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Written by Jay Turo on Monday, June 27, 2011
"….But What I do That Defines Me" – Batman
The recent capture of notorious Boston crime boss Whitey Bulger paints in sharp relief this brave new world of ours – with its full transparency and ultimate accountability for all of one’s deeds – good and evil.
Of particular interest was how, after 16 years on the run, the authorities were finally able to catch him.
He had evaded detection at least in part, not unlike the very infamous man who was once immediately above him on the FBI most wanted list, by eschewing the kinds of modern conveniences that most of us take for granted – cell phones, email accounts, or even driving a car. By so doing, Bulger avoided the electronic “paper trail” that is so easy to follow with just an Internet search here and there.
Whitey’s problem was that his girlfriend couldn’t quite manage to live the fully reclusive, offline life. She enjoyed normal things – like getting her teeth cleaned and her hair done – that involved public interaction. Knowing this, the FBI hit upon the bright idea of a public service ad aired during some popular daytime soap operas, and acting on a called-in tip, both Bulger and Grieg were captured and behind bars within a week.
This is a good thing for law enforcement for sure, but what about privacy? It seems that in our always-on, every syllable saved forever world of digital communication - it is truly impossible to hide. Probably even more troubling, often the very act of trying to hide is viewed as worse signaling than the secrets themselves!
I am of two minds on this issue. On the one hand, I am with the privacy advocates who say that even when modern media allows for the capture of a very notorious criminal, that Orwellian Big Brother fears are unsettling to say the least.
But before his publicists got to him, I also respect Mark Zuckerberg’s general take on the matter, namely that if you are so concerned about certain things that you do or say becoming public, then maybe you shouldn’t do or say those things.
You see, there is this little thing called reputation, and it is the ultimate currency in our online world.
Now, there always will be that small but very vocal minority whose main intent in life it seems is to “flame” and the more public the success, the more virulent their attacks. If you in any way doubt this, ask any celebrity, athlete, or politician about the lies, stereotypes and just downright viciousness they are subjected to online.
Adding to this, the nature of the Internet only amplifies that most unfortunate component of human nature – namely that we remember and highlight negative acts much more intensely than positive ones. Mirroring this, on the Internet the flames and the complaints are heard (and indexed by the search engines) in excess to their statistical importance.
Even with this important caveat, there remains great power and efficacy in that bright reputational spotlight that is our online, socially networked world.
Do the right thing, consistently and over time, and the world notices and rewards you.
Whether that right thing is being a power seller on eBay with thousands of positive ratings, a product on Amazon with dozens of positive reviews, an online blogger with thousands of dedicated readers, or an entertainer with millions of Twitter followers, the wheat online does get separated from the chaff.
And as for what all this means for the bad guys, well go ask White Bulger in his new holding cell if you have any doubt.
Written by Jay Turo on Monday, June 20, 2011
"You can’t start a fire worrying about your little world falling apart" – Bruce Springsteen
The financial panic of 1873, which set off a severe nationwide economic depression that lasted for 6 years, included The New York Stock Exchange closing for 10 days, 89 of the country's 364 railroads going bankrupt, and unemployment as high as 14%. In the midst of the panic, a gentleman by the name of Thomas Edison started a company called General Electric. You may have heard of both of them.
The Great Depression of the 1930's is even scarier in statistics than in legend. Industrial production fell by 45% between 1929 and 1932. Homebuilding dropped by 80%. 1,000 of the nation's 25,000 banks failed. US GDP fell by 30%.
And during these dark days, DuPont created new products and industries including rayon, enamels, and cellulose film. RCA invented television. And a little company called IBM started pouring research dollars into something called the computer.
The 1970's are commonly remembered as a dark period for America – stagflation, negative stock market returns for the decade, and hits to the national psyche including Vietnam, Watergate, and the Hostage Crisis. It was also the era that 2 ambitious and visionary young men named Bill Gates and Steve Jobs got their start.
Similarly, the severe global economic recession starting in 2007 resulted in American losing more than 25% of its collective net worth, the stock market declining more than 45% from its high, and the housing market down on average nationwide more than 30% from its 2006 peak.
And oh yes, during this last financial crisis the next generation of technology companies saw their most rapid growth, with Facebook, LinkedIn, and Twitter growing from somewhat novelties into part and parcel of global life and business, and fast on the path to other-worldly returns for their early investors.
Two main points to be made here:
1. Adversity creates opportunity. Always has, always will.
2. The world can easily be separated into two kinds of people – those that comment and complain on how things are and those that do something about it.
Since time immemorial, the town criers - those that comment and complain - have been heard more clearly because it is only human nature to be more easily scared by negativity than it is to be inspired by possibility.
Yet luckily for all of us, those that really matter aren’t wired this way. The Thomas Edisons and Thomas Watsons and Mark Zuckerbergs and Reid Hoffmans amongst us always - paraphrasing Robert Kennedy – invest their time dreaming and doing things that never were and saying why not?
The question, of course, is what about you? Will you be on the couch with the criers and the critics? Or will you be in the game with the dreamers and the doers?
Written by Jay Turo on Monday, June 13, 2011
The best entrepreneurs and executives are those that are able – through both great training and great talent – to move efficiently and profitably from ideas to execution, and then from execution back to ideas and then back to re-focused execution.
The entrepreneurs to avoid are those overly focused only on ideas or only on execution.
Those focused too heavily on ideas don’t quickly and rigorously enough subject their ideas to the rumble and tumble of the marketplace. These are the great “idea men” who never get around to actually executing upon a plan.
Those entrepreneurs overly focused on execution are often too slow to react to fast-changing technological, marketplace or competitive conditions and thus miss adjacent, easy-to-see opportunities.
No, the best entrepreneurs and executives are both creative and task-focused, but not too little nor too much of either.
They make plans and they work them, but are not slaves to them.
They understand that great businesses are inspired by ideas, but their success is counted in cash.
They are, in essence, “idealistic capitalists,” believing that the best ideas, the best products, and the best services are also those that make the most money.
Entrepreneurs running businesses like these are few and far between for sure. But more often than not, they demonstrate five tell-tale signs, including:
5. They are Risk-Takers. The proper goal of an entrepreneur is not to run a small business in the common sense of the term. With the fear of sounding harsh, the best of them are minimally concerned with protecting their own "middle-class" lifestyles.
Rather, they understand that achieving greatly requires daring greatly, and that the worst outcome is not necessarily a flame-out failure, but rather a muddling along driven by too conservative managerial decision-making.
4. They are GREAT Teammates. Great entrepreneurs are not simply great technicians, but rather have the gift to attract, cultivate, and empower a multi-disciplinary, faceted, and well-meshed leadership team.
And this team together, in turn, creates a culture of achievement. The tone of this culture might be, and usually is, set by a charismatic founder. But its enduring success depends on how it can be replicated and maintained as the company grows, and as its founder's role becomes less pronounced.
3. They are Goldilocks-ish. While there are certainly outliers in this regard, the best entrepreneurial managers are not "too hot" nor "too cold."
They have had a few past successes and maybe a failure or two, and are now in that sweet spot between experience and wisdom, and youthful hunger and energy. They know what they know yet they still have the intellectual and emotional flexibility and curiosity to change and grow.
2. They are Technologists. Well-led modern companies leverage technology -- from CRM and ERP to SEO and SEM to scenario-planning and simulation -- to "best practice" their business models. Their leaders understand that "IT" is not just the domain of a geeky guy to call when computers can't boot up, but is rather the crucial skeleton of the organism of their business.
1. They are Pig-Headed, Determined, and Willing to Sacrifice To Be Successful. More than anything else, great entrepreneurs work hard.
They work nights. They work weekends. They work when they're sick. They work when they're tired. They work and work and work and then to paraphrase the great (and famously hard-working) golfer Gary Player, "The harder they work, the luckier they get."
Look for this quality above all else -- it is almost always the best predictor of the presence of the other qualities on this list, and of entrepreneurs that build companies that grow and last.
Written by Jay Turo on Monday, June 6, 2011
Arguably the best book ever written on the power of entrepreneurial capitalism - The Rational Optimist by Matt Ridley - should be required reading by anyone interested in protecting and defending the free enterprise way of life.
In an awe-inspiring tour de force of exposition, Mr. Ridley takes the reader all the way back through human economic history.
Back to the 1st entrepreneurs who discovered fire and the copper axe, through the Phoenicians, through the great trading cultures of India and China before their long (and government induced) sleeps, through the age of the Medici and the early Dutch wellsprings of modern trade, through the 19th Century Industrial Revolution in England and Scotland, to the American Century and the dawns of the computer, information, and communication ages.
And from this tale of human history, Ridley makes the overwhelming case that the 2 key drivers of human prosperity since time immemorial have been innovation and trade.
Building on the seminal work of Clayton Christensen in the Innovator’s Dilemma, Ridley describes the innovation process and its economic value-add in very prosaic terms.
He points to innovations like Amazon’s ongoing transformation of the ecommerce experience – none of which would be considered breakthrough technology, but which in their aggregate have brought unprecedented consumer productivity gains.
And to eBay, whose core innovation was NOT the idea of online auctions as much as it was that a robust exchange of buyers and sellers could be attracted via pay-per-click advertising.
Ridley’s point is that the innovation that creates wealth - versus innovation that looks good on an academic’s or a politician’s whiteboard - is simply the abiding power of Adam Smith’s invisible hand made real.
Namely individuals and small teams tweaking the way things are done only so slightly for one purpose and one purpose only – to make a buck. Or a yuan. Or a rupee. Or a few pesos.
And because now for the first time in human history, there are billions of people thinking and working and collaborating in real time toward this basic human desire, the result is more prosperity for more human beings than at any time ever.
AND MUCH more excitingly, now that all of this entrepreneurship and innovation can be shared worldwide in an instant at the click of a button, the statistical odds are overwhelmingly in favor of everything just getting better!
As in more prosperity, better education, more safety from premature death and disease, and yes even more happiness.
For all of us, for our children, and our grandchildren.
As Mr. Ridley points out, most of our grandparents had standards of living not much greater than that of Zambians today. And by corollary, if current trends continue, the grandchildren of today's Zambians will have standard of living's equal to those of ours today.
And as for our grandchildren, well they will live in a world, like our grandparents before us, that we can only dream of.
And as Mr. Ridley proves conclusively in this wonderful book, for all of this it is the entrepreneurs and the innovators that we have to thank.
So if you are serious about participating in the great 21st Century boom, read Mr. Ridley’s book.
And thank your local, neighborhood entrepreneur. For it is he and she that are driving it.
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Written by Jay Turo on Tuesday, May 31, 2011
As evidenced by the recent $8 billion IPO of LinkedIN and the recent talk of a Facebook IPO being valued at greater than $100 billion, social networking is clearly one of the great communications revolutions in history.
AND it is driving the most revolutionary change in startup and small business financing since the birth of the venture capital industry in 1957.
That change is called crowdfunding.
If you are serious about starting and / or backing a new company, it is one that you MUST understand or you WILL fall behind.
Written by Jay Turo on Monday, May 23, 2011
The typical wisdom regarding the appropriate financing course for a new company goes as follows:
1. An entrepreneur starts a company in classic "bootstrap" fashion - with a combination of sweat equity and their own financial resources. This usually consists of personal savings, credit cards, and small loans from relatives (Mom, Dad, Uncle Bob, etc.).
2. Through connections, or through a chance meeting at a networking or social event, an angel investor hears the entrepreneur's story, likes them and their technology, and on the spot, writes a check to provide the company with its first outside financing.
The angel then introduces the entrepreneur to his or her wealthy friends and business connections who, based on the good reputation of the referring angel, also invest.
3. With this seed capital – more often than not totaling between $100,000 and $1,000,000 - the company accomplishes a number of key technical milestones, gets a beta customer or two, and then goes on a "road show" to venture capitalists around the country for capital to “scale” the business.
This venture capital financing - usually between $3 and $10 million - is the first of a number of rounds of outside investment over a period of three to five years. With this capital, the company propels itself to $50 million+ in revenues, and to either a sale to a strategic acquirer or to an initial public offering.
4. With the exit, the entrepreneur and the original angel investors become fantastically rich and are lauded far and wide.
5. The cycle is then repeated - with the original angel investors now joined in their investing by the once impoverished but now wealthy entrepreneur.
6. All live happily ever after.
It all sounds wonderful and it is. The only problem is that it almost always a fairy tale.
What really happens is more like the following:
A. The entrepreneur pours their lives, their fortunes, and their sacred honor into their company- at great personal sacrifice to them, their families, and everyone connected to the enterprise.
B. A "black swan" investor appears out of the blue and backs the company - less impressed by the technology than by the talent, desire, and grit of the entrepreneur.
Technical progress and market traction are much slower and cost a lot more than anticipated. There are a lot of dark, hard days.
C. There is considerable internal debate around whether or not to solicit and/or accept outside venture capital. For most companies, it is simply a non-starter. Management has the wrong pedigree, is geographically undesirable, competes in the wrong industry, and/or has a business model that lacks "scalability credibility" with the venture community.
D. Usually unbeknownst to all, the decision around pursuing or accepting a venture capital round will be the most important factor in determining the investment return for the founder and the original angel investors in the company.
But here is the key – contrary to popular wisdom it is negatively correlated.
Yes, you heard me right – multiple research studies, including from the Kauffman Foundation, have shown that when you remove a follow-on venture capital round from a founder or angel investor-funded company, that expected returns skyrocket.
This is very counter-intuitive but critical insight for emerging company entrepreneurs and those that back them to grasp. It is driven by the following:
• The Best Metric for the Health of a Company is Cash Flow. By definition, companies that receive venture capital cannot fund their businesses from operations, and thus need to seek outside capital.
This leads to a lot of negative selection with venture capital - backed companies – whereby the sample of companies that need venture monies are by definition weaker companies.
• Venture capitalists Have Very Different Objectives than Angel Investors. Venture capital funds are usually 7 - 10 year partnerships whereby the general partners - the “VC” - manage the capital of the limited partners, usually institutions (endowments, pension funds, etc.).
At the end of the period, all profits and proceeds are distributed to the various partners on a pre-determined split. These splits are normally such that the VC needs to obtain a “highwater” return for their limited partners before they, as the general partners, see any return.
In practice, this creates a significant incentive for the general partners to hold on for an extremely large investment return, and to be reasonably indifferent regarding smaller (less than 3x returns).
As a result, the VC will often block a portfolio company from harvesting a very attractive, but not home run, return.
• Venture capitalists Cut Tough Deals. Venture capitalists for the most part are very nice guys and passionate about entrepreneurship, but they are not shrinking violets. And they hire very aggressive securities attorneys to represent their interests.
This combo all too often leads to various forms of deal unpleasantness, like cram-down rounds, liquidation preferences, and change of control provisions, which in turn, often lead to unhappy founders and angel investors even in somewhat successful exits.
My suggestions for the investors seeking emerging companies to back?
First, look for "one and done" financings - companies that need just one round of outside capital to propel them to positive cash flow.
Second, look for companies that have short and realistic liquidity (exit, IPO) timelines.
And third, don’t get star-struck by big venture capital interest in your deal. It is often a double-edged and very sharp sword.
Written by Jay Turo on Monday, May 16, 2011
At my company Growthink, our mission is "to help entrepreneurs succeed worldwide.” When I share this with folks, they often come back to me with "Who are these entrepreneurs that you help succeed?" Touché.
So who is and who isn't an entrepreneur?
I like Professor Arthur O'Sullivan's definition, from "Economics: Principles in Action" the best:
"An entrepreneur is a person who has possession of a new enterprise, venture or idea, and assumes significant accountability for the inherent risks and the outcome. He or she is an ambitious leader who combines land, labor, and capital to often create and market new goods or services."
Building on this, let's list out individuals that obviously fit this description.
First, the "obvious" entrepreneurs:
Individuals STARTING New Companies. New companies, startups of all shapes and forms, across all industries, all around the world. The classic "man (or woman) with a plan" entrepreneur.
In the U.S. alone, this represents the more than 6 million new businesses started every year, and the many, many millions more contemplated.
Thank heavens for all of them - according to a famous M.I.T study new business starts account for more than 2/3 of all net new job creation.
I was on a panel this last week with Mr. Marco Lucioni, CEO of Financiera Confianza, which focuses on making the kind of microfinance loans here in the United States that have completely transformed the jobs landscape in many developing countries.
Marco talked about the experience of Peru, a country where over 1.5 million jobs have been created from microfinance loans in the past 25 years, and the unemployment rate in that still very much developing country is now less than that here in the United States. Now that is the power of entrepreneurial job creation!
Individuals LEADING Small Companies. Per that M.I.T study, the other 1/3 of net new job creation comes from "gazelles," - the 641,000 U.S. firms with between 20 to 1,000 employees. They, along with startups, account for more than 62% of all private sector employment.
Anyone that has spent even a day at a growing, middle market company can literally breathe the entrepreneurship in the air. The best of them are led by deeply ambitious men and women walking the talk of American business.
Now very importantly, not all small business people are entrepreneurs. The key phrase in Professor O'Sullivan's definition when evaluating whether one is, or is not, is ambitious leader.
All of us know small business men and women - that while certainly possessing many wonderful attributes - it would be a big stretch to describe them as ambitious leaders.
The "Non-Obvious" Entrepreneurs
In some ways, those that demonstrate entrepreneurial leadership in the contexts of bigger business, philanthropy, and government are even more impressive than our obvious entrepreneurs. Examples include:
Individuals that are Accountable for Change and Growth at BIG companies. Into this category falls Executives like Wal-Mart’s CEO Mike Duke. Mr. Duke is certainly an ambitious leader with very, very significant accountability for risks and outcomes - $420 billion in revenues, 2.1 million employees - and to grow Wal-Mart even 5% annually requires creating a company every year that would rank in the top 100 largest companies in the country.
Individuals with Leadership and Change Responsibility in Organizations of All Types. The challenges of leadership and accountability exist in ANY organization taking on meaningful and challenging objectives.
Bono, arguably the world's best known philanthropic celebrity, is an entrepreneur on two fronts.
First, via his commitment to world-class creative output as the leader of the mega-rock band U2.
And he is an entrepreneur, via his unique effectiveness as an activist and spokesperson for big projects - third world debt relief, and AIDS and African development issues, among others.
Other examples of “philanthropic” entrepreneurs include Gary McDougal - former Partner at McKinsey - who later in his life re-engineered the broken Illinois welfare system and made it a model nation-wide.
Or how about Gail McGovern - President of the American Red Cross - thinks and works entrepreneurially everyday to expand the brand and effect of the organization beyond disaster relief.
Global Entrepreneurs. Now more than ever ambitious individuals worldwide strive to not just be entrepreneurs per the American way, but to take the best of what we do and how we think and add to it and candidly, then to crush us. And I say more power to them.
Because entrepreneurship as its essence is about creation, and the success of one entrepreneur ANYWHERE results in a better life for everyone EVERYWHERE.
Written by Jay Turo on Monday, May 9, 2011
Noted author and entrepreneur John Warrilow in his great new book, “Built to Sell: Creating a Business that Lasts Without You,” offers entrepreneurs and executives running companies of all sizes fantastic advice as to how to build businesses with high equity and long-lasting value.
Given that 70% of the U.S. economy is services, Warrilow has particularly insightful comments on the “hierarchy of revenues” and their relative equity value.
Warrilow ranks them from worst to best as follows:
No. 6: Consumables – As Warrilow says, “disposable items like toothpaste that customers purchase regularly but that they have no solid motivation to be brand-loyal toward.”
No. 5: Sunk Money Consumables - like razor blades, which are similar to consumables, but have the additional stickiness of the consumer investing in a platform in addition to simple brand-loyalty as being of higher stickiness and thus value than a “no cost of entry” subscription as is typical for most publications.
No. 4: Renewable Subscriptions - like magazines;
No. 3: Sunk Money Renewable Subscriptions - Warrilow flags the example of the Bloomberg terminal, where traders first buy or lease the terminal and then purchase an ongoing information subscription;
No. 2: Auto-Renewal Subscriptions - like #4 and #3 above, but with the aspect of forced continuity, or “good-til-cancelled” subscriptions.
Most subscriptions are now set up this way, but when the subscription is for something, like document storage, that is extremely difficult to switch / cancel once established, the value of an auto-renewal subscriptions grows exponentially.
No. 1: Contracts - the gold standard of recurring revenues, where a customer is locked in, by contract and by law, into an ongoing, recurring revenue relationship.
Warrilow’s full description of each of these types of recurring revenue and their relative merits can be read here.
How about Investors?
While Warrilow focuses most of his book and his analysis from the perspective of the entrepreneur and how to maximize their personal equity value, his analysis is equally valid for investors seeking emerging companies to back.
Businesses that are too project to project based, or based on hard to sell, hard to deliver, customized “solutions”, or too dependent upon the skills and relationships of their owners are almost always characterized by little equity and exit value.
In contrast, companies led by entrepreneurs that understand the hierarchy of customers and revenues - and are constantly moving their businesses ever upward on it - are the sellable, and thus the backable, ones.
Written by Jay Turo on Monday, May 2, 2011
Younger workers – the so-called Millenials or those born after 1982 - with all of their creative talent and intellectual savvy, and all of their flightiness and senses of entitlement - offer unique challenges and opportunities for 21st Century managers seeking to build well-functioning teams that work and win together.
Here are five best practices:
Written by Jay Turo on Monday, April 25, 2011
On Friday Silicon Valley Bank released a survey of 375 executives at startup technology companies in the 4 core venture capital investment sectors – Software/Internet, Hardware, Life Science, and Cleantech. Here is what they found:
Tech. Execs. Are Bullish. Two of three of them say that business conditions are better than they were last year, and three out of four expect things to get even better in the next 12 months. And listen up Washington - 83 percent of them plan to hire in the coming year. Hooray!
And They Believe as I do, that America’s Decline has Been Greatly Exaggerated. More than three in four of them see America as still the world innovation leader and the BEST place to start and grow a business.
In fact, the main competitive advantage that these startup executives see for doing business overseas is cost. On every other measure – quality of employees, the quality of the higher education system, and overall entrepreneurial mindset and culture, among others - the U.S. still comes out on top.
Money Still Makes the World Go Around. The top challenge listed across all respondents was access to financing. While things certainly are improving, these executives rightly believe that the amount of dollars flowing into emerging companies is still way too low.
The study notes that in 2010, venture capitalists invested $21.8 billion in 3,277 deals, and while this is certainly up from the death spiral period of the 2008-2009 period, it is still much less than the $30 billion average that venture funds were investing annually through most of the past decade.
And Government Just Gets in the Way. Next to money - and the related challenge of scaling operations for growth - the #1 challenge that startup executives point to is the regulatory / political environment.
Healthcare company executives in particular expressed deep regulatory exasperation:
“The FDA is by its very design killing innovation and entrepreneurship. Its very charter utterly excludes the notion of fostering development, opting instead for a one-way ratchet that can only lead to longer, more costly development cycles with no improvement in real safety for efficacy.”
“Our outlook is solely dependent on the FDA. We are doing well in Europe, but the processes for the U.S. FDA simply is broken and harming innovation.”
“I am 40 years in this business, and see an FDA approval pathway that will destroy our business, for no reason. I see futile attempts on our company’s part to obtain Chinese monetary support, while we give away our technology.”
In Sum, Startups Still Make the American Business World Go Round. As its executive summary notes, “High growth small business startups are the principal driver of net new job creation…they are responsible for creating entire new industries — from IT and semiconductors, to biotechnology, to online retailing, social media and cloud computing…”
“They improve our quality of life, by expanding access to information, providing higher quality goods and services, improving health care quality and access, and fostering a more sustainable environment and U.S. energy independence.”
I don’t think any of us could have said it better - the entire survey can and should be read here.
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