01-20T09:04:00.001-08:00

My favorite meeting place here in Silicon Valley is any place named “Panera”: the food is fresh (if overpriced), the atmosphere is bright and cheerful, and — most importantly — the Wi-Fi is free.

Even now that Wi-Fi is free at Starbucks, I prefer Panera because they are less cramped and they have things that I actually want to buy to rent the table. There are three I use regularly near my home, in addition to several in San Diego and one in Santa Monica. I was at one last night and will be at a different one tomorrow morning.

Ron Shaich, founder of Panera, was interviewed this morning in the WSJ about how the created Panera and its predecessor, Au Bon Pain. He bootstrapped his first bakery chain, then merged it with a struggling supplier called Au Bon Pain. The merged company IPO'd in 1991.

To have something that was more suitable for suburbia he then acquired a small sandwich chain and renamed it Panera. To pay for the growth, he sold off Au Bon Pain.
So with his Harvard MBA, Shaich turned around and grew two existing concepts through superior execution. Although the competencies were similar, he found it essential to keep the two organizations (and concepts) distinct:

Q. After Au Bon Pain went public in 1991, you decided the company needed a new focus. How come?

A. The very thing that had made Au Bon Pain a success was limiting it. We could go to Rockefeller Center or World Trade Center and offer real food to people that could be served quickly, like turkey with smoked brie. It did extraordinarily well in high-density markets, but it wasn't mass-market.
…
Q. Why did customers like Panera?

A. We changed the environment [of fast dining] away from formica chairs bolted to the floor. And we changed the bread itself. We make fresh dough, every night. We have thousands of bakers. Those details really matter.

Chronic (aka serial) entrepreneurs seem to bore of old challenges and be always chasing the next big thing. But in this case, Shaich shows the importance of keeping the two businesses distinct, and not trying to achieve synergy (or brand extension) by blurring the lines.

Also, in Silicon Valley we tend to think of entrepreneurial advantage in terms of superior technology, IP or other formal entry barriers. In this case, both the Au Bon Pain and Panera concepts were something anyone could have had — the vision is much more incremental than Ray Kroc or Harland Sanders.

The success of Panera Bread Company (PNRA) was a function of willingness to bet on the vision, the ability to execute it consistently — and the ability to generate (or acquire) the capital necessary for expansion. As technology-based industries become more mature and more crowded, these previously underestimated success factors are increasingly important.

Tradeshow tribulations

2011-01-12T08:44:00.001-08:00

Perversely, as an entrepreneur one of my favorite parts of the year was going to trade shows. They were a lot of work, the prices and labor restrictions were ridiculous, but it was the one time a year when we could interact with the rest of the world and show our stuff.

This morning, USA Today has a great article on Scott Friedman and his experience at the Consumer Electronics Show last week in Las Vegas. Apparently, Scott was the only one in the building not selling a tablet.

Instead, the CEO of SoulR Products in Southern California was peddling a $80 high-fidelity portable iPod speaker, the "WOWee One.”

What I found particularly interesting is that the article runs through the budget for the company and its product. The company has $200k of founder money and $300k of outside money.

Perhaps more relevant to aspiring entrepreneurs everywhere is the CES budget

$23k for the 20x30 booth
$27k for booth construction
$5k for a consultant
$20k for other expenses — furnishings, photographer, hiring booth bimbos

This is probably 10x our budget for our last booth in 1993, but that was only a 10x10 at MacWorld Expo San Francisco (back when that was the must-see event.)

I think the article fills in a useful gap for new entrepreneurs, in making concrete the process of using a trade show to promote a new product. Columnist Jefferson Graham deserves kudos for his efforts.

Cleantech entrepreneurs: life without VC?

2011-01-08T00:25:00.000-08:00

Cross-posted to Cleantech Business.

Statistics released Friday by the Cleantech Group say that “cleantech” VC investments in 2010 hit a record $7.8 billion, up 28% from the $6.1 billion in 2009 for North America, Europe and Chindia. The N.A. data was even more impressive, up 45% to $5.28 billion. Worldwide, solar continued to account for the largest share of the investments, up 52% from 2009 to $1.83 billion.

Although this sounds encouraging, Iris Kuo of VentureBeat had a different take. First, cleantech VC investment has been declining for the past two quarters. Instead, the capital-intensive have been going to government sources, including BrightSource, Solyndra and Tesla.

However, analysts are just beginning to realize that cleantech businesses may be fundamentally unsuitable for VC investment. A series of clues have emerged in the past 6 months.

Exhibit A was the whole debate started by VC Fred Wilson and his “two venture capital industries” thesis:

The first VC industry is investing in software based businesses. The software VC business has been fundamentally altered by the massive decrease in the cost of building and launching a software based business.…

The second VC industry is investing in cleantech, biotech and other capital intensive tech businesses that have economic models that have not been fundamentally altered. This VC industry operates largely the same way it has operated for the past twenty or thirty years.

The statistics were supported by TechCrunch data from the first 8 months of 2010: an average of $5m for web/ecommerce vs. $31m for cleantech.

Exhibit B was the decision of Kleiner Perkins to pull back from cleantech investing and go back to its roots in IT. Of all the major Silicon Valley VCs, KPCB had made the most aggressive bet on cleantech — particularly green energy. This is the firm that in 2007 made a partner out of a former presidential candidate and Nobel Prize winner.

Exhibit C are the observations of one of the most respected IT industry executives, analysts, inventor and entrepreneurs: Bob Metcalfe (MIT ’69), inventor of Ethernet and founder of 3Com. Having finished a decade as a venture general partner, last month Metcalfe said that the VC model (so far) does not fit cleantech:

Q: What did you learn from your investing in clean-tech, or as you call it, enertech?

A: I’m still in the process of learning – this is complicated stuff. But I learned that the innovation environment in the energy space is not there yet. The problems we see are a mismatch between the asset class called venture capital and the innovation opportunities in energy – it takes too much capital and it takes too much time. But I claim that’s only because the innovation environment in energy hasn’t developed, say, the way it has in pharma. Drugs take a lot of money and a long time, but there’s a lot of venture capital activity in drug discovery. That’s because the drug-discovery business has grown into being able to exploit the venture capital model. The partnerships that big pharma has with drug companies in stage one, stage two, stage three [clinical trials] allow venture capitalists to do what they do and get the returns that they need. The energy space has not quite developed, but it will.

This entire debate was anticipated by Prof. Martin Kenney of UC Davis, the editor of Understanding Silicon Valley — perhaps the leading academic expert on Silicon Valley and a longtime expert on hightech VC.

In July 2009, Kenney wrote a book chapter entitled “Venture Capital Investment in the Greentech Industries: A Provocative Essay” that will be published in the Handbook of Research on Energy Entrepreneurship. He notes a number of warning signs:

investors have been pouring money into green energy without being able to get it back from IPOs;
market growth may be slow, since “clean” technologies are competing with established (and cheaper or better) incumbents;
the cleantech bubble investing bubble parallels the Internet bubble;
thus far, the most successful cleantech businesses have been self-funded: either bootstrapped (e.g. Danish wind turbines) or internal green ventures from existing multinationals like Siemens and Sanyo.

Kenney tries to offer a positive scenario, suggesting that VCs could learn and adapt like they have in biotech. However, in the past 18 months have been signs that biotech VC may be facing similar problems (if the returns to pharma R&D are becoming less certain).

While the scale of investment in energy is enormous, the VCs have various reasons to actually favor larger deals (and often pension funds throwing money at them to invest). While VC worked great during the 1990s with relatively small investments followed by quick exits via IPO or acquisition, but both are much harder in renewable energy.

The first problem is the time scale. If (as Zider’s 1998 classic HBR article suggests) VCs seek a 10x liquidity event after 5 years (to cover their losers), then doubling the delay to 10 years cuts the IRR by more than half (and the NPV even more than that). For a 10 year exit — and ignoring the increased risk of failure — the same IRR would require a 100x return.

The other problem is that the size of the investment reduces (if not eliminates) the opportunity to exit via acquisition. A 10x return via acquisition was common for $50m dot-com investments, but such exits are going to be much rarer with $500m invested; a 100x return is going to be out of the question.

If VC can’t find a way to make money off cleantech investments, then cleantech entrepreneurs are going to have a hard time bringing their businesses to scale. Without VC, new businesses will have a hard time competing with self-funded multinational incumbents — or government-funded enterprises in large centrally-planned economies.

Biz plan contests: more are better?

2010-12-27T11:04:00.001-08:00

The LA Times this morning ran a story on the business plan competition at the USC Greif Center for Entrepreneurship. On the front page of the business section (which today is not its own section) and with an obligatory picture of the latest winner, on one level the story was a fairly conventional reporter’s response to a college press release.

However, what caught my eye is that USC is not content to have one business plan competition, but seems to have four: the (original?) Greif competition, a New Media competition (“Crunch”?) at the Annenberg School of Communication, a newer New Media competition planned for the business school, and then a competition at the Viterbi engineering school

I know at SJSU, we’ve tried to make our business plan competition be an all-campus event, and that seems to be the philosophy at Stanford and MIT too.

There are occasional exceptions. When I was researching tech entrepreneurship programs at the top 25 business and engineering schools in the US, I noticed that Purdue has a separate Life Sciences Business Plan Competition.

There are pros and cons of each approach: The bigger all-campus competitions should be able to offer bigger prizes: MIT now offers $100k to its top winner, as well as more visibility. The smaller contests are probably going to be capped at around $10k top prize money (the three winners at Greif were awarded $12,500 each.)

On the other hand, the more focused competitions will be easier to judge, because the competitors are more homogeneous and it’s easier to get judges who can span this narrower domain. The size of the competition is kept more manageable. And perhaps more importantly, I think the organizers and judges can provide better feedback to the contestants.

The LA Times article notes — as any contestant or organizer would tell you — that the value of competing goes beyond the money to include the practice, the feedback and the connections made. My hunch is that where a campus can support multiple, college-specific competitions, the students will learn more and get a better career boost than the all-campus Inventapalooza that would otherwise ensue.

Seeking a judicious decisiveness

2010-12-14T19:45:00.001-08:00

Coming to the end of his second journal editorship, economist (and Yahoo researcher) Preston McAfee reflected on the thousands of decisions he had to make — rejected 90+% of the submissions.

His views on decision-making seem directly applicable to the core problem of an entrepreneur: making decisions quickly based on incomplete information:

When Paul Milgrom recommended me to replace him as a co-editor of the American Economic Review, a post I held over nine years [1993-2002], one of the attributes he gave as a justification for the recommendation was that I am opinionated. At the time, I considered “opinionated” to mean ‘holding opinions without regard to the facts,’ and indeed dictionary definitions suggest ‘stubborn adherence to preconceived notions.’

But there is another side to being opinionated, which means having a view. It is a management truism that having a vision based on false hypotheses is better than a lack of vision, and like all truisms it is probably false some of the time, but the same feature holds true in editing: the editor’s main job is to decide what is published, and what is not. Having some basis for deciding definitely dominates the absence of a basis. Even if I don’t like to think of myself as “obstinate, stubborn or bigoted,” it is valuable to have an opinion about everything.

In his resume, there’s little evidence of any entrepreneurial bent, and in fact he was the economist helping the Federal Trade Commission attack the creative (if controversial) Rambus business model.
I do see one problem in applying his model to a startup. The editor of an elite journal has hundreds of very bright minds to draw on. Yes, half of them may say “no” when asked, and some have personal agendas. But still, this is a tremendous pool of knowledge that can correct egregious errors by the leader.

No such pool of knowledge is available to the tech startup, which raises the risks of overconfidence by its leaders. Certainly scientists (and to some degree engineers) tend to have the view there is one “right” answer. When it comes to the merits of an idea, some overconfident leaders tend to assert “this idea is wrong” when really “this idea is wrong for us.”

Henry Chesbrough famously noted that in innovation, firms often control for false positives (Type I errors) and predictably end up creating too many false negatives (Type II errors). This is one of the reasons he came up with “open innovation” paradigm — both to remind firms to avoid Type II errors, and to suggest specific mechanisms for profiting from good ideas that don’t fit.

Still, a judicious decisiveness is essential for any entrepreneur or entrepreneurial management team. From my own experience, it’s clear that postponing decisions often makes the decision for you. The key is that if it’s important, the startup can’t afford to “watch and wait” but instead must aggressively investigate to obtain the missing information.

References
R. Preston McAfee, “Edifying Editing,” American Economist, 55, 1 (Spring): 1-8.

Hat tip: pointer to McAfee essay via blog of Greg Mankiw.

Child entrepreneurs II

2010-11-22T23:59:00.000-08:00

One of my dilemmas on this blog is how much it’s about engineering and how much it’s about entrepreneurship. I solve that by sometimes combining both, sometimes focusing on one or another.

Distinctly on the engineering side is the First Lego League, a program for kids 9-14. After experiencing FLL as a coach, the past three years I’ve served as a judge — including last Saturday at St. Lawrence Middle School in Santa Clara. The first round tournament was one of 22 organized this month by NorCalFLL and Playing at Learning.

With a St. Lawrence teacher, I was evaluating the efforts by half of the 18 teams to solve this year’s puzzle: find a biomedical solution to a human health problem. (The project is completely independent of most exciting element of the FLL competition: making a Lego robot to run the maze.)

In the end, our evaluation criteria seemed fairly similar to what an engineering school would use for a business plan competition (or idea fair) for these same kids a decade later:

A good idea, well researched
Professional, polished presentation and visual aids
Balanced team roles in the prepared remarks and Q&A
Enthusiasm and creativity in engaging the audience

Except for the content, the best teams were as good as the undergraduate teams that I’ve seen in my business school teaching for almost a decade.

The big problem we had in judging was balancing creativity vs. realism in their idea for a biomedical product. Some teams had fanciful ideas that were utterly infeasible. Others had utterly prosaic ideas that were so practical that someone either is implementing them already or will be soon. The best came up with something that might not be feasible today but could be soon.

If I had one piece of advice to give the kids (or parents or teachers) of how to balance this, it’s this: do more research. Understand your problem, customer, competitors better; understand the technology better; think through more details of implementation.

As it turns out, that’s not that different than my advice to b-school seniors for their business plans. Or, for that matter, what many entrepreneurs wish they’d done before they launched their companies.

In other words, this program for developing elementary and middle school engineers is a good predictor of skills they’ll need in college or even the real world. That‘s an impressive testament to the leadership of the FLL program, including founder Dean Kamen (creator of the Segway) and retired MIT professor Woodie Flowers (who essentially created the robot competition at MIT).

I wonder if researchers will follow up on the FLL (or FRC) competitors to see if they are more likely to entrepreneurs 10 or 20 years later.

Note: Although this is my second posting in a week on childhood entrepreneurship, it doesn’t reflect a new emphasis of the blog, just my personal interest in entrepreneurship and K-12 STEM education.

Really young entrepreneurs

2010-11-18T23:49:00.000-08:00

Normally we think of tech entrepreneurs as starting in their late 20s — earlier if their name is Jobs or Zuckerberg — but after they have an education and perhaps some work experience.

Tonight I heard a talk by an entrepreneur who thinks every kid should do a startup (or similar creation effort) before graduating from high school — because he began his own journey in 4th grade — and was shipping his first product through Amazon at age 14.

Anshul Samar spoke a K-12 event of the MIT Club of Northern California, a speaker series that I co-chair. His is an interesting story of technical entrepreneurship that involves science, consumer products, and outsourcing. It’s also a story — unlike child actors — of pursuing his dream part-time while keeping his education as the primary goal.

It was a little surreal having a high school student lecturing a room full of MIT grads (including a couple of PhDs) on entrepreneurship and science education. But he's clearly grown from his entrepreneurial journey and his many speaking opportunities.

The short version is that the once-devoted Pokemon player wanted to make an educational card game. Before having a real chemistry class, he settled on the elements as providing both real science and a basis for strong characters. The result was Elementeo, which is Pokémon-meets-Periodic-Table.

The idea was clearly novel, novel enough that well-meaning grownups eventually introduced him to Peter Adkison, founder of Wizards of the Coast (think Magic and Pokémon cards) who gave him manufacturing advice. Along the way, Anshul spoke at the various conferences: California Association for the Gifted, TiEcon Silicon Valley and the American Chemical Society.

Like any first-time entrepreneur, Anshul had to learn a lot on the job. He knew almost nothing about chemistry when he started, but fortunately library books on the elements were not very much in demand. He had the usual epiphany about financials, PR, logistics, cash flow, distribution.

One 21st century lesson was the power of outsourcing. To make his game look professional, he needed professional artwork, which he was able to outsource using a website and email to create PDFs that were iterated until they were ready for 4-color printing.

He also learned the value of 3F money — dad works at Oracle — rather than professional investors. While VCs approached him after TiEcon, he realized that “If you end up taking the VC money, it’s like 60 hours/day: work work work”.

Instead, he’s going to school, working on the game in the summer and vacations and doesn’t feel guilty about occasionally watching TV. He also plans to go straight to college in 20 months. Unlike Jobs or Zuckerberg or Gates or Dell, he’s not going to put his education aside to pursue his entrepreneurial passions. (Although Woz eventually finished college.)

His story suggested two aspects of the nature of entrepreneurial opportunity. First, users can have creative insights as to their own needs (a user innovation argument) that have not previously been realized. Secondly, although not a dime a dozen, entrepreneurial vision is far move common than entrepreneurial success: the difference is ability to obtain and effectively apply resources to realize that vision.

Execution matters

2010-09-20T07:37:00.001-07:00

The first event of the SVCE fall speaker series was entitled “Getting off the Ground: Ideas and Execution.” The panel consisted of an entrepreneur, two early-stage C-level execs and an intrapraneur:

Steve Erickson, VP and GM, Audio Products, Creative Labs
Matt Ready, VP, Sandforce (SJSU ’81)
Paul McGrath, CEO, Ridespring
Steve Olson (SJSU ’83), CFO, Ridespring

The one common thread was that the idea was (at best) a small contributor to the ultimate success of the startup venture. I don’t know that this is heresy around these part — in the land of big idea tech startups — but certainty it is contrary to the popular mythology. Given the excess entry (often funded by VCs) and inevitable shakeouts in local tech industries, the opportunity for having a unique idea seem pretty rare.

After taking sales positions at 12 different companies since he graduated from SJSU nearly 30 years ago, Ready said that he evaluated a career opportunity the same way that local VCs do, by looking at the market, the technology and the team

In particular, he looked at the new firm’s market, technology, team. He advised entrepreneurs: “if you come up with a new idea, you have to vett it against all three of these vectors.” The biggest problem that he saw was the first one, specifically the Total Available Market. If the company was going after a large enough market, it didn’t matter how good a job it did.

Not surprisingly for a finance exec, Olson was even more blunt in favoring operational excellence: “it’s less about the idea than the execution” because success is “90% execution and 10% a great idea.”

His advice to entrepreneurs was twofold. First, the entrepreneur has to be tenacious, finding creative ways to overcome the inevitable obstacles and surprises. Secondly, (s)he has to have a startup team that share that philosophy — one that is flexible and willing to roll up their sleeves to get things done.

The latter point reminds me of my longstanding observation that beyond entrepreneurs and non-entrepreneurs, many employees seem better suited for startups. Perhaps it’s because they thrive on chaos, perhaps it’s because they prefer being generalists — or maybe they just prefer an environment that provides the freedom to be creative.

As a board member of various startups, Erickson also agreed execution is what separated the winners from the losers. Without directly criticizing his employer, he noted that one of its employees created a hard disk-based MP3 player two years before the iPod . We all know who won, although getting their first brought Creative a $100 million royalty payment from the big A.

Even the one CEO offered only qualified support for the importance of the big idea. In particular, McGrath has given up on the idea of hoarding his ideas and keeping them secret for fear someone will steal them Instead, he encouraged entrepreneurs to “be brutal with your own ideas” and share them widely, encouraging others to identify any flaws.

He was blunt in encouraging entrepreneurs to get honest criticism sooner rather than later:

It’s painful if you find out your idea sucks, but it’s a lot more painful if you sink a lot of money into it.

10 easy steps to entrepreneurship failure

2010-09-01T09:18:00.001-07:00

On the WSJ website, Rosalind Resnick offers a list of “10 Mistakes that Start-up Entrepreneurs Make:”

Going it alone.
Asking too many people for advice.
Spending too much time on product development, not enough on sales.
Targeting too small a market.
Entering a market with no distribution partner.
Overpaying for customers.
Raising too little capital.
Raising too much capital.
Not having a business plan.
Over-thinking your business plan.

This is a reasonable list, a cautionary tale that can be offered to any entrepreneur. The under-emphasis on sales and distribution is a long-known problem, particular for product-focused tech entrepreneurs.

On the other hand, there is always a problem with one-size-fits-all advice. In particular, her advice on business plans — yes they’re always needed — is a biased and oversimplified summary of a much more complex and nuanced decision that entrepreneurs must make. There is rather extensive research on business plans, which is not referenced: for example, it’s clear that not all entrepreneurs need a detailed business plan.

So I’d certainly give the list of gotchas to entrepreneurs, but note that these are potential problems they should look out for, not necessarily guidelines for what they should or should not do.

It's not what you know…

2010-08-17T16:07:00.000-07:00

The morning papers report the news that Hulu hopes to IPO this fall and raise $2 billion. (The story was first reported in the NY Times on Monday.) As with a lot of tech IPOs, the company is seeking to go public without a lot of revenues.

The company is not a tech startup in the normal sense. Its raison d’être is not its technology, but its connections, specifically its corporate founders — Disney, NBC Universal and News Corp. (who later sold a minority stake to a private equity firm.)

In other words, anyone could have done the technology: what mattered was that it had direct access to three of the four major TV networks: ABC, NBC and Fox. Hulu succeeded — in true Web 2.0 style as measured by traffic rather than profits — not because of its entrepreneurial spunk, but because of its guanxi. (This seems appropriate since supposedly the name was chosen for its Chinese rather than Hawai’ian meaning.)

Because of its connections, Hulu got favorable content deals as the anti-Apple, the distribution channel that Hollywood loves to hate. It is a lot like Orbitz, founded in 2000 by five of the biggest airlines to compete with Travelocity (a venture of the Sabre reservation service) and Expedia (founded by Microsoft).

In these sort of oligopolistic (or oligopsonistic) industries, the opportunities for success are based on industry connections — or in this case, entry by intrapraenurship rather than entrepreneurship.

Still, no alliance is forever. Some wonder if NBC content will remain on Hulu once it’s acquired by Comcast, which would like to destroy the open Internet (at least for video content) and lock everyone into their premium cable TV subscriptions.

Finally, Hulu’s business model has always been hamstrung by the competing goals of the media giants: take market share away from portals they don’t control (iTunes, YouTube) while not cannibalizing the existing TV offerings. As with newspapers, the online per-user revenues are a fraction of the 20th century traditional distribution channel.

So in the end, what will retail shareholders be getting? Is this more or less secure than the IPO of a pure startup like Tesla or Facebook or some solar panel maker? Thanks to its great connections, there is only one Hulu, but that’s no guarantee it will be able to come up with a viable revenue odel.

VCs and green entrepreneurs

2010-08-11T21:15:00.000-07:00

At the Academy of Management (#AOM2010) conference this week in Montréal, one of the more lively sessions was a “caucus” on Monday entitled “ Venture Capital Investments in Cleantech: An Act of Passion or Another Bubble In-The-Making?”

As the title suggested, the audience of about 30 academics argued about the rationality of VC investments, how they might be studied by academics, and of course the underlying industry dynamics.

It was an interesting albeit disjointed discussion. Imagine 15 smart (but perhaps undisciplined) people having a series of a stream of consciousness monologues (while the other 15 sat and watched). Still, this was probably the most concentrated grouping of management academics interested in cleantech entrepreneurship anywhere at the conference. Since most of the VC (at least by $) has gone to solar, this was also a RE/EE discussion.

Not all of the discussion was about VC. (Since I don’t personally study VCs, I only think about them in the context of the availability of funds for startups.) Some of the discussion was about more basic questions of studying cleantech startups.

My own question was about how SIC/NAICS doesn’t capture cleantech industries — the so-called “cleantech sector” — nor will it until the next revision of NAICS. (Cleantech seems no more a sector than nanotech.) The answer seemed to be that various “experts” have made databases by hand that they claim capture the entire industry. (Desiree Pacheco of Portland State seemed to be the most knowledgeable here, and had clearly been down this road before.)

The session was organized by Eva Yao (Colorado), Antoaneta Petkova (SF State), Sanjay Jain (Santa Clara) and Anu Wadhwa (EPFL). They have an (in progress) study that shows that high status VCs invested first in cleantech, and the room offered a bunch of possible explanations (such as the bigger VCs have more scale, more status and more slack).

In addition to Toni and Sanjay, the Bay Area was also represented by Geoff Desa of SFSU, Gregory Theyel of GreenVisions and CSU East Bay and of course yours truly. Colorado is a hopping place for renewable energy entrepreneurship, but my hunch is that overall California has the rest of the country beat.

Training entrepreneurial engineers

2010-07-26T22:47:00.000-07:00

As an engineer who went to business training almost the minute I took my first job, I appreciate both the value and limitation of a business education for engineering professionals. Of course, I appreciate it even more now that I’ve started a copy, made tons of mistakes, got a formal business education and now teach at a business school.

Five elite US engineering schools got really nice press Tuesday in the Financial Times for their Master’s in Engineering Management program. With a little digging, it was clear they have a website and a “consortium.”

The FT article puts the best case forward:

Joseph Helble, dean of the Thayer School, says Mem programmes are “for engineering grads who know they don’t want to spend their entire careers in design or in a lab. They want to do broader, systems-based engineering, by identifying promising new product lines. They want to create a vision for the technology in the broadest business sense.”

As someone who once thought he would teach in engineering management, I’m all in favor of having more such programs.

Many engineering students have taken my technology strategy class, but without a business core, they get glimpses of insights, not the way to build upon a firm footing in accounting, finance, marketing and organizations. So an integrated master’s degree combining technical and business topics is a great way to address this.

However, when looking at the MEM consortium, I’m not quite clear what makes these five schools different. Do they have explicit standards? Is it the shared “MEM” brand? Or are they a members-only club? For example, the list excludes two of the top engineering schools in the country: Berkeley has a top-flight interdisciplinary Management of Technology program, while MIT has its System Design and Management program, jointly run by Engineering and the Sloan School.

And then there’s the question of how much any school prepares an engineer to be an entrepreneur. Plenty of engineers became entrepreneurs without formal preparation and did quite well. (Hewlett & Packard, Bose, Jacobs & Viterbi, and the list goes on...)

I don’t think a class or a business plan competition is going to help a 23-year-old engineering student create the next HP. Interning with a young company (as I did) would help, as would working for a top-flight company in the same industry. But nothing beats going to work in Silicon Valley, Boston or one of the other regions where you are immersed entrepreneurship, venture capital, startup infrastructure and a startup culture.

Egos, ethics and "no"

2010-07-10T08:22:00.000-07:00

Many entrepreneurs get ahead because of their brash confidence, unwillingness to settle for second best or accept limitations that have daunted their predecessors.

Is there such a thing as too much ego? Steve Jobs was legendary for his tyrannical treatment of direct reports, but also turned the company around by making swift, clear and (largely) correct decisions since his return 12 years ago.

And then there is Elon Musk, the co-founder of Tesla Motors, SpaceX, SolarCity and PayPal. Any one of those would be considered a highly visible entrepreneurial effort and (in the latter case) even a financial success. He has success I can only dream of.

However, at times he seems to have the ethics of a used car salesman. On Friday, Owen Thomas of VentureBeat enumerated various examples of when he said Musk was less than totally truthful.

I personally first noticed Musk when he called a college professor (and coworker of mine) a “douchebag” for challenging his claim to public subsidies for his electric cars. Anyone who takes taxpayer money should be open to public scrutiny — if you can’t stand the heat, get out of the kitchen. The whole incident reflected badly on Musk and his ability to handle criticism for his weaknesses or mistakes.

Some of Thomas’s allegations border on SEC violations, particularly related to his recent (and briefly underwater) Tesla IPO.

I try not to judge people I’ve not met, but sometimes there’s a clear enough picture from secondary evidence. From his exaggerations to trading in the 30-something mother of his five children, he seems to have gone through life without anyone ever saying “no.”

This is a dangerous way to be in business: yesmen will help you drive the car right off the cliff. (It is always possible that the brash public persona hides someone who’s willing to be thoughtful and analytical with trusted advisors in private, but I’ve not seen any reports either way from former lieutenants.)

However, the general pattern of the last decade reminds me of an old, old saying:

For what shall it profit a man, if he shall gain the whole world, and lose his own soul?

That’s not everyone’s guiding principle, but it’s certainly been mine. I was fortunate to work with other scrupulously honest entrepreneurs — even when they did something I didn’t agree with, they were honest about it and even reasonably predictable. I was also inspired by several role models, including Bill and Dave, and the memoir of Paul Hawken.

I realize that forced to choose between honesty and financial returns in a CEO, most VCs would go with the latter. But then I’m not too optimistic about their souls, either.

Flipping is not a business model

2010-04-24T18:04:00.001-07:00

I’m getting ready to grade the final projects for my tech strategy MBA class. One of the projects is about a Web 2.0 company seeking a business model — a common problem.

Near the end of the presentation, one slide summarized the revenue model options:

keyword advertising
promotional services
freemium
sell the company

With the last point, I hit the roof. (Figuratively — I tried to be patient with students no matter what they say.) This is wrong, wrong, wrong!.

Sure, it’s wrong conceptually, theoretically, legally. Getting an investment is not the same as generating income.

But it’s also wrong from a business standpoint. Yes, the founders and VCs get what they want — but the founders have failed to solve the fundamental problem of their business.

Perhaps someday Google will be able to monetize the $1.7 billion they paid for YouTube; there are certainly going to be cases where the acquiring company has economies of scope (or distribution channels or negotiating leverage) to pull off business models that wouldn’t work for a stand-alone company.

But for every YouTube, there’s a MySpace (bought by Fox), Bebo (AOL), or Skype (eBay).

On the one hand, it’s hard for stand-alone tech companies to get established and compete against diversified and integrated tech giants — whether Apple, Cisco or Nokia. On the other hand, the idea that entrepreneurs should seek an exit prior to creating something of lasting value is part of the “born to flip” mentality that was briefly in vogue during the past decade.

So I think there are a few students in one MBA course at one university who are getting the message. Let’s hope that others do, too.

Ultra-bootstrapping

2010-04-07T16:05:00.000-07:00

TiE Silicon Valley is hosting a session next week on what it calls “Ultra-bootstrapping”:

Wednesday, April 14, 2010
TiE Institute - Ultra-Bootstrapping: Building a Start-up without funding.

Event Host
Murrali Rangarajan, Director, TiE Institute

Keynote Speaker
Naeem Zafar, Berkeley-Haas Business School, founder Concordia Ventures

Panelists
AG Karunakaran, President and CEO, MulticoreWare, Inc
Murrali Rangarajan, Director, TiE Institute & Managing Director and Founder, Business Accelerator, LLC

For those who don’t know TiE, it was founded in 1992 in Silicon Valley by Indian-American entrepreneurs, but now has more of a South Asian orientation (with us Euro-Americans also welcome to participate).

The description of the event doesn’t sound very “ultra”, but just the normal definition of bootstrapping:

Learn how to manage your Business Operations tightly to run on minimum cash. Lead from the front. Build your team with the right values. This session will be ideal for professionals starting out, for entrepreneurs who are at that critical growth stage and for team members.

Still, I support anything that encourages and disseminates best practices in bootstrapping to current or prospective entrepreneurs, and hope people will attend.

I probably won’t be able to make it because I’m scheduled to be traveling on business, but I’ll look for it on the TiESV video archive.

37 years ago: Motorola’s first cellphone

2010-04-03T22:46:00.001-07:00

A wonderful blog called “Today in History” runs a series of historic engineering firsts. (An RSS feed is of course available.)

On April 3, 1973, Motorola made the first phone call on its cell phone. The event is now remembered due to the indefatigable self-promotion of Martin Cooper, the point man for Motorola’s engineering efforts in its rivalry with AT&T. (My original dissertation topic was the development of the US mobile phone industry in the 1970s and 1980s, so this backstory is familiar territory that I captured in a book chapter.)

This example demonstrates the problem with the whole “this day in history” view of technological innovation. While AT&T began deploying mobile phones in the 1940s, Douglas Ring of AT&T invented the cellular phone idea as a way to reuse scarce radio frequencies. However, AT&T and then Motorola spent decades fighting TV broadcasters at the FCC to gain necessary spectrum.

Cooper and Motorola certainly deserve credit for envisioning the cellphone as a handset (even if brick-sized) rather than a carphone. But there were many milestones in the AT&T and Motorola demonstration systems from the 1970s until the FCC granted permission for the official launch in October 1983.

The previous blog posting also demonstrates the limitation, with April 1, 1976 remembered to be the founding day for the Apple Computer Company. The Apple I was an interesting circuit board, but the mass-produced Apple II (a complete computer with a case and keyboard) in 1977 is perhaps a more significant milestone.

The blog is inspirational to any aspiring engineer — existing or nascent entrepreneur — for summarizing major milestones in technological innovation that provide business opportunities for established firms like Motorola, startups like Apple, or even an occasional college professor like Charles Townes (inventor of the maser).

Yet another business plan defense

2010-03-24T23:55:00.000-07:00

Nearly every entrepreneur has heard about the value of a business plan. Two new publications I found today — one in the Wall Street Journal, one in the Journal of Business Venturing — both reminded me of this topic and updated what I know about it.

This is not the first time I’ve considered the topic. Right now on my hard disk, I have about 15 articles from the business press and about two dozen academic articles. This doesn’t count books, including the four books I bought to teach business plans last year.

This semester, I am also helping one of our undergraduate honors consulting teams write three business plans in less than a month. Due to the accelerated schedule, we had to decide which part of the standard format to use from Jeffry Timmons’ wonderful abbreviated handbook.

Of course, I also blog about business plans here on this blog.

The Controversy

Ever since I met a job candidate several years who did his thesis on business plans, I have been following the debate in academia and the popular press about whether or not startups should do business plans.

Two of the more convincing arguments in favor of business plans are that business plans are a way to communicate with external constiuencies — like investors — and that it provides discipline to the authors. Arguments against focus on the inherent incompleteness (or obsolescence) of the plan and the opportunity cost of preparing one.

Academics — as they are wont to do — also argue about whether there’s a large N, well-controlled statistical study that shows benefits (or lack thereof) for firms that do business plans.

All of these arguments are applicable to potential high-growth startups in technology-based industries. If anything, the stakes are higher — a restaurant might start with a $50,000 capitalization while a photovoltaic company today needs more than $50 million.

Latest in the Business Press

Today the WSJ small business section ran an article endorsing business plans by a business plan consultant. The defense was framed in the negative — a list of “common misconceptions”:

Business plans aren't necessary unless you're planning to raise capital from banks or VCs.
Investors don't take business plans very seriously. They know that the numbers are garbage.
Nobody reads business plans any more. All you need is a deck of PowerPoint slides.
Nobody has a crystal ball that can predict your business's future. You're better off figuring things out as you go.
Business plans aren't necessary for a company that's already up and running. They're a distraction from running your business.

Here in Silicon Valley, I have heard entrepreneurs argue that the PPT deck is more important. My sense is that the PPT deck is what it takes to get seriously considered, but then some sort of real data — whether a Word document or a spreadsheet — is necessary to get a VC investment. (Angels seem to make their own rules).

Latest Academic Research

Also recently (in academic timescales), the top entrepreneurship journal (JBV) ran an article by a German-American team reviewing the business planning literature. Alas, as seems true for some academic journals, the paper was accepted in October 2008 but not published until January 2010. (Also regrettable is the use of an unmanageable paper title length.)
As in any good meta-analysis on a mature but disputed research stream, the conclusion is roughly: “they’re all correct because there are contingency factors that explain when business plans are and are not useful.”

For example, the authors conclude that brand new startups get less value from business plans than more established startups. The former face so many uncertainties about the unknowable that (the authors argue) that the “go obsolete” argument outweighs the value of the “planning is good” argument.

Conclusions

In my own experience — as an entrepreneur and now as a teacher — I’ve come to three conclusions:

Every firm needs a business plan — but only selectively as time, information and needs allow. There is a huge benefit to some parts of the planning, but the specific needs will vary both by company and (as in the JBV 2010 study) the company’s age.
Business plans must have numbers, even though they are GIGO. A back of the envelope calculation allows the entrepreneur to identify assumptions, risks, and at least an order-of-magnitude sanity check of even the simplest plan.
Opportunity costs are relatively low for business students to write at least a simple business plan. The undergrad (or MBA) core covers all the basic skills, and thus a very rough business plan can be done by a competent business student in less than a month. (For example, we’ve had very good luck sending business students to help students from the award-winning SJSU industrial design program.)

These are not scientific findings, but these are the advice I’d give an entrepreneur or student today.

So if a nascent entrepreneur asks: “Should I write a business plan?” my answer is simple: “Yes, but…”

References

Jan Brinckmann, Dietmar Grichnik and Diana Kapsa, “Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning–performance relationship in small firms,” Journal of Business Venturing, Volume 25, Issue 1, January 2010, Pages 24-40. DOI: 10.1016/j.jbusvent.2008.10.007

Prosaic tech startups

2010-03-04T23:42:00.001-08:00

Commoditization — or at least the business strategies of companies in mature industries — has become the norm for many tech companies. Wednesday morning, the Merc quoted Yahoo CEO Carol Bartz as accepting Yahoo’s shift away from innovation:

On the valley's perception that Yahoo is no longer a cutting-edge engineering company:
"We did lose that. . . . The comparison we get a lot, for instance, is Google. They've got a $4 billion engineering budget, and we've got a $1 billion engineering budget. We're not going to play with phones and broadband; we've got to play in our own space."

This is something that is increasingly central as I teach technology strategy to Silicon Valley engineers. Last semester, Exhibit A was the transformation of HP from innovation leader to the Fiorina-Hurd penny pinching era.

With my MBA students tonight, it was a much smaller story, that of JibJab the online greeting card company.

Two years ago, JibJab parlayed its clever political satire and ability to milk PR on the Tonight Show to create a viral hit during the Xmas 2007 season.

Since then, I’ve used JibJab with students to illustrate business models and the freemium idea. It’s a simple company to understand, unlike enterprise software, B2C/B2B social networking plays, and other more complex stories.

Today, JibJab has acquired many traits of a company in a mature industry, starting with the fad nature of its original business. The bouncing heads were novel then but now are old hat. (It also once claimed a pending patent would protect it from rivals, but now has non-exclusive rights to a third party patent.)

The company faces the challenges of any other entertainment studio of producing compelling original content on an ongoing basis. And if it’s not differentiated, its goal may be to create loyalty to the brand and the service to keep the customers it’s already won.

None of these are bad things. But it’s yet another example that success for many tech companies is less about innovation, and more about sales/marketing (ads, PR, distribution) as well as the ongoing challenge of execution.

Key to success: offer something people want

2010-01-15T15:34:00.000-08:00

Matt Marshall of VentureBeat has an interesting article about how VoIP provider Jajah landed a $207m acquisition (on a $33m investment) when many of its competitors were dying.

Marshall asked CEO Trevor Healy for the keys to success, and the list should be familiar to all. For example, the company decided to stick to a conventional revenue model — being paid for calls — while competitors tried to snare traffic by giving service away free.

The company also had a great engineering team (offshore in Israel), and an experienced management team. It also made employees eat their own dogfood — guess which telecom provider carried all calls by Jajah employees?

Finally, as any ICT architect will tell you, design systems that can grow into platforms for other products, rather than design point products. It worked for Cisco — while Netscape failed — and of course that’s what Facebook and Twitter are hoping to pull off as well.

The story notes that the management was not perfect — they haggled over a $300m deal because they thought they were worth more than a rival that sold for $105m. Still, nobody’s perfect.

Jajah’s exit shows that it’s still possible (if rare) to build a successful startup in this environment. Due to miserly VC investments, there won’t be many high-growth startups founded in 2009 or 2010, but let’s see how many others launched before the recession are able to grab the brass ring.

Timing is everything

2009-12-08T10:51:00.000-08:00

Over the weekend, Apple bought music streaming company Lala for an unspecified price. The most authoritative report comes from blogger/reporter Peter Kafka:

Apple ended up paying around $80 million for the company, according to multiple sources. That’s less than half what investors valued the company at in 2008, but it’s more than the $35 million the company raised throughout its life. Which means that some investors could get their money back and more.

But not all of Lala’s investors. Warner Music Group (WMG), for one, ended up getting back about half the $20 million it put into Lala, I’ve confirmed with people familiar the company.

This account and others make it clear that Lala is being purchased for the knowledge of its staff and its technology. One thing it never did was create a viable revenue model, despite multiple iterations and support from both VCs and record labels.

This seems to be a common problem in Web 2.0 startups. The Dot-Com II era has not been creating viable stand-alone companies, but instead technology sandboxes that have to be bailed out by a good fit to a rich incumbent. In this case, Lala’s service nicely complements the market-leading iTunes. But relying on acquisition for exit has always been a small-numbers problem, particularly when the big boys have gobbled up your competitors (leaving you without a dance partner).

As it was, it sounds like the Lala investors (or founders) got a little greedy. Kafka notes that the investors thought the company was worth $200m at its peak. It‘s not clear if there was a willing buyer that was turned away. But if the owners were holding out for more, they clearly gambled big and lost big. As Charlie Jackson used to tell me, “I’d rather be lucky than good” — an admonishment that timing is everything.

Instead, timing is against the entire categlry. A lot of people thought digital technologies would transform the music industry, and thus garnered piles of VC in hopes of realizing that vision. As Kafka notes, the track record is not great:

The last big exit for a digital music company happened way back in the spring of 2007, when CBS (CBS) paid $280 million for Last.fm. But no one has gotten anything close to that for digital music since then. Imeem is being sold for spare parts, and News Corp. also bought iLike at a steep discount. Spiralfrog filed for Chapter 11 after burning through its cash.

Still, somehow Pandora raised another $35 million. Between the economy, the capital markets, the cratering of its sector and its similar lack of a business model, the wildly popular service with innovative technology has been darn lucky to survive multiple brushes with death. If I were CEO, I’d be looking to negotiate any exit ASAP.

Update Wednesday 9am: Other estimates put Lala's purchase price at $17 million — and a net price of $3m after allowing for cash on hand. Meanwhile, MySpace bought another music service with $24m of VC for “less than $1 million” according to various accounts.

CEO of the decade: never settle for good enough

2009-11-07T07:00:00.000-08:00

Apple founder and twice-CEO Steve Jobs was named this week by Fortune magazine to be “CEO of the decade.” Although he’s a liberal arts dropout rather an engineer — and today CEO of a Fortune 100 company rather than a startup — I think Jobs’ career exemplifies the best of what a high-tech startup should be.

Barely removed from his hippie era, the Jobs I era (1976-1985) was clearly about changing the world rather than making a buck. (Until his 1997 return to Apple, Steve made almost all his wealth from Pixar, not Apple).

Reading the Merc summary by John Murrell, it’s clear that the Jobs II era has also succeeded due to Jobs fastidious unwillingness to settle for “good enough.” As Adam Lashinsky wrote in the main Fortune article:

In the past 10 years alone he has radically and lucratively reordered three markets -- music, movies, and mobile telephones -- and his impact on his original industry, computing, has only grown.

Remaking any one business is a career-defining achievement; four is unheard-of. Think about that for a moment. Henry Ford altered the course of the nascent auto industry. PanAm's Juan Trippe invented the global airline. Conrad Hilton internationalized American hospitality.

In all instances, and many more like them, these entrepreneurs turned captains of industry defined a single market that had previously not been dominated by anyone. The industries that Jobs has turned topsy-turvy already existed when he focused on them.

To me, this is what entrepreneurs do, whether Henry Ford and Juan Trippe or Simon Ramo and Irwin Jacobs. Great entrepreneurs — like other change agents — pursue their vision without regard to whether it’s practical.

At the risk of being cliché, this is the epitome of Schumpeter Mark II. As Richard Swedberg said in his introduction to Schumpeter’s Capitalism, Socialism and Democracy:

Schumpeter’s theory was centered around the entrepreneur: he argued that change in economic life always starts with the actions of a forceful individual and then spreads to the rest of the economy.

How did Jobs get where he is? In the Fortune sidebar, fellow IT billionaire Larry Ellison described his friend and former neighbor thus:

"The difference between me and Steve is that I'm willing to live with the best the world can provide. With Steve that's not always good enough." And if you look at how he tackles building a phone, or building a laptop, he really is in pursuit of this technical and aesthetic perfection. And he just won't compromise.

However, as Ellison notes Jobs is proud to have the highest market cap of any Silicon Valley company — ahead of Cisco, Intel, Google and Oracle. Ironically, two years ago Apple’s market cap passed IBM: the same IBM that offered to bail out Apple’s failed management team at $40/share (until they demanded $60) and of course the same IBM that created the PC that bedeviled Apple until Jobs’ return.

Two decades of nanotechnology opportunities

2009-10-02T09:06:00.000-07:00

Visiting IBM’s Almaden Research Center Thursday, I was reminded that 20 years ago this week, an IBM ARC researcher made history by being the first person to move a single atom.

Don Eigler is perhaps better known for his November 1989 accomplishment: arranging 35 Xenon atoms to spell out “IBM.” Either way, these were major breakthroughs that enabled the subsequent growth of nanotechnology-related products and startups.

I must confess my limited knowledge of the technological and business aspects of nanotechnology. However, it was clear from my visit with ARC associate director Moidin Mohiuddin that IBM is continuing to invest in developing these technologies, part of decades of materials science basic research. Once this technology had direct application to IBM products (such as disk drive recording heads or coatings), today IBM will also out-license its technology as part of its seminal open innovation strategy.

As it turns out, two of my fellow Anteaters (UCI alumni) are not so ignorant. Jennifer Woolley and Renee Rottner published an article last year on nanotechnology startups in Entrepreneurship Theory & Practice — one of the top entrepreneurship journals.

Their article focused on the geographic distribution of nanotechnology startups. Their conclusion was that states that most aggressively supported nanotechnology research and commercialization had the most activity. (As a cynical ex-politics reporter, I might posit an alternate hypothesis — that the regions with the strongest nanotechnology base lobbied most effectively for state spending — but I haven’t seen their data).

For those trying to understand the phenomenon of nanotechnology-related entrepreneurship, this will be a seminal piece. Jennifer is continuing to do research in this area, so I recommend her work for those interested in the topic (despite her working for arch-rival Santa Clara).

Useful revenue model ambiguity

2009-09-12T22:18:00.000-07:00

Michael Arrington of TechCrunch remarks on Twitter’s dilemma for starting its revenue model. To reword his points:

Many firms are acquired pre-revenue and thus their valuation is made without proof of its revenue model.
Before a startup has a revenue model, its revenues are anyone’s guess.
Once a firm has revenues, the range of guesses will be much narrower — and often lower than the most optimistic predictions.

Of course, I’ve long been skeptical of Web 2.0 companies and their ability to create viable business models.

Cross-posted to Open IT Strategies.

A solution that found a problem

2009-09-01T17:10:00.001-07:00

Several years ago, one of my students was involved in a business plan concept to use video board graphics processing units to provide extra processing power. The problem was this was a technology — or a solution — without a well-defined problem.

In this morning’s Merc, there was a story about TechniScan, a Salt Lake City company that is using GPU to enhance image processing of medical images (such as CAT scans). This is the targeted solution that my students lacked: a bounded technical problem (in terms of developing code and algorithms) with a well-defined group of customers with similar needs. If ever GPU processing is going to turn into a business, this would be it.

Ironically, the market they’re targeting is not a new one. Back in 1987, when my company was brand new, Peter Marx came down to Vista from Harbor-UCLA Medical Center to tell me how someday all medical imaging would be stored on computers. (At the time, the idea of images being stored on Sun workstations would have been considered technically challenging). He showed me all sorts of cool images that he’d processed on his Macintosh II.

Peter clearly had the right idea, but both the digital image generation and the host-based processing power were decades away.

So here we have examples of some of the factors that distinguish an incipient opportunity from a real one: a well-defined customer with a well-defined problem, and of course technical feasibility to do something about that problem.

The inevitable need for Plan B

2009-08-20T11:38:00.000-07:00

Many if not most tech entrepreneurs eventually face a wrenching problem: when do I give up on Plan A and go to Plan B?

In some cases Plan A and B (or A,B,C,D …) co-exist alongside each other in a successful diversified revenue model. In other cases, the company is too small to have more than one plan or the initial plan is such a loser (or another such a winner) that the answer is obvious.

However, in many cases it’s hard for managers to admit the correct decision — either because the data is ambiguous or because of emotional involvement. I suspect that most founders will have a hard time letting go of Plan A, because of the psychic investment and legacy role. Or if Plan C comes from your new CEO — and it bombs — it’s often hard to decide to ditch the plan if it might also mean ditching the CEO.

On Wednesday, I stopped by Pinger, a mobile software startup located walking distance to my SJSU office. CTO Jocelyn Cloutier — who worked for Yahoo, AOL, Bell Labs and as a Montreal C.S. college professor — happens to be married to one of my friends and co-authors.

A venture funded startup that’s not quite 4 years, Pinger spent 2 ½ years trying to get its Pinger voicemail multicast system established. Despite a few high profile wins (like the 2008 presidential campaign of John Edwards), like so many other tech startups it found itself flogging a solution in search of a problem.

Cloutier said that at some point, the management team had to admit that the original company concept wasn’t working: “I just put two years of my life into there, so let’s try something different.”

So when the iPhone App Store launched in the summer of 2008, Pinger carefully evaluated it. On the one hand, ”we didn't know at that time that app store is going to be the thing.” In retrospect, the App Store proved to be a smash success — but as in any startup, it’s tough to make a decision when the future is unknown.

Still, Pinger saw iPhone apps as a big potential opportunity, based on the prior success of the iPhone and its increasing momentum. It jumped in with both feet: in little more than a year, Pinger released four iPhone aps:

Dec 2008 Pinger Phone: an enhanced souped up IM client (ala Adium) with some other friend features. ad supported
Feb 2009. Textfree: a freemium SMS client, naturally segmented by the # of messages per day
July 2009: Doodle Buddy, a kid -oriented drawing program (that allows collaborative color sketching over a network)
Today (Aug. 20). Free2Call, a new app (approved while I was there at Pinger) that tells consumers which calls are in-network.

While the first application is no longer being sold — the cost structure didn’t work — it paved the way for all the future apps. As Cloutier said: "Pinger phone showed us there's volume there. We can put an application out there and we are going to have a lot of downloads. Now the question is how can we have an application that they're going to use every day and are going to pay for?"

For Pinger, Plan A was a hosted service and Plan B was peddling iPhone apps at $0-$5 each. (Textfree Unlimited has an annual subscription).

It turns out the technology wasn't very similar between Plan A and Plan B, but the technologists were. The founders were veterans of Handspring — and thus understood the whole device-constrained software model — which enables the team to do a good job of designing something for a 320x480 screen with no keyboard and no mouse.

Pursuing Plan B, Pinger has made it so far, but there are lots of uncertainties and no guarantees. International growth is problematic: most of their products are tied to US-specific telecom industry features (Free2Call) which would require data or localization or negotiation for each country. The iPhone/iPT is only a small part of the US market; although ISVs would like to reach other handset owners, it's not clear which app store will catch on next.

More generally, there's also the inerhent problem of package software sales — as opposed to services like If you’re Google or Verizon Wireless, which make ongoing revenue off a customer after acquiring only once.

Software products — like vidoegames, records, movies — are prone to the one hit wonder problem. Once everyone buys your hit, what do you sell them next? If you don’t sell them another product — or an upgrade like Office 2023 or EA’s annual NFL Football update — then once everyone in your segment has bought the product, the income flow stops.

This one-time nature of software product sales nearly killed my own company, as initial strong sales fizzled out as we quickly reached the limits of unexpectedly small niches.

At Palomar we went from Plan A (consumer apps) to Plan B (developer apps) to Plan C (semi-custom OEM utilities) to Plan D (retail OEM utilities). We worked through the 4 business models in the first 4 years. At year 6 dumped all but Plan C (which was cash flow positive and the long run the only one that made any money).

What’s the take home? Entrepreneurs face several tough decisions, including when to look for Plan B (or C or …), when to implement Plan B, when to abandon Plan A. This choice is obscured by the various uncertainties: not knowing what customers will want, what competitors will do, where the industry will go and how effective our execution will be.

There is also the diversification vs. focus problem. Do you hedge your bets, or does spreading your bets guarantee that neither will succeed? Do you put all your eggs in one basket — all the weight behind the arrow? If so, how can you recognize that all-or-nothing bet has become controlled flight into terrain?

Famous lie slightly more true

2009-08-17T16:00:00.000-07:00

As is well known in the US, there are three great lies:

"I'll respect you in the morning."
"The check is in the mail."
"I'm from the government, and I'm here to help you."

In a man-bites-dog story, Entrepreneur magazine (which is a lot more pro-free enterprise than Inc.) is praising a government website for actually helping small business owners:

There's something new at business.gov, the official online business link to the U.S. government: community. OK, starting a blog site isn't that new an idea generally. But the business.gov blog, which just got going in July, offers a unique opportunity for small business owners to learn how to do business with the feds.
…
With all the new federal funding floating around from the stimulus bill, this seems like a great place to maybe get a quick answer if you're stymied on how to apply to get stimulus funds, apply for an SBA loan, or about anything else governmental. …

Not enough small businesses even look at trying to snag government contracts if you ask me. Hopefully, this blog will help demystify the process.

I don’t think anyone is going to change the list of lies, but every rule has its exception. It’s good to see sensible, low-cost efforts to disseminate information about existing government programs.

Innovation is more than invention

2009-08-07T20:37:00.001-07:00

We thought we were home run hitters, but then we learned that we were born on third base. — Attributed to an AT&T alumnus

This quote by Stanford economist Tim Bresnhan (at Tuesday‘s State of the Net West conference) nicely captures the key problem facing innovative engineers working for any company smaller than the old Ma Bell.

Bell Telephone Laboratories had a better research staff (and working conditions) than all but a handful of universities. The monopoly profits of The Phone Company fueled some of the greatest inventions and scientific discoveries of the latter 20th century — things like lasers, satellites, information theory, etc. etc.

However, as this quote suggests, there are two reasons why such inventive output doesn’t provide a good measure of success:

It’s easy to bring technology to market (e.g. electronic switching, microwave long distance) if your captive customers comprise 90+% of the largest economy in the world.
When you can’t bring your expensive new technology to market, the guaranteed rate of return means there is no penalty for waste or inefficiency.

Invention is never enough. Except at Ma Bell, big innovations require (as Hank Chesbrough demonstrated in his Xerox studies) a business model and someone entrepreneurial enough to create a market if it doesn’t exist already.

Killing a business

2009-07-10T14:19:00.001-07:00

Friday’s paper brought news of the planned liquidation of the Smith & Hawken, the premium garden store founded in 1979 in Marin County. Although I’ve never visited one of their stores, it was nonetheless sad news, because the company provided important inspiration for my early days as a tech entrepreneur.

When we founded our company in July 1987, my partner Neil Rhodes and I were intentionally (and ultimately unsuccessfully) emulating Hewlett & Packard. Like Bill & Dave, we started in a garage, and we deliberately emulated certain elements of the HP culture (which also became our biggest customer).

However, it was Smith & Hawken that provided explicit validation for some of our ideas about what a business was and could be. A year after we launched, in 1988 we read Paul Hawken’s Growing a Business; this was decades before the two comparable HP histories, The HP Way and Biil & Dave.

In his book, Hawken talked about issues that resonated closely with us, things like how to treat employees and the meaning of business. Although it’s been 20 years since I opened the book, I recall his view as being that creating and growing a business was more than just about money, and that founders could and should shape the firm to reflect what they believed important.

Although his industry was very different, this was a view quite consonant with tech startups of the 1980s, back when people tried to build a business for the long haul and before IBM and HP layoffs changed forever the idea that somehow tech companies were different.

Perhaps Smith and Hawken weren’t different, either. Hawken used the success of the book and the company to branch out into other things, leaving the company in 1992, which was then sold in 1993 for $15 million to the parent of NordicTrack. Some of the experiments by the founders (losses on an unsuccessful clothing line) were seen as contributing to the company’s need to be acquired

Since 1993, Smith & Hawken has had three corporate parents. The last owner was Scotts Miracle-Gro, which bought the company in 2004 and has been unable to find a buyer for the firm. Some of the turnaround moves sounded plausible, but nothing worked.

The two founders showed none of the remorse one might expect of a parent outliving its child:

"Scotts couldn't have been a worse corporate owner," said Hawken, who lives in Mill Valley. "Smith & Hawken had become just a ghost of itself."

[David] Smith, who lives in Mendocino County and owns Mulligan Books in Ukiah, said he had gone so far as to ask friends not to shop there.

"When Scotts bought it and Smith & Hawken was owned by the largest pesticide seller in the U.S., I suggested people boycott it," he said. "It had completely lost its roots."
…
Hawken, chairman and CEO of engineering company Pax Group, used the occasion of the closing to host a party Wednesday night. "I couldn't be happier to see my name come down," he said.

What’s the moral of the story? Perhaps that nothing lives forever. Certainly that (as my mentor Charlie Jackson advised me 15+ years ago) once you sell a company, you have to let go and accept what happens. Also, people change — even visionary founders — and their passions will also change.

Most of all, I think it says that even with a unique business concept and vision, firms need to have the management depth and the dispersed leadership and the culture to continue on after their founder is gone. This is certainly a crucial issue for Apple to deal with, more than a decade after Steve Jobs undid the terrible damage done by his three CEO predecessors, and nearly five years after his initial cancer surgery.

Is entrepreneurship down, and why?

2009-07-07T23:03:00.001-07:00

Scott Shane of Case Western argues that entrepreneurial activity is declining, due to competition from larger rivals with superior scale.

Meanwhile, Jonathan Adler (also of Case Western) has a contrary argument:

It seems to me that another likely contributor is the increased regulatory burden. It is well documented that regulation can increase industry concentration. Smaller firms typically bear significantly greater regulatory costs per employee than larger firms (see, e.g., this study), and regulatory costs can also increase start-up costs and serve as a barrier to entry.

What I find interesting is that entrepreneurial opportunities and activities are not equally distributed across the country: more firm formation happens per capita in Silicon Valley than in (say) Northeastern cities. And California is larger than any other state, the total numbers will be even higher than the ratios.

Today, California is going through a series of changes that are making the business climate less attractive, especially for startups:

a shortage of venture capital
increasing taxes
cutbacks in education and other infrastructure spending
a political climate that is encouraging increased regulation

California entrepreneurs may continue despite such burdens, or they may move somewhere else, or they may not start a company after all. But a decline in entrepreneurship in California would certainly reduce the total number of US startups more than in a smaller or less entrepreneurial state.

Panel on bootstrapping tech companies

2009-05-18T07:35:00.000-07:00

Not surprisingly given the membership pool, the MIT Club of Northern California has four activities related to technical entrepreneurship. This includes separate speaker series on semiconductors and clean technology, as well the Venture Mentoring Series for alumni (more at a later date).

One that I didn’t know about is the C3 group (Convergence, Community and Commerce), which put on a panel last month called “The Art and Science of Bootstrapping.” The four bootstrapping panelists were

Paul Kocher, Founder, President and Chief Scientist of Cryptography Research
Michelle Munson, CEO and Co-founder of Aspera Software
Beatrice Tarka, CEO and Co-founder of Mobissimo
Sridhar Vembu, CEO and Founder of AdventNet

Although I didn’t make it, there is a long report in the Spring 2009 edition of the MITCNC newsletter.

Not surprisingly, the interest in bootstrapping is motivated by the increasing risk aversion of VCs, making it difficult to get seed funding. Entrepreneurs are having to bootstrap off of personal (or 3F) money to grow the business to a point where it’s interesting to VCs.

There are two paragraphs that caught my attention:

All panelists agreed that a company cannot always remain bootstrapped and there are circumstances when the founder should be open to accepting outside ﬁnancing. Paul Kochar further elaborated that if a company is in a market that is poised to takeoff and there are no barriers to entry for other competitors to come in, moving fast is key to capturing market share. In such circumstances when a company can grow very quickly, it is imperative to look for the type of ﬁnancing that can facilitate such growth, for example, to develop customer support and sales organizations or to invest in user experience. On the other hand, if a company is in a niche market with no competitors, then one can afford to bootstrap and slow the growth to maintain ﬁnancial control.

I am guessing from the report that all of the entrepreneurs had high growth aspirations — and hence their concern about growing quickly before the window of opportunity closed. Here is the other paragraph:

Regarding how long a company can be bootstrapped, Michelle said that it is easy to bootstrap in the ﬁrst two years of a company’s life, but beyond that it was less clear because the window of opportunity remains open only for so long. Sridhar said that if one does not have a big idea and no big discontinuity, it is better to be bootstrapped. Only 1% of new businesses are venture ﬁnanced. Paul pointed out that some arenas, such as clean tech or semiconductors, are not generally good candidates for bootstrapping.

Actually, 1% is much too generous a number. By my own calculation, funding peaked in 1999 (during the dot com bubble) at about 0.15%, but in the early 2000s averaged about 0.037% — one company out of 2,700.

Obviously some of the other 2,699 companies are those (like my own) that are high-tech startups or have a strong technology component. Many of these are bootstrapped forever, but this normally consigns the venture to slow growth niches.

This is how I would have summarized the event if I’d attended:

Bootstrapping is a way of getting launched and proving viability to outsiders. However, if you are pursuing a rapid growth opportunity, then you will soon need sizable outside funding — either VC or corporate VC. If your competitors have it and you don’t, you will be left behind.

The greatest source of tech entrepreneurs

2009-05-13T19:31:00.000-07:00

Journalists love anniversaries, particularly ones with big round numbers. Politicians (and others seeking publicity) love them two. They’re what we call a “news peg.”

On Sunday, the San Jose Mercury published a long article by Scott Duke Harris celebrating the 100h anniversary of the founding of Federal Telegraph and Telephone in Menlo Park. The article mentioned two other Stanford-related startups founded in the first half of the 20th century — HP [founded in 1937] and Varian Associates [1948] — as well as the familiar list of IT firms from the 1980s and 1990s.

Harris used this history to make a point about Stanford’s role in promoting high-tech entrepreneurial culture:

Stanford University's 100-year tradition of entrepreneurialism, which has spawned such tech giants as Hewlett-Packard, Cisco Systems and Google, has been recognized as a catalyst to Silicon Valley's emergence as the globe's pre-eminent tech hub.

Alas, to quote Will Rogers, “It isn't what we don't know that gives us trouble, it's what we know that ain't so.”

OK, I’m a little biased here. I’m an MIT grad, active in the local MIT club, and onetime entrepreneur alum. I have been researching MIT-trained entrepreneurs as part of a book tentatively named From MIT to Qualcomm. There are also key Stanford rivalries, with strong personal and family ties to the UC system, and today teaching tech entrepreneurship in the shadow of the world’s second richest university. (Full disclosure: I was accepted by Stanford the only time I applied, as a high school senior).

And by no means do I want to minimize the role that Stanford has played in sparcing alumni (and faculty) entrepreneurship in Silicon Valley, starting with Cypress Semiconductor, Electronic Arts and Sun Microsystems in 1982, and extending through Cisco, Yahoo and Google (among many others). After benign neglect by the business school, Stanford’s engineering school has played an incomparable role in promoting technology entrepreneurship among students at Stanford and elsewhere, with efforts like the Stanford Technology Ventures Program and its free iTunes U podcasts.

However, after talking to Silicon Valley historian (and Palo Alto native) Stephen B. Adams, I believe claims of Stanford’s role in the early 20th century are greatly exaggerated. As Steve wrote me in an email responding to the Merc article:

The early start-ups (pre HP) did not take because the Valley lacked critical mass of high tech talent. Therefore, local firms such as Federal and Farnsworth moved to areas (New York/New Jersey and Philadelphia respectively) that already had clusters going. The 1939 Census of Manufacturing showed the same thing that Fred Terman later said: by then the Valley had fewer than 100 scientists and engineers in industry. Not exactly critical mass!

In fact, there wasn’t much to HP until it wartime orders swelled its ranks to 200 employees, and it laid off more than half of those after the war.

At best, Stanford’s role as an entrepreneurial incubator began when Fred Terman was appointed engineering dean in 1946, or when Stanford decided in 1951 to allocate some of its land to form the pioneering Stanford Industrial Park. Even in the 1970s, Stanford’s role in creating startups was not obvious. Shockley (and then Fairchild and Intel) put the “silicon” in Silicon Valley without direct ties to Stanford.

Adams points out that Stanford was aggressively ahead of Berkeley for a very simple reason: without Berkeley’s ongoing support from Sacramento, Stanford badly needed the money. Necessity is the mother of invention.

Which brings me to the other point. As Anna-Lee Saxenian documented in her 1994 book, Regional Advantage, Silicon Valley surpassed Route 128 in the 1980s and never looked back. Saxenian says it’s because of the valley’s open culture, but others argue that it’s because Boston bet on minicomputers while the Bay Area bet on PCs.

However, in the period 1920-1970, there was no question which university was inspiring and fueling technological entrepreneurship: it was MIT.

Losing its land grant status and rejecting a proposed merger with Harvard, in the early 1920s MIT was scrambling to raise resources both for the Institute and for its faculty. (Remember, big Federal R&D spending started with WW II).

During the interwar era, MIT invented its industrial cooperative program (allowing students like Andy Viterbi to work in real jobs to pay for their schooling). It also invented the now-standard consulting rubric used by all American research universities, the “one day a week rule.” This is well recounted by Henry Etzkowitz and his fascinating book, MIT and the Rise of Entrepreneurial Science.

Through the end of the 1960s, MIT was also the world’s leading university in creating the field of electrical engineering and establishing computer science as an academic discipline. MIT has its own list of alumni- and faculty- (co)founded companies, with an impressive run of electronics-related startups from 1922-1985 in both Massachusetts and California that included Raytheon (co-founded in 1922 by Vannevar Bush), EG&G, BBN, TI, DEC, Bose, Lotus, PictureTel, 3Com, and Qualcomm. Among those launching its many Bay Area startups were the two men who put the Silicon in Silicon Valley: William Shockley and Robert Noyce.

By the way, where did Terman (son of a Stanford psychologist) learn his trade as a radio engineer? As one biographical article recounts:

Stanford’s own Electrical Engineering Department chairman told Terman that the biggest and best EE department in the country was at MIT. So in 1922 Terman joined a generation of promising EE graduate students on a pilgrimage to Cambridge.

At MIT, Fred undertook graduate study under Vannevar Bush. Fred earned his Doctorate Degree in electrical engineering in 1924, and having a fascination with all of the exciting events at MIT, Fred was to accept a teaching position there.

Due to health reasons, Terman returned to Stanford, but he spent 1941-1945 running the Harvard Radio Research Laboratory, an auxiliary to the much larger MIT Rad Lab.

Today, both MIT and Stanford have exceptionally qualified faculty, undergraduate and graduate students in engineering and the sciences. MIT’s technical role remains strong, but certainly (as the Merc argues) Stanford has taken the lead in fostering tech startups. Stanford has a much better local environment for entrepreneurs, but it’s an open question whether that’s due to West Coast vs. East Coast cultural differences, the availability of VCs, or the wealth of successful entrepreneurs (and entrepreneurial wealth).

If MIT has been eclipsed by Stanford in firm creation, there’s no guarantee that the latter will remain pre-eminent indefinitely. Stanford’s main rival will not be Cal (or even MIT), but instead Tsinghua or the various campuses of IIT.

I don’t think it will happen right away: these other schools may be able to imitate Stanford’s talent, but it will be longer before than can replicate the ecosystem that lies in its back yard. So even if the Merc has the history garbled, the contemporary story of Stanford’s entrepreneurial success is true (at least for the time being).

End of the IPO anomaly?

2009-04-13T12:00:00.000-07:00

In 2008, there were only six IPOs nationwide, compared to 365 twenty years earlier. The end of IPOs means that founders no longer run their companies, but instead get acquired by big firms and then quit to do something else.

Sunday’s Merc, presented its annual compilation of the Silicon Valley 150. One noticeable result was a reduction in the number of public companies and also of IPOs.

Columnist Chris O’Brien remarked on the trend:

From 2001 to 2008, there have been 90 IPOs in the valley, an average of 11 annually — and the last one was more than a year ago. Compare that with 331 IPOs in the years from 1990 to 1998, an average of 41 annually. The two years in between were so insane — producing 163 IPOs — that it's no use considering them for sake of comparisons.

We’ve long known that Silicon Valley has a higher rate of IPOs than in other countries, but the evidence also suggests it has a higher rate than the rest of the US.

In my own research on communications startups in San Diego, I’ve noticed a much lower rate of IPOs. By my most recent tally, there are eight public companies in the telecom cluster (a few were either acquired or died after their IPO).

So, I’m sorry to say, the data is starting to confirm my conjecture. The 1980s and 1990s offered an unusual window of opportunity for IPOs — both in terms of the availability of financing and the ability to create a new stand-alone company.

Acquisitions do have a few advantages: they are quicker, available to a wider range of firms, and less dependent on the cyclical capital markets. My mentor Charlie Jackson planned for an IPO but sold his company to Aldus in 1990 when the IPO market closed.

I wonder when (or if) the business (or engineering) school courses in entrepreneurship will notice the change, and adjust their curriculum accordingly.

Illegitimate startups

2009-04-09T08:02:00.000-07:00

In grading business plans this week, I was struck by a common blind spot: my undergraduates were overly optimistic about their chances of gaining sales (or distribution) from day one.

They didn’t realize that they would be handicapped by the inherent lack of legitimacy that a brand-new firm has. This is something I lived as a software entrepreneur, but also a well-known problem to strategy researchers.

Just as innovation and entrepreneurship scholars often trace back their core theory to Schumpeter’s “gales of creative destruction,” those worried about the disadvantages faced by young firms go back to sociologist Arthur Stinchcombe and his 1965 book chapter which coined the phrase “liability of newness”.

Subsequent research (such a 1986 ASQ article by Singh et al) has shown that the liability stems in large part to the lack of external legitimacy held by the new organizations. (The test was with nonprofits, but the principle is the same).

I had trouble finding something suitable for undergraduates to read; perhaps this is a publishing opportunity. However, I but did find a closely related 2008 article in Entrepreneur entitled “Credibility is King.”

In class, I tried to tease out the difference between legitimacy and credibility, but given the impromptu nature of the discussion I have to admit I was mostly winging it. In my mind, legitimacy is whether or not you’re in the consideration set. Credibility (as in the political context) is whether or not customers believe what you say.

We brainstormed the reasons or conditions for a lack of legitimacy, and I noticed that they all boiled down to two issues. One is the lack of information (e.g. about the unmeasurable quality of your good). The other is for cases of high risk: making a bad decision on a bicycle helmet is different than doing so for buying an ice cream cone. Again, this is something I hope to elaborate in a future article.

In terms of solutions, most of our options boiled down to two. One is to borrow legitimacy, such as from suppliers (“Intel inside”), dealers, or testimonials by buyers or celebrities. The other is to reduce the risk faced by buyers, such as by providing a free trial.

Again, this is something I’d like to write up sometime, but at least I have a starting point to sensitize future students to this challenge they will face as entrepreneurs.

Are you a bootstrapper?

2009-03-10T10:39:00.001-07:00

At SJSU, I’ve been working with some faculty colleagues to try to better explain how and why firms bootstrap. (Of course, there is a big question about what “bootstrap” means).

Last night, our Silicon Valley Center for Entrepreneurship had a panel discussion entitled “Bootstrapping Startups: The Pros and Cons.” It was moderated by angel investor, blogger and SJSU entrepreneurial finance professor Steve Bennet. His panel consisted of:

Jon Fisher, serial entrepreneur, blogger and author of StrategicEntrepreneurism
Gustavo Alberelli, director of Kennet Venture Partners that specializes in investing in bootstrap companies
Ilya Ronin, a former software engineer and SJSU alumnus who is one of the three executives of bootstrapping Marpo Kinetics (an exercise machine company)

Steve opened by saying “Bootstrapping is a topic near and near to my heart.” As he noted, current difficulties of raising investment capital have raised the interest in bootstrapping.

Jon had an interesting definition of bootstrapping:

Can I approve with my management team a merger? … Do the team and I own 50.1% of the company. … Do we have the ability to exit when and if we should?

Jon noted — as I have argued for a while — that the IPO exit was extraordinary, and the normal exit for most firms is (and will be) acquisition. Thus, he argued, it is important for entrepreneurs to design their companies to be acquire-able.

Gus Alberelli’s Kennet Partners, surprisingly, specializes in investing in companies that have already bootstrapped to significant financial results. As their home page proclaims:

You’ve funded your growth the hard way: by selling real value to real customers.

You don’t need venture capital to validate your idea: the market has already done that. You need a different kind of capital.
…
The companies we invest in often do not need money to survive. They have options.

But the right investment from the right partner can help them keep ahead of their markets, expand internationally, ramp up their sales forces and lead to greater value for shareholders.

This is a very thoughtful argument for the bootstrap strategy (and their ability to profit from them). They have detailed pages on why this helps entrepreneurs, and how they choose firms. They have an entire page about bootstrapping, and a white paper entitled “Bootstrap Your Business for Success.”

During Q&A, Gus said they looked for two key things: “Do you have a repeatable sales model and is there a big enough market?” Unlike other VCs, they claim to be agnostic as to whether they will keep the founding CEO (and grow his/her skills) or bring someone else in.

I didn’t take as careful set of notes for Ilya (my former student), because he had a one hour presentation to my day class that had many more details. At that session, he listed some of the key bootstrapping challenges:

Lots of work
Difficulties in attracting a good team
Small volumes mean less buying power and higher COGS
Slower growth
High level of stress on personal life

Starting with limited funds, the bootstrapper’s way out is to acquire customers quickly that pay the bills. Ilya number one piece of advice:

Look for customers that are most likely to buy quickly
Don’t target big segments that will take longer and are less likely to pay off

I am hoping that the panel will end up on the web or iTunes U. If so, I’ll add a link.

Finally, I want to end where Steve started: with a humorous quiz on bootstrapping, crafted by Greg Gianforte, founder of RightNow Technologies. (Angel Tim Keane has the full quiz online). The theme of the quiz is a self-assessment of the reader’s bootstrapping abilities (or proclivities).

My favorite question:

5. Your product does not do everything a prospect wants. You should?
a. Tell them it won't do those things;
b. Get them to pay for the enhancements;
c. Take the order and tell them it will ship in four weeks;
d. Explain why those things are difficult to do and convince them to buy the current product.

This was funny because it was so real: it exactly fits my experience as the head of a software company that bootstrapped from a $12,500 staring investment to a seven-figure run rate.

Update 1:45pm: Steve Bennet has summarized his own views of the event.

VCs vs. entrepreneurs

2009-01-30T00:01:00.000-08:00

To be successful, any sort of business deal must align conflicting interests. In thinking about venture capital, the decision of entrepreneurs to seek (and accept) VC investments assumes that both parties want the company to succeed, and the only conflict is over the terms of the investment (particularly the dilution).

However, a couple of recent blog posts highlight a second, equally important category of conflicting interests: control over the timing of exit.

On AngelBlog, Basil Peters recounts an example of a tech startup with a chance to exit via acquisition, one that would produce a 3x return for VCs, and perhaps 10x for the angels and 100x for entrepreneurs. The problem is that the VC needs a bigger return (the home run) from its winners to cover its losers. This is consistent with the story of VC investment math told by Bob Zider a decade ago in his HBR article, “How Venture Capital Works.”

Of course, such an early offer may mark a peak in the company’s valuation — in an increasingly competitive segment (as in the Peters example), the total return will only go down. Once faced with an obviously worsening situation — whether firm-specific problems or an increasingly unprofitable industry — VC are known to pull the plug prematurely, saving management attention for the likely winners rather than spending more time salvaging a “dog.” In my SD Telecom study, we had to interview one founder in the final few days before the VCs closed the door forever.

The other point is that, come hell or high water, the VCs will liquidate their investment before their investment fund matures and must return capital (and earnings) to its principals. As VCs freely admit, this means they seek a quick exit — ideally 3-5 years, with 7 years at the outside. Blogger Sigurd Rinde of Germany notes the disconnect between achieving VC objectives, and the goal of many tech entrepreneurs of creating long-term value.

I had a slow growth, bootstrap startup, which never sought (nor was suitable) for VC. This had its pluses and minuses, but it’s clear (as I used to say back then) that taking VC is like starting a time bomb: you have to come up with an answer before it goes off, or you’re dead.

Best business planning books

2009-01-26T12:00:00.000-08:00

This semester I’m teaching a business plan course for the first time since I left UCI in 2002. (I did use a business plan assignment in a 2006 strategy class — more on that later.) The course is an elective for both our undergraduate entrepreneurship and management majors, although I have a few students from other colleges on campus. At the suggestion of a local VC, we are shifting the title and emphasis of the course from strictly business plans to “Planning the New Venture.”

Although I use textbooks for core courses to cover the recommended corpus of knowledge, where possible I try to use regular (i.e. trade paperback) books for electives. They tend to be more readable, cheaper, more likely to be kept after graduation and more representative of what students will read after they graduate. So in preparing for the class, I searched on the Internet and Amazon for books related to business plans.

In 2006, I asked students to write business plans without much information on how to do it, other than walking them through our standard template, which was derived from the U. Maryland BPC. Both versions were derived originally from the standard MBA entrepreneurship textbook by the dean of entrepreneurship scholars, the late Jeff Timmons.

This year, I wanted to give them more help on the two most difficult tasks — estimating revenues and estimating costs — while also covering the broader questions of starting a new business. After buying five books and getting a 6th from the library, I eventually settled on three books.

The first book I picked was the smaller (and cheaper) Timmons paperback, entitled Business Plans that Work. It‘s not complete, but for an undergraduate course it gives a good consistent way of looking at the problem, and (not surprisingly) matches well to our (i.e. Timmons) BP format.

The second book I chose was Bankable Business Plans by Edward Rogoff. I did not expect to like the book, and with its “action steps” (rather than chapters) it’s a bit of a scattershot. However, I found it a nice complement to the Timmons text. In some areas, it’s much more concrete than Timmons, including one of the most important blind spots from 3 years ago — setting up a sales process.

These two books would have been enough for our 15 week course, if I had built a reader with 4-6 other articles to supplement the gaps in coverage. Together, they are only $28 at Amazon — a steal for anyone involved in entrepreneurship.

However, I wanted to give students a little more of the big picture of starting a business, including a sense of why they want to be entrepreneurs in the first place. In the end, I decided to use Guy Kawasaki’s The Art of the Start, which turned out to be much more substantive than any previous Kawasaki book I’d read. Still, I see Kawasaki and this book as a motivational speaker — identifying some important tricks and traps — rather than providing a business plan checklist.

One problem I’ve found in teaching entrepreneurship — with all the work of Timmons, and also many competing academics — is too much of an emphasis on venture capital-funded IPO-oriented startups. Kawasaki nicely balances this out with an entire chapter on bootstrapping, which (as he notes) can also be used by VC-bound companies to bridge between 3F money and their first professional capital. This nicely fits my course goal, which is to help students to identify the most appropriate funding approach for their idea and industry context.

The VC-centric counterpart to Kawasaki’s book is Raising Venture Capital for the Serious Entrepreneur by Dermot Berkery, a former McKinsey consultant turned VC and MBA lecturer in Dublin. It came highly recommended on Amazon, and after reading it, I saw why. It really walks entrepreneurs through the funding process — as VCs see it — and explains what they must do (and why) to put their best foot forward.

I decided not to use it this year for two reasons. First, it’s so VC centric that it would have undercut my message about being funding agnostic, and secondly, it’s more suitable for those already in business or graduate students. I would strongly consider it if I were teaching high growth-startups in the Stanford or Berkeley engineering school, and I’ll also recommended it for our new venture finance class.

Beyond the classroom, I would also recommend both the Berkery and Kawasaki books for those already in a startup. Despite 20+ years thinking about startups (as a founder, research, teacher and consultant) I picked up valuable tidbits from both — either things I didn’t know, or different ways of thinking about familiar problems. For example, Chapter 2 of Berkery’s book emphasized the importance of identifying 3-4 alternative exit strategies, so that investors (and founders) can still succeed if the initial plan is blocked.

One book that did not fit my immediate goals was The Business Plan Is Dead by Jeffrey Wofford. I’ll write more about it some other time.

Raising capital in difficult times

2009-01-24T12:55:00.001-08:00

In the past six months, it’s become even more difficult for otherwise promising tech startups to new or follow-on funding. On October 7, the now-infamous Sequoia PowerPoint deck advised their (mainly high- tech) portfolio companies:

New Realities
$15M Raise @ $100M post[-money valuation] is gone
Series B/C will be smaller raises
Customer uptake will be slower
Cuts are a must
Need to become cash flow positive

While some suggested this was a bargaining tactic by Sequoia to lower valuations, startup companies now face a double-whammy of declining demand by business and consumers and less availability of investment funds.

Of even more concern to the VCs, exit strategies will be more rare, less lucrative and more time consuming:

Increased Challenges
M&A will decrease
Prices will decrease
Acquiring entities will favor profitable companies
IPOs will continue to decrease and will take longer

Since VCs won’t be able to cash in their investments for a long time, they must set aside more money to keep alive a smaller number of companies.

In Thursday’s Wall Street Journal, veteran tech industry reporter Pui-Wing Tam wrote about [also here] the dilemma faced by a small Oakland-based VC fund:

Claremont Creek Ventures recently had to decide which of its young to forsake.
…
Amid the financial crisis and the plunging stock market, Claremont Creek decided to focus on the fund's best investments and stop backing the less-promising start-ups. It wanted to be sure it had enough cash for the next few years for the winners. The venture firm ranked the start-ups in the fund's 16-company portfolio with an A, B or C grade.

"We're doubling down on the As and likely won't invest any more capital in the C companies," says John Steuart, a Claremont Creek managing director. "The portfolio is competing against itself and it's survival of the fittest. It's brutal."

Angel investor and fellow SJSU entrepreneurship teacher Steve Bennet is one of the few who has beat the odds. In his ProfessorVC blog, he explains how one of his portfolio companies raised $6 million in Series C funds.

For those that have already tapped 3F money and can’t raise professional money, the choices are pretty clear: sell the company, stop operations or find a way to bootstrap.

Steve will be moderating a March 9th panel on bootstrapping at the Silicon Valley Center for Entrepreneurship. More details on the program when they are available.

Tech startups are always an experiment

2009-01-13T22:47:00.001-08:00

Last fall, I taught entrepreneurship for only the second time since I got to SJSU. (I’d previously taught it as an adjunct at UCI, building more on my experience as an entrepreneur than any formal preparation).

About 2/3 of the way through the semester, as part of making a point about the lack of sufifcient information in any startup situation, I wrote on the board

Business is an experiment

which will become the mantra for all my future entrepreneurship courses.

To explain my thinking further:

if you’re doing something new whether new to the firm or new to the world — the answer doesn’t exist;
in a startup, for many questions you won’t have the time (or money) to get a definitive answer; so
you need to make and implement a decision with the recognition that the experiment may fail — and thus both look for signs of failure and find an expedient way to mitigate against (rather than prevent) such failure.

That leads me to an an interesting quote from Carol Bartz (newly appointed Yahoo CEO). It came from her 2001 talk at Stanford about encouraging entrepreneurship in established companies: at that time she was CEO of Autodesk, the CAD software company.

As an aside, I’d disagree with her use of the term “entrepreneurship”: if you use the term to refer to any form of innovation or business initiative, then the term doesn’t have any real meaning. While “corporate entrepreneurship” is a bit of an oxymoron, at least it demarks a form of initiative distinct from starting a new company.

However, I couldn’t agree more with her on the philosophy she brought to Autodesk to deal with the turbulent dot-com era, a philosophy she called “Fast Fail Forward.” As transcribed by Scott Fulton of Beta News:

I had to do this during the dot-com time, where everybody panicked and decided that you guys [Stanford students] were going to rule the world. … [P]eople got even more cemented in and scared to take risks, because what did it mean in an established company?

So we started this thing called 'fail-fast-forward,' and the whole idea is, listen, failure is very acceptable. When it happens, make sure you identify it quickly, and hopefully it's in a forward motion. And then start going again.

In other words, nothing new happens without risk, and the only way to deal with risk is to accept it rather than try to completely prevent it.

Hat tip: to Scott M. Fulton, III of BetaNews.

Hewlett & Packard, Bacon & Morgan

2008-12-12T12:12:00.000-08:00

Earlier this week, Merc columnist Mike Cassidy wrote a touching tribute to entrepreneurial engineer Karl Bacon, who died Nov. 14 at age 98:

In 1946, Bacon and partner Ed Morgan opened the Arrow Development Co. in Mountain View. The two were a tight team who started out doing some machine work for HP and just about anything else that would bring cash through the door. Bacon was the math mind, a self-taught engineer who tended to figure out what needed to be made while Morgan concentrated on how to manufacture it.

Then Morgan got the idea that they could build a merry-go-round for the city of San Jose, which they did. Soon a man named Walt Disney was talking to them about coming up with some rides for a new park he was opening in Anaheim. They did that, too.

Mr. Toad's Wild Ride, Mad Tea Party, Dumbo the Flying Elephant, It's a Small World, Alice in Wonderland, Matterhorn Bobsleds, Pirates of the Caribbean, Haunted Mansion and more.

"They did most of the rides in Fantasyland," says Jane Bacon, 87, Karl's wife of 67 years.

The article goes on to talk about all their other major contributions to amusement park rides. While we don’t think of this as a high tech business, during its heyday 40-50 years ago, this was obviously state of the art.

Other tributes on the Internet include a discussion of their Matterhorn design, and the bio on Amusement Today, and a review of the book about them. Amazon also sells that book, which documents their 20 year relationship with Uncle Walt and his fantasy-land.

Engineering is "sexy" again?

2008-11-15T13:52:00.001-08:00

At least Business Week pundit Vivek Wadhwa seems to think so. (Something about Wall Street jobs being in short supply nowadays).

Forbes discovers mobile phone classes

2008-11-11T23:49:00.001-08:00

As a follow up to my earlier post on teaching mobile phone programming, this evening Forbes reported on programming classes. Reporter Elizabeth Woyke talked to professors at MIT, Stanford (iPhone), Columbia (iPhone and Android), as well as a Google evangelist.

The overlap between her story and our visit was the course taught by Prof. Hal Abelson and Andrew Yu, MIT's head of mobile services (who we did not meet). Woyke reported:

Abelson and Yu view themselves as training the next generation of mobile entrepreneurs. The course is structured around weekly critiques to teach students project management and presentation skills. Adult mentors who work in the mobile industry provide guidance in and out of class. "There's a lot of asking, 'Why will people use this?'" Abelson says. "We tell the mentors to treat them like real start-ups."
...
As more mobile development courses pop up, they will naturally become more specialized, Abelson says. He advises future classes to embrace themes, such as creating applications for the developing world, to keep things challenging. "Making something for a phone will be old news. There has to be some other spin," he says.

As with my own first-hand observations, these accounts suggest a win-win proposition. Students get credit for taking a class on programming, but by developing applications in a new and emerging industry segment — as with PCs in the 80s or the web in the 90s — they develop cutting edge skills that may be immediate relevant in a commercial (or entrepreneurial) context.

Teaching mobile programming

2008-11-01T09:23:00.000-07:00

1st of 4 parts.

I’ve spent time the last two weeks visiting various universities to see how they do research and teaching on mobile phone programming. I’m posted on the research elsewhere, but wanted to summarize here what I learned about teaching at MIT, Georgia Tech and UCLA.

Based on what I’ve seen, the model for a mobile phone programming class would be a project-based class that combines needs analysis, use cases and prototype system development. Add in some sort of revenue model analysis, and you have a course that introduces budding software engineers to the possibility of entrepreneurship. (Absent revenue model analysis you have the typical engineering “make something cool and let’s see if we can sell it.”)

The class assumes students already have basic programming down pat, and also have at least one project course under their belt. This would be either a master’s level class or an upper division class that follows (say) software engineering.

MIT

Building Mobile Applications. The most famous course on this topic probably that by Hal Abelson, who is now the dean of teaching programmers at MIT. 24 years ago he shifted the EECS introduction to programming to Scheme (MIT’s local dialect of Lisp) with his text, Structure and Interpretation of Computer Programs.

We met with Abelson for nearly an hour to discuss his Spring and Fall 2008 classes offered to MIT CS undergraduates. The spring course (Building Mobile Applications with Android) got great writeups, perhaps because one of his teams won $300K in prize money from the Android Developer Challenge, Google’s Java programming contest.

The student application, Locale, was one of the first made available on the Android Market, and the team is evaluating commercial possibilities. Not a bad return for a 13-week class.

This semester, the class has 10 teams and about 40 students. For Abelson, a founding director of the Free Software Foundation, the iPhone was ruled out due to Apple’s NDA requirements for iPhone developers (abandoned too late for this semester). The projects are instead spread across three platforms.

Instead of being entirely about Android, the Fall course has more balance. Four projects are using Android in Java. Three are using Microsoft Visual Studio and the Windows Mobile SDK, supported by Microsoft Research New England. The remaining three are supported by the Nokia Research Center in Cambridge — two Java applications and one using Python (PyS60).

The class is extremely labor-intensive. Abelson credited Andrew Yu, (manager of mobile services for MIT) with much of the work. Each team has an industry veteran mentor — essentially a voluntary TA. Paul Oka of MSR said he spends 3 hours/week in the class and team meeting, and as much as another 5 hours early in the semester when the students are getting started.

Pervasive Computing. Abelson’s was not the first mobile phone programming course at MIT. Larry Rudolph taught a series of pervasive computing courses, first with the iPaq and then with Nokia phones using PyS60. From this effort, he wrote a boo to provide a Bluetooth programming tutorial and a 2003 pedagogy article in IEEE Pervasive Computing.

NextLab. Abelson’s course is not even the only mobile phone course at MIT this semester. If Rudolph’s course was more technology-oriented than Abelson’s, then the Nextlab course at the Media Lab is more project and need oriented, with a distinct social entrepreneurship spin. The “NextLab” course is part of MIT’s “Next Billion Network,” referring to the next 1 billion cell phone users expected to be added over the next four years — mostly in less developed countries.

We met one of the NextLab instructors (Luis Sarmenta) and visited a class session run by the other (Jhonatan Rotberg). We heard presentations by three projects, servicing Mexican farmers, rural Indian mobile commerce, and Boston low income preschool parents.

UCLA

In Spring 2008, Deborah Estrin taught “Current Topics in Computer System Modeling Analysis.” The class held 25 students — typical for a lab class — mostly master’s students, and was taught uses PyS60 with the Nokia N95.

The assignments are consistent with Estrin’s large research project on mobile sensing, with the students assigned to gather location and sound data and plot the data using Google map APIs. The 12 projects tended (not surprisingly) towards mobile social media.

Georgia Tech

At the College of Computing, there was other interest in mobile computing among researchers. I found two classes.

Mobile Computing. Thad Starner is a longtime (and prolific) researcher on pervasive and ubiquitous computing. Thus, it’s not surprising he’s taught several courses on “Mobile & Ubiquitous Computing.” I couldn’t find the website, but Starner said this semester he’s teaching about 45 students using the OpenMoko handset. Openness is a big deal to Starner, who is well known around Tech for not doing any business with Microsoft.

Augmented Reality Games. Conversely, Blair MacIntyre is teaching augmented reality (the intersection of virtual reality and reality) game programming using Gizmondo. This discontinued Windows CE-based handheld gaming console has limited communications capabilities.

Other Schools

My list is of necessity incomplete: I haven’t been able to visit all of the top C.S. programs in the country. Each school visit took a minimum of 2.5 hours, and then there’s the matter of the plane tickets. Here are a few that I found on the web.

Stanford. At least one faculty that I met this week mentioned Stanford’s course, “iPhone Application Programming,” being offered this quarter (Fall 2008).

Carnegie Mellon is offering a course this semester entitled “Mobile and Pervasive Computing.”

Ending performance reviews

2008-10-21T08:05:00.001-07:00

The WSJ small biz blog this morning highlights a provocative column on HR practices by UCLA Professor Samuel Culbert. That it’s provocative seems to go without saying, since Culbert’s motto (and subtitle of his latest book) is “straight talk at work.”

Culbert wrote in Monday’s WSJ arguing that performance reviews are a bad idea. On the WSJ (inside the paywalll?), he also has a video on dealing with bad performers and a podcast for employees on dealing with a bad review.

From my days as a software entrepreneur, the column resonated with me, because my employees (including the software engineers and testers) always wanted a review, and I always hated doing them. So having someone telling me I shouldn’t do them seems like found money.

To summarize from the pullquote:

The Promise: Performance reviews are supposed to provide an objective evaluation that helps determine pay and lets employees know where they can do better.
The Problems: That's not most people's experience with performance reviews. Inevitably reviews are political and subjective, and create schisms in boss-employee relationships. The link between pay and performance is tenuous at best. And the notion of objectivity is absurd; people who switch jobs often get much different evaluations from their new bosses.

He lists 7 reasons why they’re a bad idea:

Two People, Two Mind-Sets. The review is confrontational because the two sides have different goals.
Performance Doesn't Determine Pay. Often the review is a rationalization for the eventual (budget constrained) salary decision, rather than a review of performance.
Objectivity Is Subjective. Objectivity is a myth: employees change bosses, their reviews change dramatically.
One Size Does Not Fit All. The same checklist is used for all, although people have different strengths and should be evaluated by different criteria.
Personal Development Is Impeded. Employees won’t be honest about areas where they need to improve if it comes back to haunt them at review time.
Disruption To Teamwork. The boss is supposed to lead a team but the review causes employees to conceal and be dishonest, undercutting trust.
Immorality Of Justifying Corporate Improvement. The reviews are supposed to improve performance and the company, but actually they just encourage political behavior.

I don’t completely buy his proposed alternative, which he calls a “performance preview.” However, as a teacher, a parent and someone who was a tech employer for 15 years, I do agree with the goals of his alternative process:

Holding performance previews eliminates the need for the boss to spout self-serving interpretations about what already has taken place and can't be fixed. Previews are problem-solving, not problem-creating, discussions about how we, as teammates, are going to work together even more effectively and efficiently than we've done in the past.

Anything that turns a review from a win-lose to a win-win is a good idea in my book. Also, my personal and business philosophy was always look forward, not back.

The only thing missing is how to adjust salaries, since that was the entire reason employees all pushed for a review. I guess for that I have to buy the book.

Cleantech Venture Challenge

2008-10-16T23:07:00.000-07:00

Cross posted to Cleantech Business

The University of Colorado at Boulder is preparing to host its 4th annual Cleantech Venture Challenge, an international business plan competition for new ventures that somehow address a “sustainability” need. The business plan competition is sponsored by the Deming Center for Entrepreneurship at the Colorado’s Leeds School of Business.

The competition uses a three-stage process. An intent to compete must be filed by Nov. 21, followed by a complete business plan on January 30, 2009. The eight semifinalists will come to Denver March 17-19 for the final rounds and the ultimate selection. The National Renewable Energy Lab (in nearby Golden, CO) will also invite the top renewable energy project to present at NREL.

The top prize is $25,000. The finals will also coincide with a sustainable business summit to be held at the Denver convention center, part of the state’s efforts to position itself in the cleantech business.

10 fatal assumptions

2008-10-07T12:48:00.001-07:00

In providing feedback to my MBA entrepreneurship students, I went looking for information on market sizing assumptions.

I didn’t find what I was looking for, but I did find another interesting document, from Purdue University’s extension program. The note on “Fatal Business Planning Assumptions” by Cole Ehmke of Purdue offers a list of 10 common but flawed assumptions made by new ventures.

Although he’s in agricultural economics, the first three would resonate with any tech entrepreneur or investor:

We have no competition
All we need is 2% of the market
Our product will sell itself

I would love to see a “10 most common tech startup mistakes” list, but for now this is a suitable cautionary list.

Latest research on high-tech startups

2008-09-15T08:00:00.000-07:00

Since 2003, an informal consortium of four (now five) West Coast research universities have been hosting an annual research conference on technology entrepreneurship. The 6th West Coast Research Symposium on Technology Entrepreneurship was held earlier this month at Stanford (engineering not business). The other sponsoring organizations are USC, Oregon, Washingto and UC Irvine.

The conference is no longer just a West Coast affair, but this year drew an national (if not international) contingent of tech entrepreneurship researchers, with presenters from MIT, Wharton, Illinois, Northwestern and INSEAD (among others). Because it’s a small conference — consisting mainly of the paper authors and discussants — there’s not enough room for all the people who want to attend.

In an interesting innovation, Stanford has put MP3 files of all the presentations up on the Stanford Technology Ventures Program website. (Independent of WCRS, the STVP also has an impressive list of talks posted to its own iTunes U site as well as its own website).

Next year’s conference will be back at UW Seattle. Let’s hope that this innovation becomes a regular feature of the program.

IFRS tax increase

2008-09-12T12:11:00.000-07:00

The SEC and other leading accounting and regulatory organizations are stampeding to switch US accounting rules from GAAP to IFRS. The question is not if, but when.

The nominal goal is to provide both comparability across nations, and also to simplify the accounting practices of MNCs that operate in multiple markets. (Of course, as with SOx, the shift will provide full employment for accounting firms like PWC and KPMG).

The reaction of engineering entrepreneurs to GAAP or IFRS would be MEGO. Of course, this is about the reaction an accountant would have to a discussion of the relative merits of Si or SiC as semiconductor substrates, or the platform requirements for building a service oriented architecture.

However, when I was a (non-MBA) entrepreneurial software engineer, the second class I could in night school was accounting: I needed to understand how financial performance was measured in my tiny startup and how to talk to my CPA. (The first class I took was strategy, which I thought was the most fun — an opinion I still hold more than 15 years later).

This brings me to a letter to the editor in Wednesday’s Wall Street Journal highlighted the accounting impact that IFRS will have on small businesses:

New Accounting Standard Offers Benefits, Problems
In "Closing the Information GAAP" (Information Age, Sept. 8). Gordon Crovitz has done a public service by informing the business community of the pending consequences of the adoption of the International Financial Reporting Standards. As a member of the Financial Accounting Standards Board's Small Business Advisory Committee, I can relate that IFRS has been a subject of discussion in our past two meetings.

What Mr. Crovitz does not state is the tax implications facing businesses adopting IFRS. Mr. Crovitz is correct in that IFRS does not accept the last-in, first-out method of inventory. IFRS only accepts the first-in, first-out method. Nor does IFRS accept mark-to-market accounting. Businesses changing from the LIFO method to the FIFO method will experience significant tax increases. Only congressional action protecting the entire business community can avert this unwelcome tax increase. According to my sources, the IRS is also currently working on the preparation of guidance materials for the anticipated adoption of IFRS.

The American Institute of Certified Public Accountants has developed a Web site to provide important information (www.ifrs.com). The implications of IFRS will be far and wide regardless of which party controls Congress in the next few years. The time to begin preparing is now. The time to contact our congressional representatives to protect businesses is now.

Leonard Steinberg, E.A.
West Windsor, N.J.

In an inflationary environment LIFO will increase taxes for manufacturing (or retailing) firms — because profits will be recorded against the lower basis of the older inventory rather than the newer basis of the more expensive inventory. (Of course, under GAAP, firms can elect FIFO if they expect the newer inventory to be cheaper).

My sense is that startup firms — particularly small startups run by engineers — are completely ignoring what will happen when GAAP is replaced by IFRS. But this stampede to help large multinationals be more efficient (generally an admirable goal) may crush the smaller, less well-funded small firms. And this doesn’t even count the switching cost of moving over to the new system.

The lighter side of raising money

2008-08-29T08:38:00.000-07:00

Raising venture capital is an essential prerequisite to many tech startup business plans. While some companies — usually software or services — can bootstrap off of savings or credit cards, companies with high R&D or manufacturing costs need a sizable cash hoard before they see first revenues (let alone profits).

In teaching about VC, my favorite tool has been the documentary Startup.com. Although about a New York-based startup called GovWorks.com, the presentations and negotiations with Kleiner Perkins, General Atlantic and Highland Capital illustrate the broader issues faced by tech startups raising money.

A friend, serial (i.e. chronic) tech entrepreneur Doug Klein, recommended The VC, a comic strip from the dot-com era. The strip rang true: as an entrepreneur during this period, Doug swears he lived each of these vignettes at some point during their fund-raising efforts.

The comics take the point of view that the actions of VCs are funny. Some of these are painful funny, as in the VC is going to flush us because he can’t buy a clue. Most of them are about laughing at (rather than with) the VCs in some way, shape or form.

All 52 strips from 1997-2000 are online at TheVC.com Business school professors (and public speakers) have been using Dilbert cartoons for a decade to lighten up discussions of project management, managers and (more generally) corporate bureaucracies. This site is a source of illustrations for one aspect of tech startups.

Creating firms and an industry

2008-08-23T08:30:00.000-07:00

One of the major goals of our entrepreneurship program at San José State is to identify and re-establish ties with successful alumni entrepreneurs. We have a number of College of Business graduates who achieved success in low-tech startups, most notably Peter Ueberroth, Don Lucas, Gary Sbona and Mike Sinyard.

However, the most visible successes have come from our tech entrepreneurs. A few people know that Gordon Moore spent 2 years at SJSU (where he met his wife) before graduating from Cal, and then Caltech and going on to Shockley Labs, Fairchild and Intel. (Not to mention Moore’s Law).

In addition to semiconductors, two other SJSU alumni helped create the disk drive industry that made PCs possible.

Last April we had as a guest speaker serial entrepreneur Larry Boucher (who has an EE from Cal and both a BS and MBA from SJSU). He worked for Shugart Associates before founding Adaptec, Auspex and Alacritech. He was a technical pioneer that made both SCSI and NAS possible.

An even more compelling story is Finis Conner, who got a 1969 degree in industrial management. Conner founded three major disk drive companies: with Al Shugart, he co-founded both Shugart Associates (1973) and Seagate Technology (1979). Without Al, he created Conner Peripherals in 1986.

Very few people have created both firms and an industry the way that Shugart and Conner did. Certainly Moore and Andy Grove deserve credit for helping to create the semiconductor industry (and Intel), as the two Steves did with PCs and Apple Computer.

What is cool is when an entrepreneur can have success creating an industry, as well as technical success, business/shareholder success, and personal financial rewards. SJSU can be proud of its major successes here, even if they are far fewer than Stanford or Cal (let alone MIT).

Users becoming entrepreneurs

2008-08-11T16:37:00.000-07:00

Last week I was at the HBS-MIT User and Open Innovation workshop. The conference is mostly (but not entirely) about user innovation in the footsteps of Eric von Hippel and his 1988 and 2005 books.

One of the major subthemes was on user innovators who become entrepreneurs. I’ve summarized the research I heard on the open innovation blog, but here wanted to comment on its applicability to facillitating engineering entrepreneurship.

One of the examples cited was Medtronic, the $14 billion/year firm founded by an electrical engineer and his brother-in-law to repair medical equipment. They were not user innovators, but to make their first pacemaker they involved doctors (i.e. pacemaker buyers, i.e. users) in the design.

This raises a question of how to best commercialize at the intersection of a highly technical user (in this case, MDs or scientists) and highly technical production processes (e.g. engineering of a human-wearable medical device). In this case, science is the customer — as with say instruments for radioastronomy — as opposed to being the input for the engineering (as with the WW II RadLab physicists enabling microwave radar).

So what if you have a product category that requires a combination of engineering competencies with deep knowledge of science, which belongs on the founding team? Are the engineers — who talk to doctors — more likely to succeed? Or does the advantage lie with a doctor-founder who hires engineers? The first is an example of a lead-user approach, while the second is user entrepreneurship.

My hunch (not immediately provable) is that the most important factor is none of the above. Instead, I suspect the driving force will be the same as with any other tech startup: how much business knowledge does the technical founder have — or, lacking such knowledge, how much is the founder willing to defer/listen to those with such knowledge?

Build or flip?

2008-08-03T12:24:00.000-07:00

Once upon a time, tech entrepreneurs were motivated by a desire to build something of lasting value: a better mousetrap, a great company, or to change the world. In 1938, Bill Hewlett and Dave Packard sold eight oscilloscopes to Walt Disney, who was making Fantasia. Seventy years later, the successor business-to-business instrument division is at the core of Agilent.

It always helped to have good timing — either by being lucky or making your own luck. HP was there when Disney (and soon the war effort) needed electronic instruments. Fairchild bet big on silicon just as the military was shifting from tubes to transistors. Intel took the integrated circuit to the next level with its 4004 microprocessor, and bought back the rights from Busicom. Steve Jobs and Steve Wozniak went to the Homebrew Computer Club and saw how the microprocessor would enable personal computing.

In the original waves of tech startups, going public meant generating enough of a track record of revenues and profits that investors could reasonably hope that your stock would go up. Those (relatively rare) IPOs meant a few tech entrepreneurs got to be fabulously wealthy and endow vanity foundations (that today seem likely to do less good for society than their companies did). But the wealth was not the thing, at least until the hippies of Apple Computer created dozens of millionaires with their IPO, and later IPOs from companies like Sun, Oracle and SGI permanently changed the Silicon Valley mentality.

However, a much larger number of companies didn’t change the world, or create large (or even small) fortunes. Instead, they provided value to their customers, income and training to their employees, and a chance to have a vocation of meaningful work. It’s a standard power law distribution: if you buy a lottery ticket, you’re far more likely to win $5 than $50 million.

This more typical path was my own experience. We didn’t have an exit strategy because I hadn’t heard of the term when we started the company in 1987. Every penny that I made off the company came out of positive cash flow which (without the benefit of reduced capital gains taxation) is a much harder to way to throw off profits. But we produced good quality software for 17½ years before closing the doors in 2004.

The dot-com bubble seems to have changed things. Companies went public without profits and sometimes barely with revenues. There was a gold rush mentality and people who weren’t really qualified (either by talent, ethics or disposition) to build a real company were looking for a get rich quick scheme. This has continued into the current Web 2.0 era, as I was reminded when I gave a presentation at USC Thursday on Web 2.0 business modes.

So the new mantra is “flip this company.” As a 2004 Business 2.0 article proclaimed

The New Road to Riches
How To Get Ahead In The Postbubble World
Build A Company Cheap. Flip It Fast. Repeat.

Flipping a company today is about selling out to a big company ina just a few years: the Holy Grail is the $1.8 billion that Google paid for YouTube after only 18 months. However, the philosophy is similar to the dot-bomb (some say dot-con) era, companies built using this philosophy were sold to the public as a naked demonstration of the “greater fool” school of ethics.

This may be the road to riches, but it’s not a way for entrepreneurs to create value or success (more broadly defined). This philosophy was dissected by author Jim Collins in a thoughtful 2000 essay. He illustrated a point using a 1985 medical equipment startup:

The real question, the essential question is this: Is your company built to work? The answer rests on three criteria: excellence, contribution, and meaning. Again, consider Cardiometrics. The company may not have been built to last, but in all of its activities, it adhered to the highest possible standards: Instead of relying on expedient studies and marketing hype, it conducted rigorous, costly clinical trials in order to demonstrate the value of its technology. And the company clearly made a significant contribution -- to the market, to its investors, and to the lives of patients all over the world. Finally, the people of Cardiometrics found their work to be intrinsically meaningful: They worked with colleagues whom they respected and even loved, and they pursued a worthy aim to the best of their ability. Built to Flip? Built to Last? Cardiometrics embodies neither of these models: It was built to work.

Today, I believe that the opportunities for startups to IPO are greatly diminished, for a variety of reasons. IT is mature with a large number of diversified established incumbents. Biotech startups have disappointed investors with both the risk and the payoff. Both types of startups lack the complementary assets such as distribution or economies of scope to fully capitalize on their innovations.

Today startups are being acquired, and sometimes a piddly little company can create a value that they will be unable to unlock on their own, but can be realized by a Google or a Cisco. But in a free economy, every excess eventually self-corrects, so if acquiring companies don’t get value, they will buy fewer companies and pay less for those that they get — or their mistakes will put them out of business.

Either way, assuming that a bad business will be bought at a good price seems like a lousy bet.

Who deserves SBIR funding?

2008-07-12T20:34:00.000-07:00

The Wall Street Journal reported this week on an ongoing controversy over eligibility for SBIR funding. This follows up on earlier reporting by the Washington Business Journal.

The Small Business Innovation Research program (established 1982) provides grants of about $200K for Phase I and $1.5 million for Phase II from 12 cabinet departments and agencies. In addition, five of these agencies administer SBTTR (Small Business Technology Transfer) grants — which are similar to an SBIR except they require cooperation with a university or federal research lab. The grants are funded by a Congressional mandated set aside of 2.5% of their research budgets.

An entire industry has developed around SBIR. At the university-industry conference last week at UCI, it is clear that states see integrating with SBIR is one of the easiest and most effective parts of a regional innovation strategy, as with the presentation by Lee Herron of the Georgia Regional Alliance. Drafting off the SBIR screening and legitimation, states can provide matching funds or bridge funds for firms that have won a first SBIR and are awaiting receipt of follow-on funds

The SBIR was created by PL 97-219:

The Congress finds that
technological innovation creates jobs, increases productivity, competition, and economic growth, and is a valuable counterforce to inflation and the United States balance-of-payments deficit;
while small business is the principal source of significant innovations in the Nation, the vast majority of federally funded research and development is conducted by large businesses, universities, and Government laboratories; and
small businesses are among the most cost-effective performers of research and development and are particularly capable of developing research and development results into new products.
Therefore, the purposes of the Act are
to stimulate technological innovation;
to use small business to meet Federal research and devel- opment needs;
to foster and encourage participation by minority and disadvantaged persons in technological innovation; and
to increase private sector commercialization innovations derived from Federal research and development.

The SBIR program is the envy of the world — other countries want to copy “the world’s largest seed capital fund.”

Today, however, there is a controversy about SBIR eligibility. In particular, the question is whether VC funded firms are eligible for SBIR funding. The rules were tightened in 2004 after the GAO investigated on behalf of Congress.

Of course, VC funded firms don’t care for this rule. The biotech industry trade association has been lobbying since 2003 to get the rule repealed, because very few biotech firms get started without VC. Their opposition has been far less organized, with people like SBIR consultant Gene Watson of Wyoming and some bloggers fighting to keep the restrictions.

There are arguments on both sides.

The VCs and their supporters say that the ideas that have already attracted outside capital are better quality ideas than the average submission and thus should be included. Of course, the biotech industry also cite the importance of innovation in their industry to human health and well-being.

While that’s true, there are several possible arguments in favor of the restrictions.

First, the restriction does not prevent VC-funded firms, only those that are 49+% owned by firms or investment funds. If the VCs don’t dilute their entrepreneurs, then biotechs can get funded. Or biotechs can get funded early in their life before heavy dilution. This would be consistent with the use of an SBIR as a seed capital fund.

Second, the SBIR funding is relatively small compared to the VC funding; a quick check suggested the average 2005 Series A was $21 million but today is more like $30 million. So reducing SBIR funding by $500K will just force the VCs to pony up another 1.5%, perhaps diluting the founders another 3% or so. Relaxing the restriction would reduce the amount of money VCs have to put into biotechs — but (economists would predict) not allow biotechs to develop any drugs they would otherwise be unavailable to do.

This leads to the final point. The point of the SBIR would appear to be to make sure that small businesses that don’t have money to fund their innovations have a way to do so. The VC-backed firms have shown they can raise money, so the question is just who’s going to put up the money to fund their innovations — the government or the VCs.

This year, the biotechs are winning handily. A change to explicitly allow VC-funded firms to get SBIR grants is incorporated in the SBIR reauthorization bill H.R. 5819, which has passed the House 368-43 and is heading to the Senate. A quick glance at the votes suggests that won support of all Democrats and all but a few Republicans (not clear if their opposition is from the small business-friendly “Main Street” wing or from the anti-spending Libertarian wing).

Given the SBIR program expires Sept. 30, there will be pressure to pass some sort of reauthorization bill. Given the lopsided House vote, it seems unlikely the Senate will reinstate the restriction. It appears that the WSJ story was prompted by efforts to publicize the fight by the National Small Business Association, but for the average citizen or politician, this would appear to be an esoteric policy fight.

OC learns to do tech entrepreneurship

2008-06-30T16:40:00.000-07:00

This week I’m attending a 2-day conference on university-industry relations at the West Coast home of the National Academies of Science and Engineering, back at my alma mater, UCI.

The event is taking place at the Arnold and Mabel Beckman Center — named using the profits from Beckman Instruments, founded in 1935 to make instruments to help grow oranges. Beckman Coulter is now a $3 billion/year company based in nearby Fullerton.

One of the sessions was about UCI’s efforts at developing a technology entrepreneurship ecosystem for Orange County, which has a population of 3.1 million but (unlike most urban counties in California) has no single dominant city.

My PhD studies at UCI overlapped UCI’s first push, with Accelerate (1989 to 1997), a SBDC that was a pale knock-off of the grandaddy of all public university tech hub programs, UCSD’s Connect. Having met Bill Otterson (the successful entrepreneur who created Connect and ran it until his death in 1999), the event planner at the head of Accelerate never had a prayer of duplicating 10% of that success.

Having been away from UCI since 2002 (except an occasional visit now and then and again), it is clear that UCI’s role in this innovation ecosystem has changed dramatically since then.

Phase II began in 2002, and was much more successful. In the Fall 2002, a new program called OCTANe was co-founded by a local executive (Dwight Decker, Chairman of Conexant) and a UCI’s vice-chancellor for fundraising (ex-MIT ILO head Tom Moebus). The program gets a couple of people from UCI, but otherwise is funded outside — from industry membership, program fees or from nonprofit grants.

Headed since March 2004 by Gary Augusta, the organization has an interesting (and perhaps unique) structure.

OCTANe: the parent, a 501(c)6 trade association
OCTANe Foundation for Innovation: a 501(c)3 nonprofit that focuses on educational opportunities for students and young adults
OCTANe Capital Management: for profit entity that provides seed funding for startups (and accrues the profits from those investments).

So far, it has helped create 27 companies, mostly in IT and biomedical. While that’s a small part of the 650 VC-backed companies, it’s a pretty good track record for this new program.

UCI is the informal hub of the OCTANe model, but UCI is more directly at the center of two other initiatives, which were recounted by Dave Schetter, outgoing head of the UCI tech transfer office.

One is the role that UCI plays (like other universities) in accelerating the commercialization of its own technologies through its tech transfer office. Starting from university licensed technology, UCI helps get funding from SBIR, STRR and UC Discovery Grants. To facilitate tech transfer, it also colocates researchers and startups in industrial space at the UCI research park. The acceleration model was a complex PowerPoint animation — I hope that the JPEG below captures some of it.

Second, UCI, its TTO and its entrepreneurship center are jointly running Orange County Business Incubation Network, a group of local incubators. Two already exist — Orange Coast Medical Ventures and Tech Coast Works (IT) — and two others in biotech and aerospace are planned.

Between successful startups (like Allergan, Broadcom and Conexant) and retirees, OC has capital available for startups. One legitimate question from the floor was how to create this sort of infrastructure for tech startups without such capital — which is not a problem that California clusters really have to worry about.

What does it take to create such a system? Augusta said three things: money, leadership and a catalyst to change the culture and create cooperation across boundaries and silos.

Product design and tech startups

2008-06-26T22:09:00.000-07:00

The Wall Street Journal had a special section this week on the importance of product design. It’s currently available free, although (as with other stuff on their site) you can never tell what’s going to end up behind the pay wall.

I’m becoming increasingly convinced of the importance of product design in both the practice and teaching of technology-based startups. In general, firms that enter a high-tech market tend to enter based on innovation (Dell being the obvious exception). And — particularly given Apple’s influence with the iPod and iPhone — good product design is increasingly important as a differentiator.

This means that startups often need good design skills to have their products noticed in the market. We tend to think of industrial design — the shape of the device, placement of buttons, etc.

But as a Mac programmer of nearly 20 years, we also got drilled into us the importance of user interface design — which Xerox got (e.g. with the Mesa, Alto and SmallTalk systems), Apple refined, but many Windows software companies long ignored. Apple has carried this over to the iPhone: the features that the iPhone has are not exceptional, but the ease of use is. And from what I’ve seen, Apple’s high standards for Macintosh UIs have carried over to 3rd parties on the iPhone.

This also carries over into education. Stanford has an acclaimed (and AFAIK unique) Design Division within its Mechanical Engineering department. SJSU locates its design department within the combined School of Art and Design. As with other SJSU programs (like EE, CS and business), the design program provides the largest share of local design workers due to our size and that majority of our graduates end up in Santa Clara County. The design students were quite prominent in our recent Silicon Valley Business Plan Competition.

My favorite story in the special section was about the new masonry field saw developed by MK Diamond. It sounded like an important breakthrough in portability and usability for a very mature product category. More interestingly, it had elements of user innovation in the story, which was interesting both because the users got involved in developing the technology — and also that the manufacturer listened.

Georgia Tech’s TI:GER program

2008-06-09T07:00:00.000-07:00

Last month, I was fortunate to be able to attend a workshop on technology management education that was held at Georgia Tech. The workshop emphasized the interdisciplinary nature of such education. Earlier I blogged about Harvard’s brand new technology commercialization program, instituted by Lee Fleming and his colleagues.

But with the press of work, I didn’t write up what was covered about our host’s program, the Georgia Tech TI:GER program. The program was initially funded by a National Science Foundation IGERT grant, but with the expiration of the grant is seeking replacement funding. Host Marie Thursby created the TI:GER program, based on her earlier program at Purdue.

Part of the importance of the program was transfer to other programs. One mechanism for that was the publication of a book of readings edited by Thursby and Gary Libecap. The chapters are among the readings used in the three semester-length core courses for the TI:GER students.

The TI:GER program is jointly sponsored by Georgia Tech and the Emory Law school. Each interdisciplinary team includes a Georgia Tech MBA student, two Emory law students, and a science or engineering PhD student (3rd or 4th year) from Georgia Tech. The learning goals for the team members are:

S&E PhDs: become aware of business and legal issues, produce a dissertation of technical merit and market relevance and (perhaps) commercialize their own technology;
MBAs, JDs: get experience in technical research setting; and
All: communication/team skills

So far the program has included 190 students in six years. One of the teams — Syzygy Memory Plastics, with Ph.D. student Walter Voit explaining the potential of the technology to make objects that will spring into any shape.

Tracking MIT tech startups

2008-05-31T07:00:00.000-07:00

If you’re looking for technology entrepreneurship, most academics think of MIT and Stanford. Both schools — driven more by the entrepreneurial attitudes of their engineering students than their business schools — have spawned thousands of tech-based startups. Of course, I’m a little biased (as an MIT alumnus and a keeper of the Silicon Valley myth of exceptionalism).

Looking for something else, I found the Xconomy blog, founded (by among others) by the former editor of MIT’s magazine, Technology Review. Although it’s organized as a blog, it’s more like an online magazine.

Last year, they had two really interesting articles on MIT entrepreneurship. One contrasted MIT and Harvard tech transfer. Another chronicles recent Boston tech startups (including a list of the startups).

On a lighter note, they profile the entrepreneurial activities of the successful MIT blackjack team fictionalized in the movie 21 (based on the book Bringing Down The House).

There are plenty of blogs about Silicon Valley tech entrepreneurship — led by VentureBeat and ValleyWag. Xconomy seems to be the only comparable Boston blog, and as long as MIT alumni continue to create tech startups, one worth monitoring.

Harvard’s tech startup successes

2008-05-24T08:00:00.000-07:00

While Harvard students, Bill Gates co- founded Microsoft in 1975, and Mark Zuckerberg founded Facebook in 2004. There weren’t a lot of home runs in between. Unlike the little science school down the road, Harvard doesn’t have a lot of big success stories.

The small business column of the Wall Street Journal has a long feature on today’s incipient entrepreneurship among current Harvard students, encouraged by Zuckerberg as a role model.

Based on my own experience and research, my sense is that student (or you alumni) entrepreneurship succeeds based on four factors:

student intelligence/ability
cultural attitudes surrounding the nascent entrepreneurs — family, friends, faculty, fellow students, local industry. (This is Stanford’s secret weapon, dating back to the Terman days).
formal preparation, such as technology entrepreneurship programs
external demand conditions, like starting a dot-com in 1998 or Web 2.0 company in 2004.

Harvard obviously has smart students, and now it has a real engineering school which (if it’s like other engineering schools) will be filled with faculty interested in solving real problems.

The WSJ talks about the culture issues. I hope that it’s more about empowerment — a belief in the possible through the Zuckerberg existence proof. But (as with a decade ago) there’s a hint that greed is a (the?) major factor. Wanting financial returns is fine, but great startups are created by entrepreneurs who want to change the world, not those who are counting the days to their IPO.

Photo by Scott Beale / Laughing Squid via Flickr.

SJSU's prize-winning tech startups

2008-05-22T23:21:00.000-07:00

Today we had the finals of the 6th annual Silicon Valley Business Plan Competition here at San José State. I was one of the judges that winnowed down the 69 entries to 17 semifinalists and then 8 finalists.

The first prize ($10k) was won by a low-tech business plan by a student from our undergraduate honors business program, but the second ($5k) and third ($1k) prizes went to high-tech plans from SJSU alumni:

nMotion plans to make a market in high-tech ads (since they don’t have a website, for now I won’t say more)
BayCom has developed a new text message-based reader response system it calls Dial-Send-Read.

Our four industry judges were excited by the plans, as each year we have worked to bring technology-based startup plans from other colleges across campus.

We historically have had a dilemma that I think many campuses face with their business plans. Business students can come up with well-executed plans for run-of-the-mill businesses (like restaurants), while engineering (or here, industrial design) students have great technology but a hard time making a business out of it.

As I saw at the Georgia Tech conference, the key to good technology entrepreneurship education (like real startups) is cross-disciplinary cooperation. Technology management faculty are re-inventing this wheel across the country every year.

While such cooperation is a common issue for all tech entrepreneurship, like other CSU schools we have a slightly different problem than Harvard or Georgia Tech. We’re primarily an undergraduate program: 75% of our 32,000 students are undergraduates. My sense is the matching process is a little tougher with undergraduates than graduates — perhaps because the graduates will have already experience some cooperation in the workplace.

TI:GER and the other programs are going for formal, structured cooperation as part of a curriculum. So far, we’ve gone for informal cooperation — matchmaking business students with students who have a good technology. I’d be curious to hear how others have done such informal (or at least extracurricular) cross-functional cooperation.

Japan's engineering shortage

2008-05-19T07:00:00.000-07:00

Saturday’s NY Times reported that Japan is now facing a shortage of engineering graduates.

Universities call it “rikei banare,” or “flight from science.” The decline is growing so drastic that industry has begun advertising campaigns intended to make engineering look sexy and cool, and companies are slowly starting to import foreign workers, or sending jobs to where the engineers are, in Vietnam and India.

It was engineering prowess that lifted this nation from postwar defeat to economic superpower. But according to educators, executives and young Japanese themselves, the young here are behaving more like Americans: choosing better-paying fields like finance and medicine, or more purely creative careers, like the arts, rather than following their salaryman fathers into the unglamorous world of manufacturing.

My friend Kaz Asakawa is quoted in this article:

The problem is likely to worsen because Japan has one of the lowest birthrates in the world. “Japan is sitting on a demographic time bomb,” said Kazuhiro Asakawa, a professor of business at Keio University. “An explosion is going to take place. They see it coming, but no one is doing enough about it.”

I suppose it’s good that the smart Japanese students want to be doctors. But finance? (As elsewhere, the willingness to pursue low-paying creative careers would be a function of personal and societal wealth that allow young people to live off the previous generation.) At least it’s not lawyers, who are a net drag on high tech companies.

The US has been facing this problem for more than a decade. How do we get more engineers?

One way is to persuade high school guidance counselors to send colleges more students.
Another is to relax immigration rules (such as the H-1b), which some (such as Norm Matloff) argue is just a way to reduce wages.
A third is to argue — as Hal Salzman and Lindsay Lowell did in Nature earlier this month — that quality is more important than quantity — what matters is proportion of the very best technical talent.

Yet another solution is to hand out lottery tickets — incentive stock options — in hopes that the prospect of a big payout while motivate people to take the risk of working for startups. Certainly that is the philosophy around here in Silicon Valley, in other high tech regions like Seattle and San Diego, and also among MIT alumni. This afternoon I finished reading 17 semifinalists on our business plan contest, and certainly there is no shortage of engineers around here who want to start their own company.

But I have to remind myself there are still engineers (or CS types) that just want a job. These are people paid not in founder’s shares, or qualified options, but in salary. The problem is that (as with nurses and teachers), the economy needs a lot of engineers, so raising salaries across the board is a lot more expensive than paying high wages to a handful of NYSE traders or MLB players.

As I noted in researching entrepreneurship in the Asian PC industry a decade ago, two key factors are cultural attitudes towards startups and the access startups have to the domestic market. But since then I’ve realized that a third crucial factor is labor mobility by technical workers: engineers are willing to start (or join) new companies if they know they can always get a job if the startup fails, whereas historically in Japan and Korea the best jobs were available to those who joined MNCs and never left.

So increasing the attractiveness of engineering as a career both increases the supply of would-be entrepreneurs and the safety net for those who try to be entrepreneurs but fail — not to mention the supply of experienced engineers available to be raided.

Harvard’s Inventing Breakthroughs and Commercializing Science

2008-05-12T22:26:00.000-07:00

At the Georgia Tech conference earlier this month, Lee Fleming of Harvard Business School described the program he created for technology commercialization.

The program he created is “Inventing Breakthroughs and Commercializing Science”. As the course explains its goals:

it gives you the managerial insights to increase the chances that your organization will invent a breakthrough.
it gives you an understanding of today's increasingly complex innovative landscape. …
the project will give you hands-on experience - as a member of a multi-disciplinary team - in the development of science-based technologies such as genomics, nanotechnology, information technology, and photonics.

As with the other programs discussed at the conference, the Harvard program has a strong interdisciplinary focus. In this case, the interdisciplinary nature is that of its students, who come not just from HBS, but also from science, engineering, medicine and other schools at Harvard. (Lee said a major issue is the divergence of class schedules, which Harvard plans to correct in Fall 2009).

The program (created with Vicki Sato and Kent Bown) has four modules: breakthrough innovation, opportunity analysis, analyzing prior patents, and developing cross-disciplinary teams.

As with most research schools, Lee is encouraged to bring his research into the classroom. The readings and cases (listed below) are largely based on his own work. In this day of Google, I won’t share his insight into the pedagogical purposes of each, but let instructors get that from the teaching notes.

I first learned of Lee from his paper with David Waguespack on open standards (which I cited in my own (co-authored) paper on open source communities). We met F2F when we served as discussants together for a panel at the 2007 Academy meeting, but I’m hoping we’ll be working together more in the future.

Lee also has a personal stake, in that his wife is CEO of a startup (with early stage funding) that is based on university licensed technology. So he’s living the technology commercialization life first hand.

Below is a bibliography of the materials presented by Lee.

Readings

Lee Fleming, “Breakthroughs and the “Long Tail” of Innovation,” Sloan Management Reviews, 49, 1 (Fall 2007), pp 69-74.
Lee Fleming and Matt Marx, “Managing Creativity in Small Worlds,” California Management Review, 48, 4 (Summer 2006), pp. 6-25

Cases
Here are the cases and the Harvard Business School Publishing case numbers.

“Aptekar’s Unlikely Spin; Commercializing an MRI Breakthrough from Atomic Clocks and Quantum Computing,” (N1-608-064). (Teaching Note: 5-608-078)
“Epodia: Demise of the HBS case-writing Monopoly?” (9-605-077) and “Linux, Supplement to Epodia,” (9-606-067). (Teaching Note: 5-607-104)
“HP Nanotech: Partnership with CNSI,” (9-606-045). (Teaching Note: N5-607-105)
“Infovision (A): Technology Transfer at Georgia Tech,” (9-605-064) and “Infovision (B): TI:GER Program Assessment,” (9-605-065). (Teaching Note: N5-607-102)
“Photovoltaic Breakthrough,” (9-604-034). (Teaching Note: 5-606-085)
“Barry Ricemen at NetD” (A) (9-606-090) and (B) (9-606-151). (Teaching Note: 5-607-107)
“SpudSpy,” (9-605-059). (Teaching Note: 5-607-103)

Teaching Notes without Cases

Module Note: “Key Concepts in a Module on Managing Invention of Breakthroughs,” March 19, 2007, (5-607-109).
Teaching Note: “The Process of Scientific Discovery”, (5-607-126).

Interdisciplinary tech management education

2008-05-07T08:02:00.000-07:00

Last Thursday and Friday, I was fortunate to be invited (due to a last minute cancellation) to attend a workshop at Georgia Tech on “Graduate Education in Technology Commercialization.” The annual workshop is funded by the Kauffman Foundation and hosted by Tech’s TI:GER program.

The major theme of the 24 hours was interdispclinary (or multidiscplinary) cooperation on campuses for delivering technology management education. One of the Thursday dinner dinner speakers were Mark Allen, Senior Vice Provost for Research and Innovation at Tech. Like Allen, I really liked the idea of combining research (generating new knowledge) and innovation (in this case, commercializing knowledge) under one vice provost.

The other dinner speaker was Andrew Comrie, who lists among is various titles “Director of Graduate Interdiscplinary Programs” at Arizona. He argued that the central mission of universities — knowledge creation and knowledge transfer — require creativity, innovation and entrepreneurship. Multidisiplinary programs allow creating new knowledge. One example is the professional science master’s, such as the combined biotech/business degree offered by UA and SJSU. The PSM — once a pet project of the Sloan Foundation — is inherently interdisciplinary, often including a business component to better prepare scientists for industry careers.

The discussion of the two specific curricula — at Georgia Tech and Harvard — were also clearly interdisciplinary in both the teachers and the students. (I hope to post more later).

An important point made by host Marie Thursby was that universities are organized around discplinary lines, but companies (and real world problems) are not. At some schools crossing disciplinary silos is harder than others. In my experience, it tends to be a double whammy — an overriding loyalty to disciplinary identity also crowds out an interest in solving real (often interdisciplinary) problems, as the Sidney Harris cartoon suggests.

The program continued with a panel discussion of the interdisciplinary technology management centers at various universities, starting with Ikhlaq Sidhu and Ted Schielman of Berkeley. The panel continued with Sherry Hoskinson (of Arizona’s McGuire Center) and Jay Kesan, who talked about their Certificate in Entrepreneurship and Management at Illinois.

Clearly much of the progress here is due to Kauffman funding teaching initiatives and transfer of best practices. But it also depends on the willingness of various faculty and universities to take a risk — going beyond the conventional disciplinary silos, norms and rewards systems — in search of programs that will best prepare students for work in a multi-disiplinary world.

Five business lessons for engineers

2008-05-05T14:47:00.000-07:00

At this year's TI:GER workshop, the most directly relevant talk was that by Ikhlaq Sidhu of UC Berkeley’s College of Engineering. Dr. Sidhu is an adjunct professor in the industrial engineering department and Director of the Center for Entrepreneurship & Technology.

Like most of the speakers, he talked about what his school has done in technology management education — in this case, 900 students taking 9 courses and/or involved in the VentureLab program. (The previous speaker, Ted Sichelman of the Berkeley law school, had enumerated the various interdisciplinary technology efforts across seven colleges at Cal).

As Sidhu explained his program, one figure jumped out at me — the supporting cast of 600 Silicon Valley professionals that get involved in the center’s programs. With names like Judy Estrin (former CTO of Cisco), such a supply would be impossible to find (let alone engage) anywhere outside Berkeley or Stanford (or maybe MIT or Harvard).

However, what I found most remarkable (i.e. worth remarking on) in his talk was a recap from the presentation he developed for last year’s workshop. Specifically, he identified five skills that today’s engineers need:

To know what problem is worth solving
To know how to acquire resources
To be able to communicate
To know how to work within and build global virtual teams
To be leaders in a global economy — not commoditized contributors.

This list is now driving Berkeley’s vision of how it trains engineers.

I personally found the list compelling for three reasons. First, all five relate directly or indirectly to business issues, not the technical side of engineering. That these are hard problems is exactly why I became a business professor (rather than taking the shorter path into C.S.)

Second, the list resonates with my 15 years at Palomar Software. While global teams are recent (and a bit of a fad), the other four are the issues that my cofounder and I — two engineers in a garage — confronted when running our software company 20 years ago. Neil and I were both above average communicators, but the accuracy, precision and completeness of communication by our staff was an ongoing challenge. While Palomar eventually found problems worth solving (that were not commoditized until 2001), during the first 7 years our choices were severely constrained by lack of resources.

(In 2000-2002, when we were working with HP and its other onshore and offshore printer driver development partners, we had to confront the global teams issue, complete with 8 p.m. PST teleconferences to Bangalore).

Finally, commoditization is an issue that’s been a central theme of my Silicon Valley-oriented blog. If technology is a commodity, it will be done in India, China, or wherever the cheapest location is this year: the only economic reason to train and employ American engineers is to create value that can’t be created elsewhere.

BPC: beyond the university

2008-05-02T11:58:00.001-07:00

I’m attending a workshop on technology commercialization programs at the Georgia Tech Ti:GER program, funded by the Kauffman foundation.

One of the speakers, from the Arizona’s McGuire Center for Entrepreneurship, mentioned one of their successful startup teams, LenSense. The company has a technology for camera phone zoom lenses that they hope to someday have embedded in 25% of the world’s phones.

What caught my eye was not that they were a mobile phone technology (an area of great personal interest) nor that they met with local angels (apparently as part of the annual business plan competition).

What was interesting was that the team entered a real (i.e. non-university) business competition — and ended up finishing in the top 12 (the only school team to do so). The competition, Mobile Rules! funded by Nokia, awarded a series of prizes in March.

Unfortunately, they didn’t finish high enough to get publicity out of Nokia, and it’s not clear what they won other than the experience. But it seems this is something that all technology entrepreneurship programs should consider — seeking out real world competitions, if nothing else to enable the students to enter such competitions again after they graduate.

CFP: Technology Management education

2008-04-14T22:45:00.000-07:00

This CFP on technology management education is from the AMLE, top management education journal. For the purpose of this blog, it’s important to note the link back to a 2004 special issue on entrepreneurship education. See the complete call for papers.

Call for Papers

Academy of Management Learning & Education

2009 Special Issue

NEW DEVELOPMENTS IN TECHNOLOGY MANAGEMENT EDUCATION

Guest Editors:

Phillip Phan, Rensselaer Polytechnic Institute
Donald S. Siegel, University of California, Riverside
Mike Wright, University of Nottingham

The teaching of technology management has a long history in business schools. However, the nature of such education and its focus has changed in recent years. For example, the emphasis on entrepreneurship, venture capital, and emerging technologies has reinvigorated the discipline and brought new issues and new educators to the forefront. The rise of a knowledge-based economy has also focused greater attention on innovation and the commercialization of intellectual property. New institutions (e.g., incubators and science parks) and new organizational forms (e.g., research-based joint ventures, and technology alliances) have emerged that may have profound effects on technology management education. Non-profit institutions, most notably, universities and federal laboratories, have become much more aggressive in protecting and exploiting their intellectual property. They are also working much more closely with industry and government.

...

What are the implications of recent advances in entrepreneurship education (e.g., the 2004 AMLE's Special Issue on Entrepreneurship Education) for research on technology management education?

...

Submissions should be received by September 1, 2008 and should be accompanied by an assurance of originality and exclusivity.

About this blog

2008-04-14T22:35:00.001-07:00

This blog is intended to explore the intersection of engineering and entrepreneurship education. Given my business card says “innovation and entrepreneurship” and my background running a startup software company, it’s a longtime interest.

Since I have other blogs, I’m not sure how much time this one will get, but it has an obvious focus distinct from the others. So we’ll see.