A Bubble, or Just Frothiness?

This past Friday, I made the trek to Windy City to attend the TechVision2011 conference.  Put on by the University of Chicago's Booth School of Business, the conference featured panels on (among other topics) mobile devices, venture capital, and electronic content, and keynotes from tech success stories, such as Dan Rosenweig, CEO of Chegg.com.  The topic that created the most buzz, though, was the timely panel on the "Bubble Myth."

The question of whether or not we're seeing the start of another tech bubble has been troubling me lately.  Comb TechCrunch on any weekday and you're liable to come across several "We got funded!" announcements.  (On a side note, a member of one of the panels revealed that his startup had just secured funding, but told us, "You better not be tweeting this, cause I want my TechCrunch article.")  More concerning is the prevalence of media attention brought to companies garnering ridiculously high valuations.  Is Facebook really a $70 billion company considering it commands a mere $2 billion in revenues?  A 20x EBITDA multiple is above average in software, but this is 35x revenues.  Of course, Goldman Sachs and other Facebook investors forecasted the present value of the future cash flows based on growth in user base and aggressive growth in monetization of that base.  But I'm not sure they did.  One VC on the venture capital panel logged the opinion that many investors are pushing up valuations because they know later investors will push up their valuations, ultimately culminating in an explosive IPO.  Undoubtedly, if Facebook IPO'ed next year, Goldman would stand to make a solid return.  That sounds very much dotcom-bubble-ish.

But when the moderator of the Bubble Myth panel posed the bubble question, each panelist gave a definitive "No."  Same with the venture capital panel.  However, when they actually discussed it further, they described quite a bit of frothiness going on.

• High valuations: Yes.  But this time around they are based on something, like existing revenues.  Or at least a product launched.  Or at least a prototype.  But no business plan, that's a waste of my time.  Just send me a PowerPoint deck.
• Bubble-ish activity: Yes, but not here in Chicago.  Those crazy people in Silicon Valley aren't basing their investments on anything, but we are here.  Groupon has real potential.

In other words, there is a principal-agent problem here: Of course VCs and startup founders are going to say that there is no bubble, because their quality of life is greatly increased in the midst of a bubble and is decreased when a bubble a burst.  Admission of a bubble means that it may be burst sooner.

So, the jury is still out on the presence of a new tech bubble, and the head juror is time.  I trust that it will tell us the result in a few years.

Avoiding VC Funding

This week I felt enlightened by a class discussion about not obtaining financing from venture capitalists.  Prior to this week, I assumed that the majority of startups followed a process of 1) building a prototype, 2) developing a business case for the product, 3) obtaining financing through angels and/or VCs, then 4) growing fast and failing/succeeding.  From the tech blogosphere I heard the message, “If you don’t get funded right away, you fade into obscurity.”

But that process was tossed out the window when Dr. K put up a chart showing the number of VC deals done each year.  The number of deals is two orders of magnitude smaller than the number of startups: Though 600,000 startups are founded each year in the US, only about 3,000 businesses get funded by VCs.  That means that either 99 percent of startups fail right away, or most forge ahead with no VC funding.  As is well established by research, the percentage of failures is more like 25 in the first year and 50 after five years, so it must be the case that the latter is true.

It’s useful to think through the logic of a startup obtaining financing:  Why would a startup need financing?  The primary reasons would be to get over a big hurdle (e.g. build a $30M manufacturing plant), to grow as quickly as possible (e.g. hire 60 software engineers to build out the app in six months instead of twelve), or to pay the rent next month.  A startup probably needs funding to get over a big hurdle like constructing a plant, but few need to overcome any such hurdle.  Growing quickly can be good, but it is also very risky in terms of product quality, not to mention the fact that if a startup has 60 more engineers at launch than it would have had without funding, then it somehow has to manage and pay 60 more engineers on the back of the same product.  In other words, pouring gas on the flames might get you noticed quickly, but the fire will die quickly unless you keep adding more gas.  But then, what about the risk of losing first-mover advantage?  In most cases, first-mover advantage doesn’t exist, as it is subsumed by market timing and product quality (note that iPod came three years after the first MP3 player, and Groupon came a year after LivingSocial).  Finally, not having to worry about paying the rent is nice for the owner of a startup, but rent pales in comparison to his wasting additional years finding out that his product won’t take off.

That point is another one that I hadn’t considered, but a great talk by David Heinemeier Hansson (best known as the inventor of Ruby on Rails) hints at it: If you don’t have the next Facebook of an idea, then VC funding will make you waste many years as opposed to the short amount of time you would waste on your own before you ran out of money.  What’s more, assuming your VCs included a liquidation preference in your terms, you will end up with at best nothing and at worst losing your possessions or anything else you tied to the business.

All of this leads to the conclusion that starting a business is a process that can take many paths.  The path including VC funding is incredibly risky and should only be used if necessary, so chasing after it is usually a waste.

The Brainstorm Project

It took only a few days: Less than a week after traveling to Indiana to start the next chapter of my education last Fall, I felt the urge to Brainstorm.  I had discovered a glaring inefficiency in the way students had to keep schedules at the Kelley School: Class schedules, which varied week by week for first-year students, were posted to an internal web site with no export capability.  That meant 211 students had to manually enter the same 14 class sessions into their Outlook calendars each and every week.  My workaround solution was quite simple - I gathered an email list of everyone in my class and sent Outlook invites to them - but many class members did not want to participate and others wanted to build off of my solution.  Without a forum to talk about the problem or the solution, we defaulted to giant email threads that clogged everyone's inboxes.  What's more, school administration was left in the dark.

Brainstorming would have made this problem and solution much more manageable and clean.  And by the verb "Brainstorming," I mean utilizing Intuit Brainstorm, an idea-sharing social network developed by my professional alma mater.  The tool allows employees to post ideas for new products, new services, ways to streamline operations, and anything else to improve the business.  Everyone in the organization can comment on ideas, post documents and demo videos, and form teams to push ideas forward.  I took the tool for granted while at Intuit, where I worked on ideas ranging from efficient use of office space to a mobile app that we ended up launching in the Android Market.

On top of needing a place to discuss ideas for improving classes, organization, career searches, etc., I also see a huge need at Kelley for a place for entrepreneurially-minded students to discuss venture ideas.  While we have the weekly Napkin Club meetings, there is no forum for continuing to move ideas beyond the napkins, not to mention no forum for communicating promising ideas outside of the group that attends club meetings.  While the Kelley School is truly a leader in the academic side of innovation and entrepreneurship, there is a lot of opportunity in moving the needle on practical applications.  Thus I have decided to bring Intuit Brainstorm to Kelley.

The Brainstorm Project, spearheaded by the Graduate Entrepreneur Club and supported by faculty all the way to the Dean's office, will kick off at the IDEA Competition, an annual campus-wide business plan competition.  It may usher in a new age of creativity at the nation's premier public university in entrepreneurship & corporate innovation, or at the very least, it will give student ideas a tangible home.

Creativity Exercising

This week I spent a lot of time with creativity exercises.  They were not only fun; they also helped me realized that ideas are not hard to generate given the right environment and stimulation.  For example, in Dr. K's class, each group of 6 was given 15 minutes to come up with ideas to help the Kelley school using post-it notes.  My group wrote down a dozen of them, ranging from post-it art murals to color-coded mood indicators that you would post at the front of the room before class and after class.  Ideas truly are a dime a dozen as the saying goes… or are they?

            

Recently I have been immersed in watching Bones, a crime drama on TV.  Earlier this week, while reading the textbook for the class, I decided to do one of the creative exercises from the book (“Entrepreneurship: Theory/Process/Practice”, written by Dr. K).  The exercise calls for writing down all of the functions you can think of for a given list of items.  For each of the physical objects on the list (“A large pebble”, “an old hubcap”, “an old coat hanger”), I found myself thinking “murder weapon” as the first function that came to mind.  And for each of the people on the list (“An egotistical staff member”, “The office tightwad”), I found myself first thinking “potential suspect.”

Why did I first jump to crime-related functions for those objects and people?  I suspect the reason has to do with Phase 1 of the Creative Process: Background or Knowledge Accumulation. (The four/six phases of the creative process are documented throughout innovation research, but I won't delve into them here.)  Since I have been “educated” about crimes through watching Bones, I am likely to think of solutions to problems in the crime space.  However, what I believe is the most critical part of Background or Knowledge Accumulation is recency.  The more recent an experience has been had, the more likely it is to be the subject of ideas in creative exercises.  Put another way, the ideas generated in a creative exercise are most likely to come from recent knowledge-gathering activities or recent experiences.

This has important ramifications for innovation, particularly in a corporate situation.  Consider a team that has recently completed a big, important project, and now it is asked to have an “ideation” session where it is to brainstorm for 30 minutes on ideas for new products or product features for the company.  I’m willing to bet that most of the ideas would be small features to be added to the project that was recently completed.  In other words, you would get ideas for incremental innovations.  But what if you really need radical innovations?

In order to get ideas for radical innovations, you need to introduce variety and take advantage of the effect of recency.  Shortly before asking your employees to brainstorm, have them do things outside of activities related to the recent project.  Have them visit customers, read international news, go to the beach - anything that will help them get a different perspective than what they would have being heads-down on a project.  Social events are not just good at keeping employees happy on the job; they can also jumpstart creativity and, by extension, innovation.

This line of thinking has encouraged me to try to move Napkin Club to varying locations and varying days.  “Same time, same place” may make it easy to remember, but it can hurt creativity.

Baby Steps

Last week I started in on the academic portion of my Kelley education on corporate innovation and entrepreneurship.  The class is called Entrepreneurship: Leadership and Practice, taught by an enthusiastic pioneer of the field, Dr. Donald Kuratko (known to students as Dr. K).  On Tuesday, Dr. K introduced the principles of "corporate entrepreneurship," otherwise known as "corporate innovation" or "intrapreneurship."

One topic in particular really got me thinking on Tuesday: Dr. K noted that companies are more successful with their innovation programs if they start with incremental innovations as opposed to radical innovations.  He rationalized the data by saying that if senior management came in and announced that the company was looking for breakthroughs, middle management would get turned off because they didn't see themselves or their employees as "breakthrough"-type people.  In other words, a company just beginning its transition to an entrepreneurial culture needs to take "baby steps" to start its journey.  While Dr. K’s explanation of the point made rational sense, my immediate reaction was, What about the employees who have really good radically innovative ideas already?

That brought me back to May 2008, soon after I started working as a software engineer at Intuit.  One business unit (the one responsible for TurboTax) held their first-ever “Idea Jam,” a competition where teams could pitch their innovative ideas to senior executives.  The CEO personally flew down for the event and prefaced it by challenging employees to “discover the next growth engine for the company.”  A few colleagues and I entered the competition with an idea for a social network aggregator, and others pitched (and some demonstrated) truly amazing ideas, such as a smartpen mashup that translated writing and drawings from paper to computer screen instantly.  However, none of the ideas that blew me away were mentioned when the awards were given out.  No, the top prize went to TaxCaster, a web application that forecasts your tax refund from a limited set of data you input.  Senior management invested in TaxCaster and it launched a few months later (http://turbotax.intuit.com/tax-tools/calculators/taxcaster/).  While TaxCaster was a great idea and has since certainly increased sales of TurboTax, it wasn’t anything close to the next growth engine for the company.  It was an incremental innovation.

The experience of seeing a set of amazing (and radical) innovations get passed by in favor of a small one caused many of my colleagues to become bitter about the company’s innovation efforts.  It took some of them two years before they participated in any events like Idea Jam again; they were unenthusiastic about pitching ideas to managers who were only interested in add-ons to TurboTax.

While I now understand the logic behind focusing on incremental innovations first, I wonder if that logic fails to account for those in the company who are already entrepreneurial and are ready for radical innovation.  Are baby steps worth the risk of losing the participation of the most entrepreneurial employees?  Or is there some other action that leadership could take to encourage radical innovators to stay engaged?

The Silicon Valley MBA

For the past three weeks I was on hiatus, as many b-school students were for the holidays.  Out of my desires to find a summer internship and to learn about innovation in the discipline's flagship metro area, I flew to the Bay Area to meet with companies, Kelley School alums, friends, and strangers.

Several of the company visits were arranged by my colleagues in the Kelley Marketing Club as a Bay Area trek.  One of the stops on the trek was Google, a world-renowned hotbed of entrepreneurial thinking.  My first sight upon entering the visitor's lobby in Building 43 was a bit unexpected: roughly one million b-school students in suits.  The dichotomy of suits shaking hands with Googlers in jeans was striking.  I mean, really, you thought it was a good idea to dress seventeen levels above the people you're meeting?  However, it turns out my shock at seeing a bunch of suits at Google was somewhat controversial, as I found out from a fellow Kelley student who was feeling self-conscious in her business-casual attire.

"What do you wear to an interview in Silicon Valley?" she asked me.

"I would say business casual at the most, since most people here go to work in jeans," I replied.

She gave me a look.  "But don't we have to wear suits to interviews?  I mean, we're MBAs."

No, that doesn't fly here.  During my three-month stint in San Francisco and my numerous visits to the Valley, I have found that the perceptions of the term "MBA" range from "respected business leader" to "former coder who couldn't make it" to "out of touch ivory tower dweller."  I recently had a conversation with the founder of a tech startup at a coffee shop in San Francisco.  After I told him that I was an MBA student, his first question to me was, "Do they make you do anything at your school?"

And this attitude isn't just limited to startups.  A former coworker of mine often lamented that product managers just shot down all the ideas of engineers, killing their entrepreneurial spirit.  True, business school is great at teaching students about the multitudes of things that don't work.  Admittedly, when I mull over Harvard Business Review cases, more often than not I am tempted to answer with "liquidate the business, this will just fail and waste money."  No wonder MBAs are not universally regarded highly, to put it mildly, in a Valley culture that rewards those who try, fail, and confidently pick themselves up to try again.  But it's hard to blame business leaders for adopting such a risk-aversion.  Engineers are told to fail fast, to learn from their mistakes, and that at some point along the line they will develop something that customers will be happy with; a great engineer understands the value of iteration and feedback.  By contrast, when a middle- or upper-level manager oversees a failed project, she is quite often the subject of a "with mixed emotions" email to the group.

What does this mean for promoting an innovative culture?  What can an MBA do to foster such a culture in such an environment as the Silicon Valley tech scene?  Well, it starts with accepting the "risk-aversion" learned in business school as "prudence."  It is prudent to not bet the farm on an idea or a product created in a vacuum, of course.  But as we can learn from Clayton Christensen's The Innovator's Dilemma, it is also prudent to put resources behind seemingly non-sensical product lines that have the potential to cannibalize sales from other product lines.  The keys in that situation are to develop the new products in autonomous (in a practical sense) organizations, and have them find or develop new markets for their new products, not attempt to satisfy the needs of the company's current customers.  Dismissing the development of such disruptive products is not only bad for creating an entrepreneurial culture, it can also be dangerous to the business itself by opening the door to disruption from startups, a malady seen time and time again in Christensen's study of the computer disk drive industry.

Put succinctly, an MBA can gain credibility by promoting innovation within an engineering-focused organization while at the same time remaining prudent, as she is taught to be in business school.  The key to Silicon Valley opening its arms to MBAs lies in that very concept.

Jump-starting Entrepreneurship

This morning, as I flipped open my daily TechCrunch, I found a fascinating story about Travis Kiefer.  (http://techcrunch.com/2010/12/03/for-27-this-kid-will-do-whatever-you-want-in-antartica-on-tuesday/)  Travis Kiefer is a Stanford student who founded Gumball Capital, a non-profit that gives college students $27, 27 gumballs, and one week to find a way to raise money (The Gumball Challenge).  Proceeds from the challenge go to micro-lending organizations to provide funding to entrepreneurs in the third world.  In essence, Kiefer is an entrepreneur who encourages entrepreneurship to fund entrepreneurs.  Say that ten times fast.  And how does he raise money for his non-profit?  Well, on Tuesday, he is running a marathon in Antarctica and will do whatever you want there if you donate $27.

The Gumball Challenge (and Kiefer himself) is pretty wacky, but it's a very creative solution to the problem of encouraging entrepreneurship.  That is the very problem I'll be seeking to address starting next month, as Vic's successor as President of the Graduate Entrepreneur Club.  Currently the GEC has several programs to address it, including Napkin Club, which encourages idea generation through camaraderie in a social setting.  What I'm hoping to do going forward is help move students in the direction of action on their ideas.

But what really interests me about the Gumball Challenge is precisely the fact that its wackiness is effective.  Last year, 47 teams took up the challenge and managed to raise $2000 for micro-lenders.  That means that on average each team raised about $44 in proceeds off of a $27 investment in one week.  Not too shabby.  The challenge reminds me of a similar project done annually in a class taught by Stanford professor Tina Seelig, where she gives students $5 and two hours to make as much money as possible.  In her book, What I Wish I Knew When I Was 20, she chronicles many of the projects done over the years, including a bicycle-tire-refilling operation that netted the students several hundred dollars.  (Watch this for a short presentation on the project.)  As she notes, the most successful teams thought beyond the 5-dollar and 2-hour constraints and did something that they could have done with nothing.  I think the big lesson here is that the gumballs and the $5 are examples of successful catalysts for entrepreneurial thinking.  In other words: Set the stage for the event, give people something a bit wacky, and watch the innovation flow.