It’s not just in connection with Google Glass.  Over the last few weeks there have been more than a few observations made about the possibility of creating machine and software based vessels for the human brain and consciousness.  Will it work? Won’t it? Will you still be you if your brain is transferred to the web?

Here’s my point, technology advances because of the combination of human curiosity, the desire of innovators and inventors to leave their mark on the world and plain and simple commerce.  So long as some part of our world provides incentives (or at least doesn’t prohibit it), technology will continue to progress.  Technology and humanity have become intertwined, as a form of expression and as part of a complex feedback loop.  As technology advances, it creates challenges to existing social structures and the status quo, and ultimately shapes society.  Which, leads to further changes and so forth.

For example, technology has given us the ability to communicate via phone, email and messaging as we move through our day.  Look how that change has shaped and changed society.  What is acceptable behavior in social settings have changed.  I bet you weren’t upset when a colleague took a look at her Blackberry during lunch (you probably took a quick glance at your iPhone at the same time). Think about the email/text you sent ahead of the meal saying “you would be five minutes late.”  It used to be that being on time was showing up on time – now on time is sending a message of your likely arrival time.  These simple examples show how the existence of the technology of ubiquitous communication have changed social conventions. 

There are many other examples.  Consider how the existence and structure of the web has changed how people get information about the world, and how fragmented our political system has become.  It’s not an accident.  Have you thought about oil fracking recently?  Think how our country will change as it becomes energy independent – with hydrocarbons that pollute our water table, perhaps.  And have you really thought about the implications of autonomous cars, 3D printed guns and cybernetic limbs? How about artificial life (created from real DNA), quantum computing or mining space?

One of the things that I find most concerning about our current political climate is how our representatives spend many hours arguing about a future that they haven’t really thought through. They argue about privacy where the horse is already so out of the barn he is over the hill and far away. They argue about “death panels” as medical technology converges on technologies to allow humans to live for extended periods.  They argue about how to create free markets, while they enable concentration of our dominant industries.  But, what they rarely do is think ahead.

However, in this case I do think that they are truly representative of our democracy.  These days we do not really spend much time thinking about the future as it will be shaped by technology, and instead speak more and more of the need for austerity.  Discussions of a different future are somehow seen as trivial and “not serious” as we are encouraged more and more to believe in a future of scarcity.  By doing this we end up limiting our horizons and ability to make good decisions about how our country will progress.  This is a mistake.  History shows us clearly that for good or for ill the one thing that we can count on is that technology will progress, and change will occur. 

Here are some examples that come to mind:

1. Assume that advances in medical technologies continue as they are.  Within a relatively short time horizon, technologies will exist that will dramatically expand the lifespan of humans.  Who will get these technologies?  How will they apportioned?  Just for fun, imagine a world where they go to those that can afford them.  Or, a world where they apportioned by lottery.  They would be very different societies.

2. Assume that Google Glass and Siri are the thin edge of a trend. Within the next ten years the line between what we know, and what we can find out, will blur to the point of unrecognizability.  What will knowledge mean when all knowledge is available by asking the right questions of our personal assistant?  Think we are educating our children properly for this world?  Think education will matter?

3. Assume that data mining and surveillance technologies continue to advance.  What will privacy mean?  Who will care?  How will you react when it becomes clear that there is in fact nothing unknowable about you to the government, advertiser, employer, colleague or stranger?

4. Assume that 3D printing progresses to a point where first simple manufacturing and eventually complex manufacturing can be done on a desk top machine.  What will happen to manufacturing employment as a result?  How will intellectual property rights be handled?  What will it mean to work, or not to?

I could go on for many more paragraphs but by now I expect you have seen my point.  The future won’t be like today, but the way that society adapts to new technologies will define what that future becomes.  We can either engage in meaningless discussions on the side show, or we can address the real issues at hand.  The more that we look ahead to the challenges that technology can create, the more likely we are to benefit from them.

Entrepreneurship is a human behavior, without question.  People who are entrepreneurial often seem to be born into it.  However, growing a successful business is not instinctive. It is a journey, and one that is more likely to be successful if the people involved have knowledge and context to guide their instincts.  Moreover, a successful business needs a team, and some members of the team need to have detailed skills.  One of the best examples of this I have seen is the appreciation of competition. Each business has it, and a successful business must overcome competition to succeed.  An instinctive entrepreneur often believes she has no competition. An educated individual appreciates how markets work and how supply and demand forces shapes competition. In other words, education provides context and a framework for instinct.

While it is wonderfully exciting to talk about high school graduates that succeed because they throw off the shackles of a college education, the reality is that for most mere mortals an education is vitally important.  In a given population, there will always be outliers, of both success (internet millionaire) and failure (BA cab driver), but for the substantial majority of a group, having an education is essential both for themselves and for society as a whole. 

“Any sufficiently advanced technology is indistinguishable from magic.”

— Arthur C. Clarke

We live in a highly complex society and world.  Material and physical science has progressed to the point where the composition of matter can be explained from the subatomic level upward to the universe itself.  The understanding of the composition of DNA and the mechanics of life has progressed to a level of understanding that allows scientists to utilize software to predict protein sequences and use DNA to store computer data.  We are linked together through spinning electrons, waves, minerals and materials that we can manipulate and triangulate down to the head of a pin.  Our economy is shaped by the creation of money out of thin air, traded by computers and converted into goods, and then back again in a complex ballet of interrelationships.  There are dependencies, externalities, ideologies and typologies everywhere you look.  If you think that you can understand this last paragraph by instinct I wish you the best.

Without education and the ability to gather an appreciation for the highly complex world within which we now live, a citizen cannot really participate.  You can’t compete in a game where you don’t have the tools.  In addition, there is something more important at stake.  Without an education the world appears unstructured and random. It appears magical. But, not in a pleasant, Game of Thrones kind of way. It appears magical in the way that anything is possible, and everything is relative.  When that happens, jet contrails in the sky can be a government plot to seed clouds just as easily as a natural reaction to jet exhaust in the upper atmosphere, and zero point energy can get just around the corner. 

The reality is that our populace needs to be educated for our democracy to function and our economy to grow.  Society exists because we stand on the shoulders of those that have come before.  We build our lives on the knowledge that our predecessors leave behind.  Today’s software engineers use technology built by those that come before, and our scientists build knowledge on the theories proven by those that preceded them.  Politics and social trends are built upon the experiences of our parents and so forth.  None of us figure out everything during our lifetime, no matter how smart and brilliant we are. Moreover, we are smarter and progress further, when we get the head start of the knowledge of those that have come before.

This does not mean, however, that our education system gets a pass as it currently exists.  Many of our universities have wildly inefficient business models, and have raised their prices not because of inherent value, but as a way to signal exclusivity and limit access.  The world of education, particularly higher education, needs structural reform.  However, to state that the education industry needs to understand and serve its customers is not the same thing as saying that the product that they sell is not valuable.

Overall, my belief is that an education, of whatever type, provides value to the student if the student applies herself and develops the ability to stand on the shoulders of those that have come before.  It is up to the student to decide whether the education overall allows her to stand on shoulders that matter and provide opportunity (in other words, whether learning Eastern European literature is as economically viable as studying Ruby on Rails or chemistry).  The truth of education is that we should support it as a societal value, and leave it to the free market for students to determine what they want to pursue.

The next time you hear a voice argue otherwise, I want you to ask yourself “why does this person rail so loudly against education?”  Or, ask them.  I suspect you’ll find the answer they give will have more to do with themselves than they would like to reveal.

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.

What all of these articles, conversations and musings have in common is an implicit assumption: financing startups is a unique and distinctive activity that exists somehow independently from other markets and uses of capital.  For these observers, the only thing that matters for understanding the ability to access startup capital is to understand the identified sources for startup capital.  Unfortunately, this approach is like trying to understand the universe by only discussing what is visible, and forgetting about dark matter.  To truly understand what is occurring in the world of startup financing, and what is likely to occur, you must appreciate the dark matter of the financial markets.

The financial markets are highly complex, and extremely efficient at allocating capital to opportunities for perceived returns.  Efficiency in this context is not a normative term, but is used to describe the ease and rapidity at which a market (for example, the market for milk, or the market for financial assets) adjusts to changes in supply and demand.  Believe it or not the best example of efficiency in the financial markets is the crisis of 2008 and its aftermath.  The markets worked efficiently – pushing capital into a market sector that had high return potential with small perceived risk (mortgage backed securities).  What happened thereafter was the market learned that the risk of holding mortgage related assets was much higher than expected, and market participants rapidly reevaluated the price at which they would purchase these financial assets.  The phrase “not at any price” became the market price for many of these assets, and the cascade of repricing resulted in a near collapse of the financial system. Forget about your political leanings for the moment which cause you to apportion blame (it was the fault of greedy buyers of houses, Fannie Mae, greedy bankers, blah, blah).  The financial market did what it always does when left to its own devices – it moves capital to where investors think that they can get the best returns with the least corresponding risk.

“Ah, ha,” you say, “but markets aren’t about people looking for returns without risk!  How do you explain Angel and venture capital investments?  There’s lots of risk there.”  You are absolutely correct.  But, here is the key point – investors do not look for investments without risk: they look for investments where the risk that they take is compensated for with an appropriate level of return.  Simply put, investors demand more return on their investments the riskier an investment opportunity.  And, in fact, they look for investments where they are overcompensated for the risk with a higher comparative return.  In other words, they try to find investments where for some reason their perceptions of actual risk are less than the market generally, so that they can get an investment with a higher return potential than they otherwise should.  It is the constant push/pull of investors trying to get higher comparative returns, and the sellers of investments wishing to offer the lowest possible return potential, that makes financial markets work.  When agreements as to the correct level of price and risk occur, a sale of an investment takes place.

This matching of buyers and sellers, and the allocation of risk versus return happens throughout our financial markets on a constant basis.  Business people often think of these market allocations as occurring in a continuum, where each investment opportunity is evaluated on the same criteria (return versus risk).  They describe this continuum as the Capital Market Line.  The CML looks like this:

Because of the highly efficient characteristics of the world financial markets, most financial investment opportunities around the world exist on the CML.  Certainly, because the US financial markets are the most efficient financial market in the world, each US investment opportunity, whether it is a Series A investment in a startup or the purchase of US Treasury Bonds exists on the same market continuum.  Which brings us to the reason for the foregoing explanation – if you want to understand the world of financing of startups, you need to understand the CML and the factors currently affecting it.  So, with that, here are few big ones:

• The financial markets are presently dominated by a desire for short term, highly liquid investments.  Liquidity is a term that is used by financial market participants to describe how quickly they can turn an investment into cash.  There are a number of salient reasons for this focus on short term investments with high liquidity, including the financial crisis of 2008/2009, geopolitical challenges (i.e., Iran and the atom bomb or China and Japan fighting over a small island) and the continual drum beat of political risk (i.e., strikes in Greece, Elections in Italy and Sequestration in the US).  Investors are highly motivated to have liquidity to get their capital back and “run for cover” from the next to occur market panic.
• Financial markets reward the people who can generate high returns while maintaining liquidity.  A Hedge fund manager can legally take 20 to 50% of his investors’ profits for himself.  A banking proprietary desk manager can make $20 million a year doing his job well (which, by the way looks a lot like managing a Hedge fund).  As a general matter, the highest compensated investment professionals can make $1bn or more a year managing a Hedge fund.  In an industry where “keeping up with the Joneses” means how are you compensated vis-à-vis your friends, the compensation of Hedge fund managers drives behavior in the financial markets in a few ways.  Firstly, it drives up compensation requirements for all finance professionals.  Secondly, because, the highest compensation opportunities come from taking a percentage of profits trading opportunities that create immediate high profit potential are favored.
•  The central banking system is at present much more concerned with combating deflationary pressures and counterbalancing governmental austerity, than inflation. Therefore, they are pushing unprecedented amounts of money into the financial system.  At the moment much of this money is being captured on bank balance sheets (which drives down their need to pay interest to depositors to attract more lending capital).  Concerns that at some point this money will result in higher inflation (which would cause investors to seek higher returns in compensation for the same amount of risk) have so far been unfounded. But, the niggling fear of inflation shapes market perceptions and reinforces investors’ preference for liquid investments.
• Corporate management of publicly traded companies is shaped by investor preferences.  For most public companies compensation has become more and more tied to stock performance, so this interdependency has become more pronounced.  Therefore, as management of corporate objectives has become more shaped by financial market attitudes, how companies are managed has to comply with general investor attitudes, rather than other factors that might be more relevant to longer term strategic considerations.
• Investments by individuals in startups are also affected by the same desires for short term and liquidity.  This is why startups that are perceived as having a short time to exit are much more likely to obtain Angel capital.  The clustering of Angel capital around Silicon Valley (and elsewhere) light software startups is an example of this.
• Where capital is invested in private pools (i.e., venture capital, LBO private equity or Hedge funds), in any given recent period the amount allocated by investors to Hedge funds dwarfs investments in all other types of private pools, by a large factor (in some cases more than 20 times).   Hedge funds are categorically driven to seek short term, high profit potential investments.
• Investible assets are largely held by the very wealthy (investible assets of more than $10 million) and institutional investors that are investing to satisfy retirement obligations, educational or charitable purposes.  Such investors tend to be conservative in investment appetite (either because they are interested more in wealth preservation than wealth creation, or because they are represented by professional money managers who have a legal duty to be careful in how they manage their client’s capital).  Conversely, very little investible capital is held by middle class or less fortunate individuals.  For example, most individuals currently facing near term retirement in the US have zero (as in no) savings at all.  Only 10% of these people have savings in excess of $250,000 (including their houses).    It could be that as more and more investible capital is in the hands of the top tenth of a percent of households, risky illiquid investments are just not that attractive.

With these facts in mind, and the immutable realities of the CML, what is going on in the world of startup finance is easier to understand.  For example:

Why is there less Series A financing available? 

There is less Series A financing available because the institutions that invest in venture capital funds see other opportunities to achieve required returns with less perceived risk.  Moreover, because a Series A investment has a likely 5 to 8 year term before it ripens (and hopefully generates the expected return), it is less attractive in a world where investors are concerned with short term liquidity.

Will the JOBs Act free up lots of new investment capital?

Probably not from middle class investors (otherwise known as “non accredited investors” since they do not have $1 million in assets or make more than $200,000 a year), since they just don’t have that much savings.  It might make it easier for wealthy individual investors to find new investments, but it’s not going to produce large pools of new capital.  Investments in startups will still have to compete on the CML against prevailing investor requirements for liquidity, less risk and shorter time frame.

Why are Hedge funds, private equity funds and venture capital funds competing more and more for late stage technology companies?

Because the investors in these different pools of capital are fundamentally interested in the same thing: high return, lower risk and greater liquidity.  Investing in a pre-IPO/exit startup can be very lucrative without a high level of perceived risk.  Look at the folks who bought Facebook a year before it went public for example.

Why would a great technology company like Apple Have $137 billion on its balance sheet as cash, rather than investing it in research and development or basic science?

As a public company Apple’s management is motivated to make short term decisions that affect its stock price and perceived expectations of momentum, rather than making long term spending and strategic decisions.

I could go on, but I think that I have made my point. The realities of the financial markets pervade all aspects of financing of startups.  An entrepreneur’s ability to obtain financing is very much tied to how her investment opportunity compares to others on the CML.  Unless it provides sufficient return to compensate for perceived riskiness, an investment opportunity will fail to attract sufficient capital.  Indeed this is where most entrepreneurs fail to achieve funding – they do not understand clearly the true nature of the risk/return tradeoff for their investment, and either price the opportunity incorrectly (too little upside (return) for the investor) or do not appreciate that there are some startups that are just not attractive investments whatever the price (they cannot offer sufficient upside to justify the risk).

The broader market factors which affect how investors look at all financial assets also will come into play.  This means that an entrepreneur must at all times be watching the broader financial markets and political and economic events.

It also means that if entrepreneurs are concerned about the availability of risk capital for their businesses, they should be.  Market demands are not at this moment consistent with a long term investment horizon.  Over time, the market may adjust, through a combination of changes in perceptions of market risk, or a willingness to accept less liquidity for higher return potential.  It’s also possible that governments may intervene to encourage changes in investor behavior.  However, these changes occur, if at all, is something that will happen broadly as part of the overall financial markets, and not narrowly.  My best advice to entrepreneurs is to get to know the dark matter of the financial markets, and to appreciate those factors which while not always reported in Tech Crunch or Venture Beat may as important to the entrepreneur’s financing plans as the next release of iOS or Android.

Anyway, to extend on the analogy please consider this.  What are you most interested in doing when you are dating:  Getting someone to like you, of course.  Think about how you accomplish this goal.  Are you engaging, interested, a good listener, prompt, well turned out or some other positive characteristic?  Think about all the ways you have acted to try to gain someone’s engagement and attention.   Now, think about the ways that you can undermine this goal.  Have you been clingy, a liar, unpleasant, unkempt, removed or otherwise been negative in some way?  Hopefully, you now see the point in the analogy; connection comes from what you do and how you act.  And, connection with an investor is essential.

Investing, whether done by an Angel, Venture Capitalist, friend or family member requires at its most basic level that the investor like you and trust you.  If you can point to an investment decision in a start up company where the investor going in said “I don’t like and trust the founder, but what the heck, let’s roll the dice” I will publish your comment and give you major kudos.  I have never seen that.  This doesn’t not mean that other factors are not also important – particularly the more that the investor is motivated by achieving financial gains.  Still, at some level the decision to invest is very much about making a connection and the entrepreneur being perceived in a positive way.

My experience with the importance of a positive connection extends after the initial investment.  The reality of start up life is that it is hard to achieve success, and it is at best a circuitous path.  There will be times when disaster seems behind every turn, and moments when all that seems to remain is to count the money that is about to come in.  The mayhem of being in a start up is only really analogous to raising a child (but that is another story for another blog).

If an investor does not trust the entrepreneur then at these times of uncertainty for the start up, the lack of trust will result in a higher likelihood of investor disappointment, intervention and recrimination.  Having a positive engagement with the investors in a start up is essential.  So, again, we go back to Dr. Phil and relationships.  Think of all the ways you keep a relationship going.  And, all the ways you mess them up.  It all applies to start up life and how you work with investors.

So, raising money and interacting with investors is like dating.  It is, but it’s also much more difficult.  You know why?  It’s a lot easier to have a positive result out of a date….  Here’s what I mean.  There are roughly 70,000 Angel investment deals done a year, and roughly 4,000 VC deals.  Compare that to the number of new businesses started each month – roughly 500,000.  The percentages for getting an investment from a stranger is just not that favorable.

The implication of this is that if you are looking to raise money for a start up then for each investor meeting that you take, there is only ONE positive outcome that truly matters: you get the investor to invest.  Who really cares if you have a nice time, or enjoy each other’s company?  You just want the investor’s money.   There are many, many more ways for a date or relationship to be a positive experience.  And, that brings me to my last point.

Before you look for capital, you need to be ready for rejection.  A high percentage of rejection, and much higher than the rejection (hopefully) you have experienced at any other time of your life, including dating.  For an activity that requires so much personal attention and energy, fundraising is unbelievably hard for that reason.  Moreover, it is hard not to take the failure to raise money personally, since it feels for the entrepreneur that he is extending himself in the most vulnerable way:  “look what I have built, don’t you just love it?”

Therefore, my best advice for entrepreneurs who are going to seek capital is to appreciate that it is like dating, but with a much lower likelihood of success.  Does that mean you shouldn’t try?  Of course not, but just understand that it is an activity that will tax your psyche and challenge your own sense of self-worth and happiness.  Get your helmet on and get out there, but be ready too!

A few days ago I was talking about entrepreneurship with a good friend in the venture industry.  We were trying to identify the most important personality characteristic an entrepreneur could have.  Our conversation centered on the usual attributes – tenacity, self-awareness and risk assessment – but ended up fixing on something less often discussed. This was the entrepreneur’s motivation to succeed as a way to find completion or resolution of an unsatisfactory personal relationship or memory.  As my friend put it, he likes to back entrepreneurs that are motivated by a desire to “put it to someone.”  I was initially taken aback, but as I thought about this, and my own life experience, I realized that he had a good point.

The  illustrative story he told me was of an entrepreneur who shared that he could have gone to Harvard or Stanford, but went to a less well known university “because if he went to _______ he could get a scholarship and stop having to be [s—t upon] by his father.”  The entrepreneur (unwittingly perhaps) communicated something fundamental about his personality – a desire to be his own man, to be in charge, and perhaps to excel over the negativity of a parent.  My friend pointed out that this story was reflective of most of the founders that he has backed – they all share in some way a desire to overcome, or prove wrong, someone who was close to them along the way.

As I have reflected on this story, it seemed to me that there was something to it.  In my experience entrepreneurs are motivated by a desire to control the world around them, coupled with a belief and vision that they can do so.  It is a core value, and passion that drives all entrepreneurs that I know.  Could it be that what explains this desire for control with many entrepreneurs is a desire to obtain power so that they can be safe, or secure, or to fight back against someone who has harmed them?

I’ve rolled this thesis around with a number of successful entrepreneurs since that time.  Interestingly, all of them have in common a motivating event where someone told them they “weren’t good enough” or “would never amount to anything.”  In fact, in each case they have pointed to these events as change-making moments that are long remembered.  I have a similar story in my own life where a high school principal reminded me that while I thought I was as smart guy, “the world doesn’t give a [frack] about you.”  That guy pissed me off, let me tell you.  And, he motivated me for sure.  Another friend told me of an interview for a prestigious job where he got turned down after he was told by the interviewer he wouldn’t amount to anything in life and asked “if he was on drugs or alcohol.”  Apparently, he thinks about that interviewer often as he goes through life….

I have often remarked that the most important entrepreneurial characteristic is self-awareness.  That is still true to me – an entrepreneur must be able to calibrate information, data and experiences to change paths and adapt to changes in circumstances.  But, perhaps I have shortchanged the “why” of entrepreneurship?  What motivates and shapes an individual’s life ambition and career path to be an entrepreneur rather than employee?  Could it be that entrepreneurship is driven by a deep seeded need – the need to be right, to be powerful or successful?  Does ambition require a sense of inadequacy (at least for a time), to take root and drive us forward?  Can you be a happy and well-adjusted child and become an entrepreneur?

I don’t have an answer to this question today.  Perhaps you do, and will comment on this blog post.  But, I will say that I have been exposed to another tool for evaluating entrepreneurs to work with, and invest in.  In future due diligence meetings, I am likely to ask “Do you have what it takes” right before asking “Who has really pissed you off.”

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?

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.

The place to begin is to acknowledge a few home truths. The first is that entrepreneurship, particularly, startup entrepreneurship is a 24/7 job.  It is not something that should be done lightly or without passion.  Successful entrepreneurs make their startup business their number one priority. This happens because of some of the key behavioral aspects of entrepreneurial behavior: passion for the entrepreneurial journey, optimism and a belief that an entrepreneur’s own efforts can change the surrounding world in a material way.   The net result of this is that successful entrepreneurs tend to give the appearance of monomania and single mindedness.

There is another aspect of entrepreneurial behavior that is not as widely discussed, and frankly should be.  Successful entrepreneurship also requires mental health.  It is extremely stressful to live on the edge, and manage the ambiguity of entrepreneurship.  Balancing this is the particular rush that comes with the journey, its highs and lows, and not knowing how it will turn out.  The very nature of the startup journey – its inherent instability – may be its most intoxicating characteristic. This explains why when entrepreneurs achieve an exit (or a failure) they tend not to retire to the beach, but find another startup.

The dark side of entrepreneurship, however, is that it also attracts personalities that are dysfunctional. The rush of entrepreneurship, and its intoxication, can fuel the flames of personality types that are ultimately fundamentally unsuited for business success.  Risk taking for its own stake, constant challenging of authority, a need for complete control, and the riding the highs and lows, may be examples of behaviors that manifest from dysfunctional and self-destructive personality flaws.  This is the largest challenge that investors face – determining the difference between someone who is drawn to the flame of startup life, but is able to manage not to be burned by it, and someone who will ultimately be consumed by the flame.

Personality is complex, and it eventually provides the template for how we deal with stress and challenges.  Individuals have something I call their “winning strategy” – the behavior pattern they utilize when they have their backs to the wall.  For example, people who are introverted tend to take challenges on by closing themselves in dark rooms and thinking.  People who are extroverted tend to want to talk things out.  For individuals under stress the largest issue to address is whether their winning strategy is in fact the best strategy for dealing with a challenge.

My experience with the startup CEOs that I have backed (and the many others I know well through FounderCorps and elsewhere) is that the most important characteristic that the successful ones all share is self-awareness.  This allows them to moderate and modify their personal winning strategy, or surround themselves with people who are able to work with the entrepreneur’s winning strategy appropriately.  In other words, functional entrepreneurs tend to be better able to see how their behavior patterns work with and affect their surroundings.

In my experience, self-aware people share another characteristic – they understand what steps they must take to nourish themselves.  The same way that we all need to eat, we all need to do things that allow our minds to rest and revive.  Successful entrepreneurs can identify the limitations of their personality, and find ways to take care of themselves for the long term.  Because entrepreneurship is a long term, life long journey.  It is a marathon, not a race.  Simply put, entrepreneurship is a 24/7 job, but entrepreneurs need to find ways to manage the stress and nourish themselves.

I am not suggesting that a startup entrepreneur shouldn’t have as his number one priority the success of his business.  Nor am I ascribing to the view that an entrepreneur’s life should be in balance the way that an employee’s should.  A true entrepreneur is 100 percent committed.  But, that is different from saying that an entrepreneur has to work on his startup every waking moment.  When I work with entrepreneurs I find that they are much more likely to be successful if they have some outlets and opportunities to refresh themselves.  The important thing is that they have sufficient perspective and self-awareness to take care of themselves.

In answer to the question, what do investors require from their founders I say that we look for, and require, a healthy and consistent commitment to the startup.  We look for perspective and self-awareness.  We are wary of compulsive people that are unaware of their behavior patterns and how it affects their surroundings.  In short, if a startup entrepreneur wants to spend 4 hours being a mentor, or 4 hours on a golf course, or 4 hours in a Church it is up to them. All I care about is the success of the business that I invest in.  And, I want the entrepreneur to be fresh, motivated and committed 100%.  How the entrepreneur accomplishes this task, is ultimately within their control. Because that my friends is the most important lesson of all. Entrepreneurs become entrepreneurs because they want to be in charge of their lives.  To suggest that they should confirm to a blanket truism or approach completely misses the point.

The content is also below. Kudos to Venture Beat for reacting so quickly when the DC Tech community raised its voice!

GUEST POST

Actually, Washington, D.C. does have a vibrant startup scene

January 28, 2013 10:13 AM
Jonathan Aberman

A few days ago I was minding my own business, enjoying my morning Chocolate Cheerios, when I came across a guest blog post in Venture Beat asking “Is there Hope for D.C,’s Startup Scene?”  Yeesh.  Not a great way to start a day.

Not one to let a good breakfast be ruined without fighting back, I wrote my own blog post standing up for D.C.’s tech scene, and subsequently had some really great interactions with VentureBeat and others in the D.C. tech community about it. I will give VentureBeat full credit for taking my and others’ reactions to heart and recalibrating their headline. The retitled post now asks, “Does DC know startups?” Reading the retitled post, it raises two important questions for D.C. tech: Can you find tech leadership in Washington? And what is the proper role of government in fostering technology?

There is no doubt that when I wrote my original blog, it was to stand up for the place where Amplifier Ventures and I make our home, and where every day I see entrepreneurs and government working hard to make things happen.  D.C. has a tech scene.  It is vibrant and frankly much more diverse and established than tech scenes in many other parts of the nation.  And, the government has a role — a large role in fact — in the tech world both locally and nationally. As someone who has been part of the D.C. tech community since the 1990s as an investor, and has worked in policy areas with both federal and local government officials, I have a firsthand view of the broad aspects of D.C. tech. I also have spent a great deal of time in Silicon Valley over the years, and think it is a terrific place. It has a vibrancy that is essential to our national economy, and is an extremely valuable resource for our future. I believe that D.C. tech has a similarly important role, and understanding its importance will allow all of us to benefit from its contributions and potential.

D.C. startups: Diversity and dynamism

Entrepreneurs follow opportunity (or as we VCs like to say, “entrepreneurs follow the money”).  The D.C. tech scene has a very distinct composition when compared to other regions.  Like Boston, New York, and the Valley, D.C. has a vibrant software startup scene.  We have accelerators, incubators, nationally recognized VC firms, and local government agencies that are committed to fostering further development of this scene.  Perhaps our light software development ecosystem is not as deep as some other regions, but if you aggregate all of the D.C. region’s entrepreneurial activity it is comparable to, and in some ways more dynamic than, Silicon Valley’s. What is not appreciated by many outside our region is that a substantial portion of local techentrepreneurship is engaged in creating complex software and other technologies and providing it to serve national security and the government.  And, this portion of our tech community has been extremely successful and productive for the last 25 years.

This kind of technology entrepreneurship might not be as blog-worthy as the newest way to share photos of cats, but it has created wealth and entrepreneurial rewards for many people in our region.  Moreover, there is a large technology work force here: There are as many software engineers in the D.C. region as in as the Valley, for example.

Technology M&A is also comparable. Last year I published a report about our region’s M&A activity. I looked at every M&A deal in the D.C. region and the Valley from 2005 to 2011.  M&A in Silicon Valley is concentrated in what it does best: consumer Internet and semiconductors.  Tech M&A in the D.C. region is more diverse.  Overall activity by number of deals was very comparable.  Entrepreneurship in the D.C. region is very symbiotic with the federal government.  That has been its biggest strength, and creates its biggest opportunity.  When you combine that with a healthy light software innovation ecosystem the picture is more nuanced and much more exciting.

If entrepreneurship is measured against its overall success rate, rather than its success against a particular type of innovative activity, the D.C. region has as many, if not more, opportunities for entrepreneurs to come up with a business idea and work it through to a rewarding exit than anywhere in the U.S.  It may not be sexy enough to be part of the tech blog echo chamber, but it’s a fact supported by data and my anecdotal experiences every day working with serial entrepreneurs in the D.C. region through FounderCorps and Amplifier Ventures.

The importance of the federal government

The second question I want to address in this post is the role of the federal government in technology entrepreneurship. Specifically, many in the Valley (and elsewhere) seem to share  a concept that “government doesn’t matter for entrepreneurship — it should just get out of the way.”

I have a problem with that as a broad statement. One of the unappreciated facts about our economy is that there is an almost direct correlation between government spending on R&D (and government regulatory choices) and every successful industrial cycle that that the U.S. has benefitted from, since building the nation’s railroads.  The relationship between basic science, application, national security and subsequent commercialization denotes a highly symbiotic connection between government and investors.

For example, the venture industry and entrepreneurs have benefitted mightily from the Internet, but the basic research to create it happened through U.S. government spending and policy choices.  The venture capital industry does not create industries, it finances incremental innovations in industrial waves.  That’s not a criticism, it’s a fact: Creating industries takes time and many blind alleys.  The VC industry needs rapid growth and returns.  It needs industrial waves to succeed for it to generate returns.

I would argue that the current challenge in the venture industry (which is related to its inability to generate extraordinary returns) is a direct reflection of the maturing of the most recent industrial wave and its monopolization and concentration.  This is why you currently find two types of venture funds succeeding: funds that can make big bets and withstand monopolistic market power from the Five Horsemen of Technology, and funds (and angels) that grow quick acqui-hires for these same monopolies.  But, they are not funding new industrial waves.

The big question to be answered is: Where do the next industrial waves come from?  Casting one’s eyes towards life extension, material science, artificial intelligence, man/machine interface, alternative energy, conservation, robotics and space, as just some examples, you see a large role being played by government R&D spending and policy in shaping these nascent industrial waves.  To say that government should just stay out of these things is to completely miss the point. In a world of hedge fund-driven financial investing and public company constraints, just about the only source of long-term R&D capital for emerging technology in our economy is the federal government.

There is certainly a large ideological battle being played out in our society about the role and expense of government.  It is playing out in the grinding fight over tax rates and government spending.  Heck, when golfers complain about their tax rates (thanks, Phil Mickelson, for crying about your 62 percent tax rate and demonstrating that you have the worst accountant on the PGA tour) we clearly have reached a point of saturation.  But, balancing a budget without recognizing the importance to our economy of government funded tech R&D and consumption is just silly.  It is like burning your furniture to stay warm.  At some point you are going to need someplace to sit.

Over the last 18 months I have worked with extremely committed people in DOD, DARPA and elsewhere in our federal government to figure out how to get the next generation of technologies matched with entrepreneurs and into the commercial world. This is a big effort and one that is of crucial importance to national and economic security. I expect that many of these technologies will get developed and industries will get established in Boston, New York, Silicon Valley, and the D.C. region, as our entrepreneurial communities innovate. But, make no mistake, the role of D.C., both in its entrepreneurs and in the government, will be an important part of our next industrial waves.

My message therefore is pretty simple.  Either on the level of the entrepreneur, or on the level of being a source of industrial waves, the DC region is highly relevant and important to our national economy.  To my friends in the Valley I say hello, and invite them to come spend some time with me here in DC.  It might open your eyes — and, as is often the case for entrepreneurs — some of you might move here.  After all, entrepreneurs follow the money.

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Jonathan Aberman is the Founder of Amplifier Ventures, an investor in government related technology driven companies. He is also Chair of FounderCorps, a regional not-for-profit focused on mentorship and entrepreneurial development in the Washington, DC region, and an Adjunct Professor of Entrepreneurship at the Robert H. Smith School of Business, University of Maryland. He is the co-host of the nationally broadcast politics and business program Leftjab Radio on SiriumXM. Follow him at @jaberman.

Top photo: U.S. Capitol via Shutterstock

Read more at http://venturebeat.com/2013/01/28/washington-d-c-startup-scene/#8FHPT8kdb3RrEGVf.99