Velocity Conference: Day 3

The third and final day of the conference had the two dozen of us back in the comfort of the Faculty Club in Berkeley.  The assembled cast included several veterans and a relative newcomer:

• Gary Rogers, former CEO of Dreyer's Ice Cream
• Louis Jordan, SVP of Corporate Finance at Starbucks
• Joe Walsmith, Entrepreneur in a number of companies
• Rick Roethke, Founder & CEO of Barrington Management Co, a real estate firm
• Nicholas Seet, Founder of Auditude

Gary Rogers told us a fascinating tale about visiting an ice cream shop penniless, jobless, and looking for whatever work they had.  Two days later, he was the new owner of Dreyer's Ice Cream.  His ability to seize opportunities whether or not he seems to have the resources to do so absolutely exemplified the entrepreneurial spirit, and it served him well throughout his career.  He gave us seven points of advice to take with us in our own careers:

1. Make the most of every day (and he extended this to include "be serendipitous")
2. The joy of life is in the struggle
3. Be a builder (the process is the most fun part)
4. Prepare to be lucky ("fortune favors only the prepared mind")
5. Be a persistent optimist ("there is no such thing as can't, only won't")
6. You can only make some of the people happy some of the time, and that's enough
7. Develop a sustainable competitive advantage and leverage it

Rick Roethke struck me as somewhat of a modern-day folk hero.  He actually joined us for many of the sessions during the conference, including the cocktail reception at Plug and Play, where I talked with him for quite a while.  "I'm not like all these people here," was one of the first things he said to me.  When I asked what he meant, he explained, "They probably wouldn't like the way I do things."  He continued to describe his career: laid back, enjoying the ride for what it is, never working too hard, taking vacations when he wanted to take vacations (even if it meant ending jobs), a lot of luck, finding deals by talking with people on vacation, and so on.  For Rick, his storied career wasn't for some feeling of achievement, purpose, or altruism; it was something to do that provided him the means to enjoy life.  His main concerns were world travel and relaxing in San Diego.

With all that we hear in our professional lives, and especially in business school, about success and taking on more projects to get ahead, Rick's story causes a bit of pause.  Yes, there is another way.

Velocity Conference: Day 2

A few weeks have gone by since the conference wrapped up in Berkeley - I spent two with a class in New Zealand and Australia (perhaps more on that later) and one back in Bloomington getting re-acclimated to the usual school life.  But I'd still like to share some of the insights I gained from the wonderful Velocity experience.

Day 2 had us traveling the Bay Area to meet with several organizations living the Silicon Valley lifestyle.  First up was Google, a place I've visited many times but which always has something new to offer.  Part of the "new" this time was a rude tour guide, a software engineer who had obvious disdain for us business students - my favorite quote was "People will a lot of times write code up here on the board... but you guys wouldn't know anything about that."  (I suppose his attitude gives validation to my earlier thoughts on MBAs.)  But some good insights into Google's innovation-related incentive system came out as well: One important piece is the practice of holding people accountable for goals beyond their control.  Suppose you're in a cost center, like development support, but your bonus hinges on a profit center's, like Android's, revenue.  What are you going to spend your spare time on?  Another piece, of which the managers we talked with were particularly proud, was that employee performance is measured by impact, not effort.  In other words, evaluation is based on how many people you get excited about something, not how hard you work.  Does that encourage entrepreneurial activity?  I'm not convinced on that point, but it certainly encourages a focus of existing entrepreneurial activity on things that matter to lots of people.

Our next stop was Sonicwall, a B2B company that provides top-notch firewall hardware, software, and services to (primarily) small businesses.  We met with members of their executive team to hear about working in a high-growth environment.  The key, one of the executives told us, to entering a new market is to not look at what competitors are doing, but to instead imagine you have nothing to do with the market and simply solve the customer's problem.  His favorite line of thinking was to imagine how LL Bean would enter the aviation market.  I remember hearing something very similar from Aaron Patzer, founder of Mint.com, when he spoke to all Intuit employees shortly after the acquisition of Mint by Intuit.  When speaking about the beginnings of the company, Patzer focused on the fact that he completely ignored what Quicken was offering and simply thought through what the average person wanted to see about their finances.

We finished off the day at Plug and Play Tech Center in Sunnyvale, the world's largest business incubator. The tour took us through mazes of cube farms grouped into themes by nationality, alma mater, and sometimes subject matter (like "mobile app development").  The unique decor found in each nook and cranny of the place made me feel that this was a truly creative space fit for entrepreneurs.  When our host explained how Plug and Play works, I was surprised to hear that it does not see itself as an incubator - it's a real estate firm.  It offers rental office space to entrepreneurs, and the relationship can end at that.  Of course, it also invests in some of its patrons (about 1/5 of them) and provides services like mentoring and introductions to VCs, but all of that is a la carte.  After the tour we heard from a panel of entrepreneurs housed in Plug and Play itself, who gave us advice on starting and running a business in the Valley.  One valuable nugget that came out from the panel was the belief that when you're starting a business, you have to look at your community as if you're on a playground: everybody might as well be your friend, regardless of experience, age, title, and so on.  Another nugget: If you're relying on secondary research to start a business, you might as well build nothing and just give up.  You must conduct primary research to really understand a new market.

The end of the day brought us a cocktail reception in a Plug and Play cafeteria with dozens of Kelley School of Business alumni in the Valley, and headlined by Art Norins, founder and CEO of Nor1, Plug and Play's largest client at something like 120 employees.  Back in October, Art spoke to us in Bloomington about the founding of his company and about networking in the Valley, so it was a bit of a reunion for us.  This time he addressed the challenges with rapid growth, as Nor1 has expanded from just 70 employees when we saw him five months ago.

Armed with piles of SWAG from the day (I was particularly fond of my Android keychain flashlight), we boarded the bus for the trek back to Berkeley, where we would close out the conference the next day.

Velocity Conference: Day 1

This morning kicked off the latest instance of a dozen-year-strong tradition for Entrepreneurial Management Academy students at the Kelley School:  We traveled to the Bay Area to learn about, at ground zero, the most vibrant startup culture in the world.  The Velocity Conference is put on each year to expose entrepreneurially-minded IU MBA students to the culture, the industries, and the financing environment of Silicon Valley.  Why this particular place?  As the mastermind of the Velocity Conference pointed out in his kick-off talk, the last 30 years in the Valley has seen more value creation than in any other place in any other time period in the history of mankind.

That mastermind was Dr. Jack Gill, founder of Vanguard Ventures, former faculty at Harvard, and IU alum.  He gave us a talk on his research into understanding the relationships between intelligence, leadership, and entrepreneurship.  As he posited, "intelligence" as we normally understand it is concerned only with the left hemisphere of the brain (logic, analytics, verbal skills), and thus our education focuses almost exclusively on developing left-brain skills.  However, an analysis of all Fortune 500 CEO's revealed that, in general, they do not possess superior left-brain skills, but rather they possess superior interpersonal and intrapersonal skills associated with the right hemisphere of the brain.  In other words, they are confident in themselves and they have the ability to build positive lasting relationships, and they are merely "good enough" at the core business subjects we learn in school.

We also heard from Andrew Smith, Founder and CEO of Advanced Transit Dynamics, a company that produces the Trailer Tail, a contraption that mounts onto a tracker trailer to reduce drag and therefore improve fuel economy by 5-6%.  Starting from his idea getting launched by winning the Rice business plan competition in 2006, he took us through his journey coming out of business school as an entrepreneur, and offered nuggets of advice that he has picked up along the way.  He uttered numerous quotable lines, including, "Entrepreneurship is mobilizing resources that you can't control."  How true: The art of entrepreneurship (in both a startup environment and a corporate environment) lies in inspiring people to help you achieve your goals with the least capital possible.  Need a prototype built?  Find some mechanical engineering students at a local university and see if they want to build one for a class project.  Getting a lot of money early can turn out to be a burden if you lose sight of such valuable frugality.

Other speakers included Greg Oslan, President and COO of Narus (now part of Boeing), and Rick Johnson, CEO of Johnson Ventures.  Greg took us through his experience successfully crafting turnaround situations, while Rick gave us his perspective on what makes a good business.  Our final speakers of the day, Sanjay Subhedar (founder of Storm Ventures and IU alum) and Tim Walsh (VP at Silicon Valley Bank and IU alum), shared with us their thoughts on financing in the Valley.  They lamented that it is becoming increasingly difficult to find good deals out there, not because there is a lack of ideas, but because there is a lack of need for funding; hardly anyone needs to build a manufacturing facility or even a storefront anymore so venture capital is limited to later-stage, high-growth period companies.  What I found particularly intriguing about their talk was their nonchalant acceptance of the beginning of a new tech bubble, something with which I'm concerned.  Sanjay half-joked that he was really looking forward to the bubble, because his companies would stand to be acquired for top dollar by big players like Google and Facebook.

Tomorrow we're on the road, visiting Google (to learn about corporate innovation), SonicWall (to learn about the rapid growth stage), and Plug and Play Tech Center (to learn about the world's largest incubator).

An application of Outcome Driven Innovation

The unique 7-week class schedule of the Kelley School of Business has meant that this week has been chalk full of final exams, projects, and presentations.  From among that intensity has emerged a project applying a particularly helpful tool for corporate innovation: Outcome Driven Innovation (ODI).  ODI has its roots in the "jobs" methodology I wrote about a few months ago, as it involves identifying outcomes that customers are trying to achieve with a particular product type.  The tool specifies five steps in the research process:

1. Plan outcome-based interviews
2. Capture desired outcomes
3. Organize the outcomes
4. Rate outcomes for importance and satisfaction
5. Use the outcomes to jump-start innovation

For the subject of our research, the four of us team members selected Oncourse, an intranet tool used within Indiana University for the purposes of facilitating classroom document sharing, calendaring, and communication, among other uses.  We found the ODI methodology to be especially helpful in breaking through the feature requests for and complaints about Oncourse that were flung at us as we interviewed users, allowing us to see the truly greatest areas of opportunity for innovation of the product.  Our summary memo is below.

----------

Executive Summary

After conducting primary research and applying the opportunity algorithm of the Outcome Driven Innovation (ODI) model, we concluded that the outcome with the most opportunity for improvement is one that maximizes student preparation level for class.

Background

Oncourse was selected for several reasons - it is a well-known product among students at Indiana University, playing a central role in the students’ academic experience.  However, since each student uses Oncourse in a unique way, we thought there was opportunity for innovation since a commonly agreed-upon usage method does not exist.  We explored various outcomes students are trying to accomplish using Oncourse, helping us understand specific stress points with the product and also innovations that would enhance the product in the most meaningful ways.

Application of the Outcome Driven Innovation Methodology

The ODI methodology identifies a qualitative as well as quantitative way of fine-tuning outcomes that customers are trying to accomplish, solving one of the problems with qualitative research: customers can rarely tell you what they want. For instance, when asked about a time of frustration using Oncourse, one student responded “professors upload files in different ways, there is no standard method.”  While this comment referred to a feature, specifically file structure, we had to probe him for a deeper understanding behind his response.  Therefore, we asked him what feelings he wanted to experience or avoid using Oncourse, to which he responded, “I don’t want to become impatient.  I want to feel calm and the process should not require too much of a thought process.”  By understanding the emotional context of the high level feature comments and suggestions, we were able to analyze and aggregate the student experience with Oncourse.  To replicate a representative sample population, we selected males, females, Kelley students, non-Kelley students, domestic students, and international students.

Upon analysis of all the responses, we discovered six distinct outcomes that students were trying to achieve with the product. These outcomes addressed specific issues with the product that are important to students, including preparation for exams, access to supplementary course material, and making up for a missed class. Next, we followed up with the respondents by having them rate the outcomes on importance and the level to which they were currently satisfied by the product. We then utilized the opportunity algorithm to identify the areas of greatest opportunity, finding that the three greatest opportunity areas were maximization of preparation for class, minimization of stress related to exams and assignments, and minimization of time necessary to see everything related to the school experience. Finally, we brainstormed possible directions for innovation based on the outcomes with the greatest opportunities.

Conclusions

We learned that Oncourse has several benefits but also several areas of improvement. The respondents use Oncourse to satisfy the basic jobs that the software was designed to perform: obtain the material needed for classes, exams, homework, and even updates on social events.  However, emotions behind the responses indicated that Oncourse could perform these jobs either in more efficient, innovative, or personable methods. 

The opportunity matrix revealed that maximization of students’ preparation level for class is the outcome with the widest gap in the current version of the product. In order to address this, we identified ways to better organize class information to make it easier to consume and more relevant for the student. Sample ideas include: a uniform interface across classes, a list of required vs. recommended actions for class preparation, and outlook calendar sync with class schedules and deliverable dates.

At the same time, we identified challenges with the ODI data gathering process: it is difficult to steer interviewees away from merely suggesting features or logging complaints, and equally difficult to draw out clearly distinct outcomes.

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.