Some tech startups are more high-tech than others

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

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

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

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

Judges at KGI 2013 Business Plan Competition: George Golumbeski, Stephen Eck, Bob Curry. Not shown: Liam Ratcliffe, Paul Grand

Our KGI business plans (from my ALS 458 class) were all about commercializing patented (or patent-pending) biomedical technologies (therapies, diagnostics, devices) developed by top research institutions such as Caltech, City of Hope, and USC. The Kravis competition included several IT concepts, some low tech businesses, and AccuMab, a cancer diagnostic company from my KGI class.

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

What is dramatically different about our students projects was that (with one exception) is that they’re highly capital intensive, requiring $5 to $50 million in outside funding. For example, the winning team — using technology from Children’s Hospital Los Angeles to repair Shortened Bowel Syndrome — estimated it needs $20 million in equity and $5 million in government grants to get to market. This project — like many others — is building on millions of dollars of NIH/NSF/foundation grants already received to develop the basic science. There is a certain minimum scale required to get FDA approval and thus generate first revenues.

2013 winning KGI team — Hadi Mirmalek-Sani, Porus Shah, Shrina Shah, Rajesh Pareta —
with Bob Curry, chair, KGI Board of Trustees

Think about the story of Mark Zuckerberg, who launched The Facebook in early 2004 and took its first outside investment (of $500k) later that year. (Yes, they didn’t monetize initially, but still they created a compelling product and reached a million subscribers using the founders’ money). The iPhone app startups were launched for tens of thousands of dollars: Rovio had 40 million Angry Birds users before they took their 2011 Series A investment.

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

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

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

Developing science and engineering majors

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

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

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

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

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

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

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

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

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

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

Will high growth bring a failed marriage?

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

Still, last week I was surprised to read a New York Times blog posting that suggested that the outcome is predetermined. The article was written by a former entrepreneur who runs an entrepreneurial training program in suburban Atlanta:

Balance? Don’t Believe the Hype
By Cliff Oxford

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

Fast growth is a 24/7 proposition. It is not just the hours you put in at work; it’s that it owns your head. You think about work in the shower and on vacation, and you get lost in all of the ideas while you are sitting at dinner. It is exciting and dangerous. Of course, the collateral damage on the big three — family, health, and faith — can be disastrous.
…
Now I work with hundreds of fast-growth entrepreneurs who struggle to find the balance they read about in airplane magazines as they zip off to see the next customer, and I see these tragedies happen over and over. I tell fast-growth entrepreneurs not to get married while they are in fast-growth mode. They always do.
…
I thought I could help entrepreneurs understand that balance is a fantasy — a good fantasy but still fantasy. … I have been told that this is about the same success rate for heroin users in rehab.
…
Here is the deal: Fast growth means all-in, 24/7 for the mission and success of the company. Balance is snake-oil that says it can all be pretty and nice. It can’t. But I think setting boundaries can help.
…
Boundaries are trade-offs, and entrepreneurs are good at negotiating trade-offs. Balance is propaganda that sells well but is a cruel hoax that will continue to write tragedies.

The author’s viewpoint seems to be strongly colored by his own divorce and regrets over his loss of time with his (now adult) daughter. I have my own regrets over poor work-life tradeoffs, but (perhaps with more distance) am less inclined to generalize.

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

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

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

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

The opportunity cost of entrepreneurial education

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

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

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

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

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

However, I find some of Wadhwa’s advice more than a little contradictory:

I believe very much in the value and importance of education and consider the bachelors degree to be a basic requirement for success in business — whether you are working for someone else or starting your own. If you don’t have this, you are at a severe disadvantage because you have too many gaps in your knowledge and you have not had a chance to develop important social and learning skills.
…
My team at Harvard and Duke looked into the backgrounds of tech entrepreneurs found that, on average, MBAs start their companies 13 years after graduating. Subsequent research revealed that what makes entrepreneurs successful is their experience — including previous successes and failures; management teams; and luck. Next on the list are professional networks and education. 

Yes, it’s redundant for someone with a good undergraduate business degree to get an MBA — whether trying to be an entrepreneur or not. Those with undergraduate business degrees may be well-suited at starting a franchise or retail firm, or (after many years’ experience) of being the finance or marketing cofounder of a tech startup.

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

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

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

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

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

The customer is always right

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

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

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

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

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

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

Perhaps — as with a political candidate — he’s trying to dispel any doubts in his base, rather any attempt to appeal to the average buyer. Still, it seems to be a counterproductive strategy; as Nicholas Thompson, a New Yorker editor wrote today:

It seems there are a few things we can learn from this:

• Never escalate a fight about a negative review, unless you're certain to win. The debate has driven a lot of people to Broder's initial review. And there's nothing in that review, or the rest of the debate, that's going to make anyone want a Tesla car.
• Twitter is a temptation. Musk's fierce initial response is artful. The first sentence is clipped and sharp. But, even when he first put it out, did he think that "fake" was the perfect word? Or was it just that it's shorter than, say, "flawed"?
• If your company has a celebrity CEO, use him carefully. Musk has a lot of power, in part because of his position of social media. But by personalizing this battle, he's done real harm to both his brand's and to Tesla's.

But then Musk has a habit of shooting the messenger, exaggerating and even lying in his attacks on reporters who disagree with him. A VentureBeat reporter wrote nearly three years ago:

I don’t believe Musk twists the truth out of malice. Rather, at this point, it may well be out of habit. He’s so used to getting his way that future possibilities just seem like present realities to him. And pragmatically, it’s worked. Whenever Tesla has been in a bind, Musk has spun his way out of trouble.

It’s a character trait of which elements are found among many successful entrepreneurs: the compelling presentation of an alternate reality in the hopes that so many people will sign on to the vision that it comes true. Apple CEO Steve Jobs, for example, is so masterful at this that people speak of his reality distortion field. But Musk may have taken distortion to extremes.

The old Steve Jobs (Jobs I) was like that: a good friend went to work for Jobs (at NeXT) and told me that everything I’d heard about “reality distortion field” was true.

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

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

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

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

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

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

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

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

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

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

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

When entrepreneurs aren't "the next Apple"

Big company exec-turned-Forbest columnist Steve Faktor posted a funny column Friday that says “Shut Up, You’re Not Apple”.

The introduction is as provocative as the title:

At first, it was funny to hear insurers, IT firms, and startups with no revenues compare themselves to Apple. Since the iPod launched in 2001, I’ve seen hundreds of presentations that liberally use “learnings” from Apple. 1) The word is LESSONS, not “learnings”, my Hillbilly friend. 2) The comparison feels as fresh as that Michael Jackson impression your spouse has been doing since you started dating. 3) Drenching slides (or products) in an iconic brand’s juices won’t transmit innovation, like some benevolent plague. If that were possible, we’d never stop harvesting and packaging Brangelina extract. It’s time for an intervention. Here’s why brands must find their own voice (and scent)…and keep those synthetic Apple fumes from turning into laughing gas.

The ‘why you’re not Apple’ checklist:

I know I’m not alone. We’ve all been to the same Apple-laden meetings…er, orchards. How did those comparisons work out? Did that company become the most valuable in the world? Did that product become iconic and emulated by every company in Korea? Or, did it live and die in its sad PowerPoint tomb.

Using Apple as a model is the business version of ordering jeans after seeing them on Kate Upton. They might not look the same on you. Like Kate, Apple is a unicorn. It defies so many conventions that deconstructing its lessons is silly, unless it’s the last thing between you and a lonely Saturday night at Harvard Business School. To quote my friend and fellow innovator Stephen Shapiro’s book, Best Practices Are Stupid.

It’s not that your company can’t be Apple. It’s that your company absolutely, positively will never be Apple. I’m not discounting your skill or vision. I’m simply acknowledging that Apple’s success is a witch’s brew of leadership, timing, technology, and culture. All those variables can’t be replicated.

He then offers a checklist of factors that it would take to be Apple: a visionary CEO, iconic products, $50b in cash, a million fanboys, and #1 or #2 in most product categories. Yes you can mention Apple in your analysis of the industry landscape, but “as the unicorn in the room.”

As someone who’s studied Apple for almost 30 years, the reality is not just that Apple is one in a 100 million companies: it’s that Apple’s run from 2001 (the first iPod) to 2007 (the iPhone) to 2010 (the first iPad) — will never be repeated in the company’s history. (Or as Faktor put it, “Even Apple won’t be Apple forever.”)

I remember when Neil and I started our company in 1987, we wanted to be the next Hewlett-Packard. Instead, we never got more than 15 employees, a few million in revenues and lasted only 17 1/2 years. Wanting (or posing or emulating) doesn’t bring success: satisfying some need better than anyone else — in a way that’s hard to copy — is what bring success.

When they started in a Los Altos garage in 1975, Steve Jobs and Steve Wozniak didn’t imagine they would have a market cap bigger than IBM. Instead, they were just trying to bring a better PC to market than any of the other hobbyist-hackers out there. Customers didn’t flock to the Apple II, Mac, iPod, iPhone or iPad because Apple wanted to change the world, but because they had a product that no one else had.