Ten Tips to Manage Growth

Recently, I was asked by the Washington Business Journal to provide my ten best hints on managing growth in an emerging business.  You can find that article here.  I believe that the challenge of growing a business past the start up phase is actually much harder than appreciated.  But, there is much less in the startup media about these issues.  Actually, what happens after “acceleration” is more important and much more littered with failure.  With that in mind, here are my ten keys to meeting the challenge of growth.

1.       Match Money to Growth. Corporate finance is not about getting a particular type of financing as a way to signal your importance. It’s about getting capital that has the right growth expectations for your business’ likely path.  Money is only a way to keep score once it’s yours.  Until then, it’s a resource to get the things you need to succeed.

2.       Avoid Burning Hair.  If everyone at your company is running around with their hair on fire you need to get organized.  Hysteria might be fun at a rock concert, but in order to build a lasting company you need to be managing for a marathon, not a sprint.

3.       Control Culture to Control Your Company.  Once a company grows, a level of corporate governance will be required – particularly if there are outside investors involved.  Corporate governance shifts control away from the founder towards the Board of Directors.  However, true control remains in the hand of the founder.  Companies that do not have consistent culture will usually fail – and culture comes from the founder’s values and work style.

4.       Have a Clear Vision and Share It.  As a company grows, all involved need to know why they are coming to work each day.  Failure to come up with a compelling vision that engages employees, other stakeholders and the broader community, is often the first slip in a downward spiral.  People like to win – together – but they need to know what game they are playing.

5.       Love Your Customer.  Although I would wish this was obvious – for many it is not.  While technology is exciting, and advertising can be clever, the reality is that if you don’t make your customers feel important to you, they will find someone who makes them feel that way.  Recall that a business without customers is a hobby.

6.       All Businesses are Family Businesses.  The prevailing attitude in corporate America is that family is something that happens outside of the business, at best during “family time.”  However, the issues of family, particularly in closely held businesses, often color behavior.  Understand the sacrifices that family members make for the business’s success – at least appreciate that questions of “is it worth it?” will inevitably come down to how the folks at home feel not just the team at work.

7.       Be Ready to Get in the Way.  If you are successfully growing your business at some point you will become annoying to other larger companies.  Be ready to survive the onslaught.

8.       Know Your Number.  If you overcome being annoying to your competitors, you will next become alluring.  Know what your number is – what your price is to sell.  Develop a sense of what your business is worth to you, both psychologically and as a financial asset.  The best time to sell is when you are not intending to. So, have a view, even if you don’t think you are ready to sell.

9.       Always Look Over the Horizon.  It’s not the things that you can see which will kill your business – it’s the things you can’t.  Your most likely competition will come from well capitalized and larger companies (see being annoying). Don’t assume that they are all stupid and slow moving.  And, never under estimate the possibility that someone will out innovate you.  Hard as it may be to believe – there are some folks out there that could be smarter.

10.   Don’t Kill the Milk Cow.  The competitive advantage that drives a business will eventually be successfully combated by others (see Microsoft or Eastman Kodak).  Do not hold on too long – be ready to advance to the next innovation while there is still money in the first.  Nimble innovation is the way to succeed in the 21st century, particularly in technology.

Morality, Capitalism and Empathy

Earlier in the week I did a panel discussion on “empathy in business” with a great group of co-panelists: Angel Cabrera, President of George Mason University, Bill Drayton, CEO and Founder of Ashoka Innovators for the Public, Carly Fiorina, formerly CEO of HP and currently CEO of Carly Fiorina Enterprises, and Julie Rogers, President and CEO of the Eugene and Agnes E. Meyer Foundation.  It was a very interesting conversation, and one that showed pretty clearly that as you triangulated on business and society from various political angles and viewpoints there was a common thread.  Empathy, the ability to acknowledge and shape your message and attitudes by how you affect others around you, was a key competency for entrepreneurs, managers and leaders to possess to succeed in business and wealth creation.  It is not a value; it is a tool, like reading, writing or computer literacy.

This morning I read with more than a little interest Steven Pearlstein’s piece in the Washington Post, asking if capitalism was moral.  Steven is a friend and a very smart guy, and his analysis was balanced and right on point.  Morality with respect to capitalism, it seems, is very much shaped by your political viewpoint.  To generalize: the right leaning viewpoint is that morality is found in the unencumbered freedom to generate as much wealth as possible; and the left leaning viewpoint is that morality is found in redistributing wealth to provide a middle class livelihood to as many as possible.  With such a disconnection in what constitutes morality, it’s not surprising that it’s hard for politicians and citizens to agree on a common course of action as we struggle with our nation’s economic future.  By now, of course, this blog has waddled into “class struggle” and your hackles are up.  As Michael Buffer likes to say, “Let’s get ready to rumble!”

And, that is the point.  When you start to talk about issues of morality and empathy, the default tendency that most of us have these days, is to define the conversation in terms of politics and class.  But, then the conversation often breaks down into name calling, shouting, and overall unpleasantness.  It’s not surprising that it does.  Conversations about limiting freedoms, picking winners and allocating wealth are always going to be hard.  These are at best difficult topics.

However, in the US, unlike other societies, the conversation is made much more difficult because of a particular approach we take to politics and economics.  Elsewhere in the world, politics and economics are seen as highly interactive and interrelated – you can’t talk about one without the other.  Politics is about allocation of wealth and opportunity, and economics is the mechanism for discussing how allocation occurs.  Here in the US, we have a different approach, one that stretches back to the 1930s, and perhaps earlier.  We are strongly encouraged to separate our politics and economics.  The pressure to do so is intense and pervasive.

I am often struck in my teaching how often my students will say that an unencumbered free market economy is a core value of the United States.  Yet, in the same conversation they will talk about building their careers in industries that are shaped by, and benefit from, government regulation, government R&D spending and a government supported legal system that reinforces wealth creation and retention.  The pressure to separate politics and economics is also seen when someone suggests that politics is about allocation of wealth and opportunity and they are stigmatized as being a “communist” or “socialist.” To suggest in the US that politics and economics are interrelated is to run the risk of being identified as a left winger, heretic or worse.  “You didn’t make that” became an election year meme, as a “socialist” president suggested that all benefited from government spending, not just the poor.  To my ear he was suggesting that government spending and rules created conditions that allowed people to be rich, not that the government made them rich.  But, perhaps I had wax in my ears….I do wonder though how many hedge fund managers in Connecticut would survive in a world without rules that prohibited the use of force, or a world without government regulated securities trading markets that allow them to move money around the world in computers and bandwidth of incredible complexity and inter-dependency.

Anyway, the reality of modern society is that we live in a world that is highly complex, and one that requires rules of conduct.  Society hasn’t been an unencumbered free market since we were located in small groups where we were all known to each other.  To observe that there are things that society needs rules to do, and that there might in fact be issues of fairness to discuss, does not mean that the observer doesn’t appreciate the system that exists.

I suspect that where empathy and morality really intersect is where there is conflict between individual freedoms and the rights and benefits to a broader society.  This is the core challenge of any democratic system, including our own.  When we talk about morality, on all sides of our political debates, there is a clear polarization of what constitutes “right and wrong.”  There is also, in many instances, a clear polarization around the concept of empathy.  This is not surprising, since empathy often constrains our own individual actions.

Over the last few days I have wondered about empathy and morality in connection with our business world and society, and I have come up with the following thought experiment.  Have you ever walked past a homeless person?  I bet that when you make eye contact you are much more likely to give that person some money for a meal, than if you walk past unseeing.  How about behind the wheel of your car?  When you are in line waiting to get in, don’t you find that the person in the car next to you lets you in more often if you make eye contact?  What you are seeing, I think, is that when those around us are not anonymous, we tend to moderate our behavior in favor of those who we contact.  Or, if we don’t moderate our behavior we tend to think about it a bit more.

I wonder if it could be that the reason why our political debates are so nasty and disconnected is because we just don’t see each other anymore.  I also wonder if by decoupling politics and economics, it makes it easier to ignore the human implications of policy prescriptions.   American democracy requires that we work through challenges and come up with solutions that work for our country as a whole – not certain sub groups.  Compromise is not a weakness, and suggesting that we look at morality in the broad context of economics and limits on individual rights does not mean that entrepreneurs can’t continue to create wealth, or keep what they make.

I believe that the entrepreneurial spirit, the right to pursue a greater economic purpose and wealth is a major driver for the United States’ historical prosperity and its future.  I also believe that we need to ensure that we preserve this right to do so in a democracy that has the support of its citizens.  The question that I find most troubling is can you have a sustainable society, one that will support the economic freedom I just described, without ensuring that the system works for substantially all?  Can we have a society where we do not see each other?  And, where we hide behind arbitrary disconnections to avoid asking hard questions?  I am not sure I like the answer to those questions, but if I was working downtown in Congress, it’s what I would be asking my peers right now.  Perhaps with a bit more empathy they could find a path that worked for all Americans, instead of trying to muscle through an approach that satisfies their own narrow viewpoints.

Are You Ready For Artificial Vision? The Future Is Yesterday’s Tomorrow

About 8 years ago, I came very close to licensing some technology from the Naval Research Lab to start a company to do something extraordinary. The technology was a retinal prosthetic – an implant that would substitute for the degraded rods and cones of an unseeing human eye.  I remember my conversation with the scientist very well. He was excited about the invention’s ability to allow blind people to see again.  I agreed, but also suggested something else: if the technology worked as advertised, I could imagine people with healthy eyes using it also, as a way to enhance their vision or to have a “heads up display” for their lives.  It was a slightly awkward moment, as I recall.   We had a shared moment of discomfort as we thought about the broader social implications of his invention.

Ultimately, the technology was licensed to another company, and I turned my attention to other deals.  However, a few things from that interaction stayed with me: (i) federal labs could be a place to find interesting technologies to start businesses, (ii) federal R&D funding was a driver of advanced technologies and (iii) truly innovative technologies may have unintended social effects.

I have kept track of the development of retinal prosthetic technology since that time, and it has continued to develop and is now being commercialized in Europe.  It has now been approved by the FDA for use in the US.  The possibility that people who were previously blind will be able to make out shapes, faces, street markings and discriminate between light and dark is a terrific achievement.  An article in today’s Washington Post captures the human side of this development very well.  It also drove home to me how technology’s progression will change and challenge society.

The first element of the article that struck me was the cost of the implant technology — $100,000 per patient.  This is no small amount (2 times the median income of a US family).  Certainly, for someone who is blind, the ability to make out the face of one’s child would be priceless.  But, $100,000 is a lot of money.  It’s suggested in the Post article that the retinal implant could become reimbursable through Medicare.  This would certainly bring it into reach for many more patients.   It also raises some implications that are worth discussing.

The retinal prosthetic technology is one example of a growing and exciting trend in man/machine interface, which includes artificial limbs, memory enhancement and vision augmentation.  As the scientists describe in the Post article, further enhancements of the prosthetic technology – color vision, higher definition – are likely.  The message is simple, technology moves forward, and as it improves people will want it.  And, medical technology is moving forward.  Not just in the areas of man/machine interface, but in the areas of personalized genetic medicine, life extension therapies, brain disease and artificial organs to name of few.

My point is that at some point in the future medical technologies will be available that will either singly, or in the aggregate, dramatically change life expectancy and the productive life span of those that can afford it.  As is always the case for new medical technologies, they will initially be very expensive.  I wonder whether we have fully thought through the implications of these technologies.  Who will pay for them — and how — may make the current debate about health care spending seem like a friendly dinner table chat.  Imagine a life extension technology that costs $100,000 per year, but for each year of use extended a person’s productive life span another year.  How much would you pay to have 20 healthy years between 70 and 90?  How many of the current Baby Boomers wouldn’t want that?  Who will pay for it?

The implications of enhancements in man/machine interface also raise implications for their use on otherwise healthy people.  If technology is available to enhance vision, would hedge fund traders want to be able to see data in a screen inside their eye?  Consider the following: as enhanced reality becomes possible (see Google Glass for the harbinger of this trend) would some people opt for a two hour operation to implant a second screen in an eye rather than wear glasses?  Or, if artificial limbs become more useful than natural limbs, would some seek to utilize them?  What about an artificial heart muscle that has enhanced blood pumping ability?  Are we ready for enhanced humans?  What will be the definition of a human?

My point in this post is that technology doesn’t exist in a vacuum, and that it ripples through our society.  Technology enhances our lives, but also challenges our beliefs, our values and how we see ourselves.  I believe in technology, and the striving for the better which captures much of what is wonderful about the human mind and spirit.  It has also been the basis of increases in the standard of living in the United States and elsewhere for more than 150 years.   But, I also am concerned that as technology progresses we are a nation that is not able to absorb and address its implications.  Technology will more and more challenge our accepted beliefs and social norms, and require our politicians to make hard, and informed choices.

In the technology world we often speak in hushed tones of ideas that will change the world.  But, we don’t often discuss how technology’s progress challenges and shapes society.  Nor, do we really discuss the possibility that society might reject or restrict technology’s progress.  Yes, we do have food fights about healthcare spending, or the origins of life, but these are in some ways simplistic side shows for the bigger questions to come.  Are we ready for this?  Are you?

If the Super Bowl Was Covered Like Politics – An Entrepreneur’s View of Modern Political Debate

Last night I watched a very competitive and engaging Super Bowl along with 100 million other Americans.  As a group we watched the same commercials, taxed our neighborhood water infrastructure at the same moments and screamed at the TV at the same time.  It struck me as I was watching the game that the Super Bowl was one of the few events all Americans experience in the same way.  It is rare because we exist in a world of ever increasing narrow casting. As technology allows us to receive information that is valued in large part by how it reinforces our world view, experiences where there is a collective frame of reference become fewer and fewer.

Let me give you a sense of what I mean.  Let’s suppose that last night’s game was covered the way that most political and economic events are described these days.  Here are some hypothetical headlines and story lines that we could be reading today:

  • “Super Bowl Ravens Bring Lombardi Trophy Home to Brighten Working Class Neighborhoods Decimated by Continued High Unemployment.”
  • “Super Bowl Power Outage Results From Inadequate Post Katrina Repairs – Contractor with contacts with Obama Administration questioned.”
  • “Questionable Timing – Mysterious Power Outage Changes Game – Concern that Communist Chinese teenager hacked power grid ‘to help 49ers win.’”
  • “Faithful Ravens Carry Super Bowl – Prayer during game turns tide.”
  • “Power Failure Could Have Been Due to Cyber Terror Attack – Rapid denial adds to concern of State Department cover-up.”
  • “NFL Collective Bargaining Agreement Challenged by MVP Award – Financial success of Ravens quarterback Joe Flacco will be restricted due to union rules.”
  • “NFL Collective Bargaining Agreement Reinforced by Ravens Win – Collective bargaining creates shared benefit and reinforces team spirit of both Super Bowl teams.”
  • “Forget Disney World; I am going to Heaven.”
  • “Lights Go Out But Fans Stay Calm – Second Amendment works again.”
  • ”Sandy Hook Child Actors Sing – Actors Equity card found on Superdome field after game.”
  • “Beyoncé Hip Syncs Through Performance.”

See what I mean?  You could imagine each of them, couldn’t you?  This is my point.  And, why I am concerned.  A number of years ago Daniel Patrick Moynihan remarked in a debate, “Everyone is entitled to their own opinion, but not his own facts.” What he was getting at was the importance in any political or economic discussion of protagonists having a shared sense of a situation.  Put another way –   without some sort of common frame of reference a negotiation or building of consensus is impossible.  A conversation of opinion without a sharing of common facts can never result in true communication – there is no common frame of reference.

I try very hard to gather information about economics and politics from distinct sources, and am constantly struck by the distinctively different frame of reference of our media, bloggers and my Facebook/Twitter feed, as some examples.  I see wildly divergent opinions and facts being recited and shared in reaction to the same core event.  I also regularly see a substantially different framing of these facts – or the ignoring of facts of others – to reinforce or reflect an expressed opinion.  A great example of this is the current discussion on entitlement reform and the budget deficit.  You can find credible opinions (and supporting facts) on the web and in the media that state emphatically there is no actual crisis in government spending, and elsewhere you can find credible opinions that state exactly the otherwise.  These cycles of contrary opinions (and facts) are everywhere these days.

I am not suggesting that there should only be one way to discuss events.  However, the state of our current society is far from that.  As we narrow cast ourselves and our information sources into self-referential echo chambers, America is losing something extremely important.  We are losing the ability to communicate and clearly share the same reality and context.  This is a problem for two reasons.

The first is that a democracy requires an informed populace – or at least a populace that has a shared sense of context to function.  The intellectual history of the US, based as it is on the concept of authority being granted to the government by the consent of society and its people, depends upon democratic principles.  Without a shared sense of context, democracy becomes difficult and the nation ungovernable.

The second is that any society has a collective consciousness.  The US is no different.  It is why, for example, most of the readers of this blog think that democracy, equality, freedom of expression and entrepreneurship are core values of our culture.   Society subtly and not so subtly passes from generation to generation the memes of what it means to be an America (or an Englishman or Japanese).  There are just things you “know” by being part of a society and sharing a place and identity with others around you.  Consider, for example, the pervasiveness of the frontier and the cowboy, and how rugged individualism and the image of riding on the range play out in many distinct parts of American society.

As the underpinnings of our collective experience are eroded away, and challenged by a narrow cast world view, something significant is occurring.  As we lose our collective sense of what we share, and we define ourselves by smaller groups of like-minded people, those that don’t agree become alien and threatening.   Go to downtown DC and sit in a Congressional committee room if you don’t get what I mean.

At least a portion of the phenomenon of narrow casting is caused by the technology of interconnectivity and segmentation that entrepreneurs have created and are diligently working to expand.  Twitter, Facebook, Google, and changes in media ownership have all played their part. And, thousands of new startups and emerging technologies are going to come on line and accelerate this trend.   The trend of connectivity and the narrowing of data appear inexorable.

The challenge that we face as a society, as citizens and as entrepreneurs is how to take advantage of the benefits of a more connected culture technologically without disconnecting ourselves as citizens.   All entrepreneurs should remember that we all benefit from a society with rules that promote our ability to be entrepreneurs, and reinforces our ability to benefit from and retain the fruits of our individual labors.  Perhaps we should all take the lead on committing ourselves to looking past the nonsense headlines  that bombard us because we have the most to gain from the continuation of American democracy.  I’d recommend that each day we take a few moments to read past the story lines of those that we look towards and challenge our viewpoints with facts and data from other sources.   We don’t have to agree, but it would be helpful if we understood each other a bit better.

Austerity Follies – Coming Soon to a Theater Near You

If you have been watching Europe over the last year or two (or have been reading my blog), you know that there is a slow motion car crash happening over there.  As I have written about previously, the European Union is caught in an apparently unreconcilable conflict between Germany’s fear of inflation and a need to rationalize government spending and investment in a more flexible manner.  I am afraid that a breakup of the Euro is looking more and more likely, and in light of the path that Europe is on right now it could be argued that the sooner the better.  The similarities to early 1930s economic history with today’s Euro substituting for gold as the main protagonist are troubling.  Unless Germany dramatically changes its position and willingness to support monetary expansion in the EU, it is likely that a number of EU nations will be forced to take back their right to issue currency or fall ever deeper into a deflationary spiral.

Before I go on to the main point of this blog posting, I do want to emphasize that the breakup of the Euro would be a net positive for the United States (provided we don’t engage in self-inflicted harm – see below).  We generate very little export benefit from the EU, and unlike Europe have a central bank that would support national financial markets and avoid bank runs in the event of a Euro-based default (for example, Greece or Spain).  That doesn’t mean that a Euro collapse or sovereign default wouldn’t provide opportunities for investors to short markets – it would – but longer term the US would benefit.  This would be the case for a few important reasons: (i) the US dollar would become even more important to international trade (since the Euro would become less viable as a medium of international exchange after a default which undermined perceptions of its stability), (ii) the perception of the US as a safe haven for capital would be enhanced and (iii) in comparison to Europe longer term investment and economic trends favor the United States.

The bigger threat the Euro poses to the US is political.  An undercurrent of “we don’t want to be Greece” will likely become a full throated meme as we head into the fall.  This will be an issue for the election, but frankly, it will be much more of an issue for Congress and the President, after the election.  The Debt Ceiling, Sequestration and the Bush Tax Cuts will all require attention from our politicians in November and December, at least some of whom will not be in power after January.  Quite simply, no matter how the election goes, we are going to have lame duck politicians deciding these important issues.  If you thought that the Debt Ceiling follies of last summer were fun, just wait until you see how “people of principle” act when they aren’t accountable.  To say that I am worried about this would be a bit of an understatement.  Wilbur Ross, a well-known investor summed it up well yesterday, calling it a potential “freakshow.” 

Here is my point – we are not Greece, nor are we any of the other EU countries.  The issues for the United States are not the same, and we run the risk of burning the furniture to stay warm by embracing the idea that we are. 

As we head into a discussion about the role of deficits, taxation and the role of government this fall, we should consider some important nuances in how the US is similar and different from Greece, Spain and the other EU nations and build an approach that allows the US to grow with a stable fiscal base.  

Risks and Opportunities for the Greater Washington Technology Community

The momentum and excitement surrounding entrepreneurship in the Greater Washington Region is palpable.  I see this every day in my various roles in our community.  My days are now full of meetings and interactions with entrepreneurs and supporters who are heavily engaged in making our region a strong entrepreneurial ecosystem.   Having been in our region since 1998, I am struck by a few aspects of the current situation that are particularly important:

  • Much of what is driving this entrepreneurship cycle so far is that it is a “bottoms up” movement.   Efforts such as StartupDC/MD/VA, Foster.ly, the Fort, FounderCorps reflect this, as do many others.
  • We are moving away from networking for its own sake (which is very important), to networking for company building.
  • The acceleration movement has clearly taken hold here (the Fort, Acceleprise with others to come), amplifying (forgive the pun) the large number of well-established incubator efforts that already existed.
  • Seed stage capital and Angel capital is collecting and organizing in a more efficient and directed manner.
  • The media has expanded its coverage of entrepreneurship, and new media outlets and blogs have started to gain traffic and followers.
  • Bellwether startup companies in key verticals (for example Living Social and OPower) are taking leadership roles in driving the community forward.
  • Service providers are rediscovering entrepreneurship as a driver of local opportunity, and providing support for community efforts.

All these efforts are just terrific and it is wonderful how far and fast we have all come in accomplishing our collective dream of a world-leading entrepreneurial community.  We should all keep pushing.  As we move things forward, we should now focus our efforts on ensuring that our activities result in a lasting change.  Although the circumstances are very different this time than in the late 90s, it is important to remember that we had a similar period of enthusiasm and support for entrepreneurship during that period.  Unfortunately, when the Internet bubble burst in 2001 the momentum surrounding entrepreneurship stalled also.

We need to make sure that this does not happen again.  Last time around the sense of entrepreneurship was narrowly confined to Internet related businesses.  This left our community vulnerable to changes in market sentiment, and reliant on venture capital and hot money.  I am concerned that at the moment our community is similarly fragile.  Much of our current excitement centers on software, particularly software and apps that can be built for not a lot of money and a lot of red bull.  This is important, and we should not at all discourage this.  However, I think that it is extremely important that we broaden our efforts aggressively.   Not all entrepreneurship can be accelerated in a short period, nor can all innovations occur through software.

A few months ago I released an M&A Report to encourage a broadening of our efforts, and promoting engagement of the local business community. This is something that we are beginning to do through StartupDC/VA/MD, and I believe that other efforts are under way.  I think that the Acceliprise effort is reflective of this.  Continuing to focus on broadening contacts between our local entrepreneurial base and local industry is essential.

We also must get our local universities more visibly engaged with our entrepreneurial community.  Things like Mason’s lean startup group and UMD/GWU’s recent Startup Job fair are reflections of what can be done when entrepreneurs team with our local universities.  I know that there is a sense in some parts of the tech community that universities are slow moving, or somehow not relevant to new models of entrepreneurship.  I just don’t agree.  Universities have many things that will help make our entrepreneurial community durable: resources (physical, capital and people), ideas (intellectual property for commercialization) and a long term view.  Every leading technology region in the world has at its center one or more world class research universities.  That is not an accident.

We must increase the interactions between our government creators of technology and our entrepreneurial community.  The Federal government spends more money on technology creation than any other source – many of the industries and technologies that are the basis of our prosperity and growth were fostered by research undertaken by government labs or financed by government program managers.  In the next month I will be releasing a sequel to my M&A Report which will show the depth of amount of government technology research dollars being spent in our region.  We should be ensuring that the companies that are formed to commercialize these technologies are established in our region.

Finally, we should be preparing for a major change in our local region’s broader economy.  The budget crisis of last summer will reverberate through our region later this year, as Federal spending on outsourced IT services is likely to fall significantly.  As this spending is withdrawn from our region it will have an adverse effect on the level of wealth and activity in our region.  In the short term the entrepreneurial community could mitigate some of these effects, but it needs to plan for this dislocation now both through programs that will reach out to the resources that will be dislocated by these changes and also to build new companies that will allow our local government contractor base to capture new revenue opportunities through innovation.

My point in this post is not to discourage the great progress we are making, but to remind all of us that our job is not yet done.  Broadening and deepening our entrepreneurial community over the next six months should be our highest priority.

Crowd Funding Will Not Change Startups For the Better – Well, Someone Had to Say it

I know that I am supposed to embrace all things cool and innovative – Angel List, lean startups, accelerators everywhere for entrepreneurs (with or without business models) and so forth – otherwise, I can’t be seen as a cutting edge VC.  The implicit theme when these new ideas are presented, and promulgated, is that what is old is bad and what is new is good.  It’s a recurring cycle of innovation – economists call it “creative destruction.”  Let me therefore say that I am all for innovation and change – but at the risk of being perceived as an old man shaking his fist at the neighborhood kids (“get off my lawn”) the idea that crowd funding is going to change the startup industry in a positive way is just silly.

I suppose what drove me over the edge and break ranks was a post I just read in TechCrunch “How the JOBS Act Could Change Startup Investing Forever.”  Here’s the link. The post, which was written by a promoter of crowd funding, lays out the argument that by making startup financing more democratic and open, more financing will be available for startups, financing will be available for startups that aren’t funded by those silly Angels and VCs (that don’t get most businesses other than technology) and that crowd funding will be able to do the appropriate diligence on investments and avoid fraud through the pooling of information.  Implicit in this argument is a belief that there is a large untapped pool of capital available for startups, if we would allow the less wealthy to invest in them, or if we got intermediaries like VCs out of the way.

For those of you who aren’t familiar with this issue, here is a short primer on the current world we live in.  If you want to raise capital from investors there are a few proscribed ways to do this:

  1. You go through a complex process of registration with the SEC, which requires the preparation of reports and financial statements that are reviewed for completeness and conformity with approved disclosure requirements.
  2. You sell to a small group of people that you know (who could be rich or not), in a transaction that is not generally offered.
  3. You sell to a slightly larger group of rich people, in a transaction that may be slightly more widely offered.

What you cannot do?  Offer to sell investment in your startup in a general public solicitation without complying with SEC disclosure and accounting rules. In short, if you want to ask a large group of people for gifts that is fine, but if you want to ask them to give you money to make money, you have to comply with rules that are designed to provide the investor with some level of consistent information.

The bedrock principle behind crowd funding is that it is undemocratic and inefficient to prevent startups from easily soliciting the public for investments; investors can fend for themselves in the age of the Internet.  We should get the gate keepers of capital out of the way, so that people can immediately get at all these wonderful investment opportunities that the rich and gate keepers are hoarding.  Put in this way, the argument should appeal to those that oppose regulation and those that hate financial gatekeepers and the 1%.  It’s just a winner issue.

So, why am I concerned? There are a number of reasons:

I do not agree that the problem with our financial markets is that early stage investments are not easy to get.  The issue is that the capital available to purchase financial investments is in a small number of hands, and generally those funds are managed professionally.  There may be some incremental money to be gathered by making it easier for people to buy startup equity, but the level of additional wealth that is truly available for risky investment is not that much larger.  The reality is that investible wealth is concentrated in a small percentage of the population – 20% of the population holds substantially all of the financial assets in the United States, with the top 1% of the population holding as much as a third of all financial assets in the United States.  The median net worth of American family heads in the 55 to 64 age group is approximately $250,000 (that’s cash, stock, bonds, equity in a house, IRAs and so forth). You can’t really bend the rules of physics.  Making investing in startups easier to do is not going to change who has the money and how they view it.  For an investor, particularly an investor who works with a professional manager, any investment opportunity is viewed through the same prism – how well does the investment opportunity compensate the investor for risk?  Startup investments are risky, and in many cases do not properly compensate investors for the risk that they take.  Making these investments more readily available will not change that fact.

It could be, in fact, that the reason why most startup investing occurs through direct interactions and professional management is that there is a risk reducing function that is performed by the VC or the experienced Angel. I know that comment could touch off a firestorm of comments, so let’s just leave it as a “maybe” move on.  Suffice it to say that wealthy people tend to believe this, as do the professional managers of endowments and pension funds. Making it easier for these people to directly invest doesn’t mean that they will.

A second issue I have with crowd funding is the idea that a larger group of people making investment decisions together will make better decisions.  From the Tulip Bubble in the 1600s to our Mortgage banking fiasco of the last decade, markets have proven repeatedly that large group market decisions are prone to momentum and emotion.  On the other hand, what the experience of the US securities market since 1934 has shown is that when you have a market regime in place that requires the provision of consistent information, and a consistent market, you are more likely to have investors participate, and in many cases make good and considered investment decisions.  The crowd funding argument in many ways is a rejection of the regulatory regime that levels the playing field; because it is expensive.  Sometimes, however, expense is worthwhile.

Which brings me to my third issue: most investors are not sufficiently financially literate to evaluate an adjustable rate mortgage, much less a startup.  We do not have a financial literacy test in our financial markets (perhaps we should), so instead since 1933 we have relied on the concept of accreditation, which simply stated is “if you have $1 million in assets, and you make a bad investment in a risky startup you can probably afford to lose the money – or at least hire someone to help you understand the risk.”  Crowd funding’s response is – why be so paternalistic – if people want to risk their money they should have the right to.

Which brings me to my fourth issue – when financial markets are not policed fraud occurs.  The phrase a “fool and his money” is truer than you can imagine.  In my career as an investor and previously as a lawyer I can only say that I am constantly amazed by the level of mendacity that criminals can show when it comes to investment opportunities.  Implicit in the crowd funding model is that the market should not be policed, or not policed and regulated as heavily as start up financing currently is.  Well, as sure as the sun comes up, you should expect financial criminals to take advantage of the opportunity if crowd funding eliminates regulations that require disclosure and consistent information.  My overall conclusion is that when you combine criminals with inexperienced investors you don’t get a happy result.  What do I care?  Because another thing that has been shown throughout the years of capitalism is that when a market is perceived as rigged or unfair it tends to fail.  A startup financing ecosystem that is prone to fraud will rapidly discredit startup investing as a whole.

And on to my next point – even if crowd funding works like its supporters say it will (thousands if not millions of new investors come into the world of startup investment) I am not convinced that every entrepreneur should take advantage of it.  Here’s why: startups rarely if ever go as planned.  In fact, they generally go really badly more often than they go well.  Does it really make sense to have investors in a startup that aren’t ready for this?  And, by ready I don’t mean them saying “yep, I’m ready,” I mean do they have the psychology and appreciation to deal with the random walk of startup entrepreneurship.  I don’t know whether crowd funding supporters think that all of these new investors will just “be understanding,” or if what the investors feel is irrelevant once the entrepreneur has the money.  I am not sure it matters, all I know is that in my experience when certain investors lose money they get angry, and when some of them get angry they get lawyers.  In short, I believe that the best way for an entrepreneur to raise capital is to do it from friends and families, sophisticated Angels and professional investors. Why? Because they will leave the entrepreneur to succeed or fail, so long as she tries hard and honestly.

My overall point is that the financial markets that exist today for startups works reasonably well to protect the interests of investors and entrepreneurs.  Creating a system that is more “democratic” will not achieve a significant pool of new capital, and has the possibility of discrediting startup investing if people who cannot afford to lose money (either financially or psychologically) are unhappy, or, worse, defrauded.

Perhaps ultimately the crowd funding movement confuses a current liquidity bubble in Angel investing (particularly in Silicon Valley) with a long term change in where capital is aggregated in our economy, or a change in the rules that people who have money use to make investments.  I just don’t think that is the case, and ultimately, my conclusion is that crowd funding is unlikely to have a positive effect over the long term on startup financing.  Other portions of the JOBs Act, particularly making it easier to reach the public markets in an IPO are laudable and should be supported.  But, I think that crowd funding of startups is something better left undone.

FounderCorps and StartupVirginia Release Survey on M&A Activity

FounderCorps  and StartupVirginia Release Survey on M&A Activity to Accelerate Technology Business Formation in the Greater Washington Region

 

M&A Survey evaluates technology acquisitions from 2006 through 2011 to provide guidance for accelerating GWR’s economic development.

McLean, Virginia February 8, 2012 —   In support of the recently launched StartupVirginia and StartupDC initiatives to promote and accelerate regional entrepreneurship, FounderCorps, a not-for-profit organization promoting entrepreneurial and economic development in the Greater Washington Region, today released “Merger and Acquisition Trends in Silicon Valley and the Greater Washington Region: 2006 to 2011.”  The report evaluates each M&A transaction occurring during the referenced period and identifies its relevant industry and location of acquirer (among other data), in order to identify correlations in activity that could guide business formation activities going forward.   The report was prepared by Jonathan Aberman, Co-Chair of StartupVirginia, President of FounderCorps, and Managing Director of Amplifier Ventures, an early stage venture capital fund operating in the GWR.

The report provides significant insight into the frequency of exit transactions for each region, and uses the data to make a number of relevant conclusions: (i) where there is a high concentration of intra market transactions startup formation and growth is accelerated, (ii) Silicon Valley’s technology M&A market is driven by a relatively narrow range of industrial segments, while the GWR’s M&A market is significantly more diverse and (iii) the GWR M&A market has been  surprisingly robust, even in comparison to Silicon Valley. Contine reading

Launching StartupVirginia

Not much more than six weeks ago, the idea of organizing a statewide effort to collect and mobilize entrepreneurs seemed pretty farfetched to me.   Six weeks later I find myself in the center of a vortex of activity to do this in Virginia, Maryland and DC.  It’s just extraordinary what I am seeing and experiencing.

Ten days ago, I was worrying about whether we could get 50 people to show up for an event to launch StartupVirginia.  Yesterday, I had to figure out how to extend available seating to increase the event capacity to 450 people to accommodate the waiting list.  Last weekend, in the middle of an ice storm 60 entrepreneurs and supporters gathered on a Saturday afternoon to discuss how to make Virginia a better place to be a startup entrepreneur.  On Friday I was with a group of Maryland-based entrepreneurs asking similar questions.  This coming Tuesday night, 125 invitees are coming together at GeekEasy to discuss this topic.  There is clearly something going on here.

Through all of this I am very struck by the level of engagement and desire there is on the part of the local entrepreneurial community to drive accelerated economic growth in our region, and how committed and passionate people are to make something positive happen here.  I have been part of this region’s entrepreneurial ecosystem since 1998 and I have never seen anything like this.

Peter Corbett, Frank Gruber, Jen Consalvo, Robert Neelbauer and many others have seen this for a while – they have done a great deal to get the emerging entrepreneur community engaged and excited.  DC is much more on peoples’ minds as an entrepreneurial hot spot than it used to be.  What I am seeing now is that the enthusiasm that they have tapped and encouraged is spreading into a broader spectrum of our community.  My sense is that we are heading towards a cross over point – where the enthusiasm of some becomes the mission of the many.

Perhaps some of this is a reflection of fatigue with the 24-7 news cycle of doom and gloom, but it just seems to me that people are getting tired of waiting for Godot to come.  Our entrepreneurs aren’t waiting for someone to tell them what to do; they are mobilizing to tell us what to do.  I have never been more optimistic about the possibilities for entrepreneurial growth in our region.  Over the next few months as our efforts result in the launching of new initiatives, I hope that many more will join in.

Tomorrow morning we are launching StartupVirginia at Mason’s Arlington campus.  There are a few seats left.  If you want to attend and add your support to this effort please register here.

And if you are interested in being part of the movement, register with StartupAmerica through this link.  There are a growing number of financial benefits for StartupAmerica companies, so I’d recommend signing up.

To this point, StartupVirginia is intending to focus on the following initial areas:

  • Connecting entrepreneurs around the Commonwealth.
  • Promoting avenues to connect startups and ramp ups with larger local companies.
  • Connecting university students with startups for internship and work opportunities.
  • Encouraging the development and propagation of mentorship programs and activities that cut across regions, and focus on entrepreneurial development.
  • Working with financial market participants to identify innovative approaches to accessing entrepreneurial capital.
  • Whenever possible, work with our large and established infrastructure of supporters – tech councils, universities, development groups and others – to provide them with insight into what entrepreneurs are looking for in their communities and support structures.

If you have other ideas, please comment on this blog post.  Otherwise, stay tuned for more updates.

Interview in WashingtonExec

Earlier in the week I was interviewed by WashingtonExec.  The full article is here.  If you don’t subscribe to WashingtonExec, I suggest that you should.  It’s a good source of things going on around the local IT Tech scene.  For those of you who don’t describe, below are my answers to the interview.

WashingtonExec: Is this a good time to be investing when the economy is so unstable?

Jonathan Aberman: It really depends upon what you are investing in and what you are seeking to achieve. As someone who invests at the earliest stages of a business’ history I am looking out to what the world will be like 5 to 7 years from now. In many ways, the best time to invest for the long term is when people are uncertain. You find that the entrepreneurs who start businesses during uncertain times are often better able to handle ambiguity, and are clearly in for the long term. It is not a surprise that many of the best known companies in our nation were started during times of economic uncertainty. I look for companies that are ahead of social, demographic, technology and economic trends, not behind. I think that the US is about to enter a new industrial cycle with technologies that are currently in the lab leading the way. We are at the beginning of a wave, not the end.

WashingtonExec: What do you think will be Amplifier’s biggest challenge within the next couple years?

Jonathan Aberman: The challenge for every investor, and every entrepreneur, is obtaining sufficient risk capital to grow a business. With the current uncertainty there are many individuals and institutional investors who are looking for safety rather than return — in other words, for many current investors not losing money is better than taking the risk necessary to make money. We are also seeing a large scale contraction and concentration of institutional venture capital funds, and that will adversely affect the ability of many startups to scale. The interesting thing is that the economy is actually much better than people perceive, and with the exception of a potential oil price rise shock, there really is nothing out there right now that will meaningfully disrupt the upward trend. You can look at my recent blog post on Outlook 2012 for why I think that. In any event, brave investors are going to get into some wonderful opportunities. As they make money, and the economy improves, money will flow back into risk based investments from the less brave.

WashingtonExec: How do you think the new technology (such as mobility solutions) will impact the government contracting industry.

Jonathan Aberman: I believe that we at the cusp of a major revolution in how people interact with data. Siri is the thin edge of a wedge. I expect that within a short time, people will all have electronic personal assistants that manage their interactions with information in sophisticated ways. This fusing of what we know, and what we can find out, will have profound effect on our society and the importance of the Web will be multiplied exponentially. There will be tremendous opportunities from these changes, but also huge social and technology risks. The government contracting industry will likely be the place where many of the risks are dealt with, and solutions are found. Additionally, as the line blurs between existing expertise and expertise that can be acquired through a mediated search, the nature of billable hour based work will also change. But, the biggest issue facing the government contracting industry is going to be how it deals with a shrinking government budget — many existing companies will need to find new sources of revenue, or act to maintain market share in a declining market. I expect that many of them will become product oriented companies in at least some way, and attempt to diversify. If I was starting a company in this region today, I would be looking to be a position to take advantage of that trend.

WashingtonExec: Do you use social media to advance your career and business? If so, why or why not? What advise can you give other leaders about social media’s potential?

Jonathan Aberman: Social media creates a large echo chamber, which can be very useful for a business leader. It can allow you to reach out into the community and to get feedback for your ideas and thinking. But, it can also allow you to become a shameless self-promoter. In other words, social media can be a feedback loop or a megaphone. Unfortunately, I think that too many people use it as a megaphone. My best advice is that when you approach social media as a business or leadership tool (compared to a tool to keep in touch with friends) you should always seek to add value for others. I try to provide blog posts that educate and inform, so that readers get something of value by reading my blog or my Twitter feed. That’s my viewpoint whether my post is read by ten or a thousand people. I also believe that you should approach social media with authenticity. As people get more sophisticated about the use of social media, they are also getting better at sensing self-promotion and punditry. I would therefore only use social media to advance a career or business if you have something meaningful or tangible to add to your reader’s knowledge base. If you don’t think you can do that, then I would stay away from social media — other than for sharing holiday pictures, of course.

WashingtonExec: Do you feel optimistic or pessimistic about the next couple business years for you and your clients?

Jonathan Aberman: Amplifier is positioned at the center of some really interesting technology trends in our region. I continue to see great entrepreneurs and wonderful opportunities. We recently helped seed Sypdrsafe, an Android data integrity startup that will take advantage of the trend I described above. The company will let employees use their own Android devices in the work place, without modification or software add ins. We’re also doing a greater amount of things around government funded technology and commercialization. We think that there are some really interesting opportunities in our backyard. We also think that the local market is an underappreciated from and M&A perspective, and that as government contractors change their business models there will be a boom in local technology startups and exits.

WashingtonExec: What are you most proud of?

Jonathan Aberman: As someone who grew up in two family businesses, and whose parents were raised in two other family businesses, I have always wanted to be involved in entrepreneurship. Whether its Amplifier, FounderCorps, my work with Mason through the Mason Enterprise Initiative, teaching at the Smith School, or the other things I am involved in, I spend each day and every day working with entrepreneurs and doing what I want to do. That is a great feeling. But, the thing that I am most proud of is the quality of my relationship with my family and friends. I think that we are most accurately measured by those relationships. I am also pretty proud of how well I play guitar, but that’s probably a bit further afield.