Wednesday, October 4, 2017

What do you want money or power? (650-7)

Entrepreneurs are often told that the founder must struggle with a "control versus wealth" dichotomy. So we ask budding entrepreneurs, "Do you want to become rich or do you want to be in charge?" If the assumption is that the entrepreneur is solely seeking capital appreciation , we may advise the Founder CEO to give up control as fast as possible, if a faster runner comes along you should give the baton to them, right? The more folks rowing your boat the faster it will go.

In fact, this is an artificial construct that mirrors the assumption that monetary wealth is the only way to measure value. Many folks decide that because they can't measure it it doesn't exist. Are you captive to that false assumption? If so, then a single yardstick, capital appreciation, can fool you (and prior economists) to determine that that yardstick is sufficient proxy for value.

Craigslist, Wikipedia, Apache, Linux, MySQL, LibreOffice, and Firefox are all enormously valuable yet their success did not translate to capital appreciation.Today's entrepreneurs are not the Robber Barons of old; it is rare that only motivation is money. Most folks have a sense of fairness, ethical behavior, environmental sustainability, equity, and positive impact. At some time these other values will challenge a steadfast emphasis on monetary gain. As one replaces "wealth" with "value" the dichotomy falls apart.

Control and value are not dichotomous. Tight control can yield or destroy value, as can lose control. For example, a lack of control by the founder can generate a lack of value placed on social responsibility and subsequent production of a company with minimal or negative social impact. In fact, that choice may lead to destroying monetary value as well if the customers also value social impact. Do folks really think that one can launch a successful company that sells a product that kills people (e.g., the tobacco industry)?

If the personal definition of value is more nuanced and a non-monetary reason for a desire for control is defined, a simple function won't do. To be fair to the entrepreneur and guide them in the choices they need to make we must develop a more broad definition of the tradeoffs associated with value creation.
The first step is to define the personal value of control. 
  • Do you want control because you have a vision of something that is truly unique? 
  • Do you want control because otherwise you have no clue what you do with your time?
  • Is the purpose of control to ensure that you and only you tell you what to do? 
  • Do you want to be invcontrol because you get bored doing the same thing? 
  • Do you seek out flexibility to engage in opportunities you didn't foresee?
Alternatively, are you tired and would rather be a spectator than a player?

Value too can vary. All these models of control seeking and avoiding can achieve different types of value.
  • Where does social responsibility fit in? 
  • Do you care about externalities? 
  • Is compensation parity an issue?
The control vs. value debate is thus not a battle or a tradeoff, but the start of an internal and external conversation, and an exploration of how the two relate for you. That isn't as simple as a dichotomous model, but our brains are pretty sophisticated. Reducing motivation to two options was inevitably simplistic.
  • How much control over the direction of the startup do you want and what are the personal and external motivations? 
  • What value do you want to create? Assuming there are multiple components, how do you rank them in importance or weigh them?
  • If it turns out that you cannot achieve all your potential values, which one is more flexible for you. What value will you give up?
  • Most importantly how does your being in control map to obtaining value? In other words, without your efforts would the value still be realized?
Answer the questions now and write them down. Later when an investor asks you to change your control or the direction of the company, you'll have an answer and a guide for what direction to go. Over time, one's desire for control changes as does what we value. Be prepared to ask the questions again; the answers might not be the same.

To summarize, the vision of an entrepreneur as someone who wants to become fabulously rich or powerful is pervasive. And we expect that to achieve the goal they need to tirelessly work 80+ hours a week and demonstrate to third-party investors on a daily basis that they are willing to forgo everything to make money for them. Instead perhaps entrepreneurs are people with new ideas who want to work with others to launch them. Entrepreneurship in America is actually decreasing, despite all the resources that are available here versus elsewhere in the world. Perhaps in 2017 we should stop focusing on burning out entrepreneurs by locking them into a treadmill assuming that value equals money, and instead focus on capturing their creativity and energy.

Photo Credit: Omnidirectional treadmill immersive simulator.JPG Author: David Carmein Licensing: Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License,

Monday, October 2, 2017

Should Entrepreneurial Finance Calculations include Non-Monetary Impact? (650-6)

We all have assumptions that we don't question. In the Venture Capital world the assumption is that most new startups will fail, a few will have middling performance which basically returns the initial investment, and a few will be "superstars". The latter will return the bulk of the capital that's invested by the venture capitalist. This expectation assumes an emphasis on capital appreciation is the only goal of funding; that is, the goal is to extract capital from the very few "winners" and to discard the "loser" companies. 

Alternatively, I would argue that is it possible that discarded companies failed because the venture capitalists in their focus on capital potentially destroyed what was unique in the company through their manipulation and overemphasis on money. Had they showed more respect for the company's desire for social responsibility and corporate culture then the start up would have retained its value and grown. Perhaps not as quickly but potentially in a long-term way. 

Admittedly, such an emphasis may mean that the bright stars of their funding do not burn so brightly. So they end up earning less of return on their investment. And potentially VCs have already done this calculation and made the decision to stay with the status quo.

However change tends to happen whether you do not accept it or not and eventually this model may fail. How could that happen? The goal of capital appreciation assumes that it is aligned with the goals of others. If staff and officers develop other priorities (e.g., B Corporations) then the model that emphasizes accumulating cash-based wealth will be too simplistic and miss other means to obtain value. The venture capitalist will need to adapt to a model that values more than just capital appreciation and return on investment. 

That may sound fanciful (or naive) but we already see in the sharing economy that people need less. For many the phone is the only device they need and will soon be the only computer. The foldable screen will even remove the tablet. Ride sharing is eliminating cars and autonomous cars will further that. Even housing is migrating to less expensive model requiring fewer "things." Just in time delivery of things is reducing the need for personal inventory and VR allows one to explore and connect at lower cost. So needs are changing and capital is just one of many needs.

So today's business plan is full of money in, money out, buyers, sellers, income and expenses. My guess is that tomorrows business plan will also include non-monetary value in/out. It will also identify externalities, that is negative impacts on society that won't show up on the balance sheet but will be a cost to society. And investors will shy away from business plans that suck in value but provide little non-monetary value in return. And companies that create enormous value by passing on the negative value to society will fail to get funding. 

Photo CreditAuthor: Greenberg, Arthur, Environmental Protection Agency. (12/02/1970 - ) TitleHUGH STRIP MINING MACHINERY IN OPERATION NEAR DUNFERMLINE IN FULTON COUNTY. FULTON COUNTY HAS BEEN, AND IS, A CENTER FOR STRIP MINING IN THE STATE, April 1973, This media is available in the holdings of the National Archives and Records Administration, cataloged under the National Archives Identifier (NAID) 552417.

Sunday, October 1, 2017

Startup Scaling Issues (600-7)

The founder might ask "am I a Bill Gates or a Mark Zuckerberg?". In other words, "Will I be the leader of my company many many years from now?" "Will I retain the powerful position of CEO forever?"

Leaving aside the unique talents and skills of those two individuals, carefully look at their businesses. Microsoft entered the software business for PCs when it didn't exist. Its major potential competitor became its supplier of business, that is IBM. IBM did not see the value in software and allowed Microsoft to control that market. This unique situation that will never happen again. IBM's foolish mistake is a lesson for the history book. Further, in a connected world, there will never be an opportunity for a company which can grow in isolation for so long and allow an individual to develop the necessary CEO skills at a slow and methodological pace, as Bill Gates was able to. Look at the autonomous car market. Can you imagine a few companies that are make cars and one recently created company writing the software to drive them?

Regarding Facebook there were multiple other social media platforms before Facebook so time was moving more rapidly then it did for Bill Gates. Still, Mark Zukerberg was able to grow his idea slowly and incrementally and reach a very specific audience with a successful product. But this all happened before Facebook was created. In today's highly connected world a new idea with potential would become immediately available, probably via Facebook. If the CEO does not grow the idea rapidly it will be easily copied. Today, it will be easily copied by Facebook or Google or Apple or Amazon. Look at what happened with Snapchat and Instagram's rapid copying of its core features. There simply is no room for growing slowly anymore in today's startup culture.

So Founder CEOs must assume from the beginning that they will likely not be able to adapt or acquire the skills required to grow the company at the incredibly rapid pace required in today's business climate. As a visual analogy, the season change too quickly now. for a tree to adapt and survive.

The question then becomes how can the CEO founder prepare for the inevitable?

As always burying your head in the sand is probably not the right strategy. Proactive Founder CEOs will seek out feedback on their performance from the board and self assess their skills and talents on a regular basis. Are they accomplishing their goals? Do they perceive that a new challenge is coming which will be outside the skills they need? If so, the Founder CEO must be proactive and initiate the search for a new CEO since finding the right CEO is not necessarily an easy or rapid process.

By initiating the change in CEO, the Founder CEO actually increases the likelihood of continued involvement in the company at a management or board level. In resisting the change they guarantee that eventually they will be pushed out and there will be an unpleasant transition. In the worst case scenario, that transition tanks the company and the Founder CEO has lost everything they hoped to gain in terms of both financial wealth as well as the ego support for the creation of their company.

As the startup grows this is a significant problem for other founders as well. It is unlikely that they are still the best person for the job they were given and the titles they received. They too must self-assess and be ready to yield to a person who has more talent to handle either the existing challenges or the coming challenges of a rapidly growing company. If they don't see it, then making them see it is the job of the CEO. And a Founder CEO struggling with this decision  proves yet again to the board that the Founder CEO isn't the right person for the job.

Similarly, there are likely to be non-founder initial hires who've been elevated to higher positions than they their skills justify. They may also be paid more then should be based on their skills and talents. The founder and supervisors of such staff must be able to accept the potential replacement of such individuals even if they are family members. Resisting that replacement merely delays the day of their replacement. And again proves that there are leadership problems at a higher level. The positions of the initial hires are not guaranteed. New leadership will inevitably proceed with staff changes that are required based on company growth.

The message above is not one of hopelessness but the need to acknowledge that the company is growing and in today's business market change will come quickly. With growth comes change and every founder in every position should recognize the high likelihood that over time a more qualified person should take over their position.

  1. Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 10.
  2. Solomon Glenn. Transitioning from a startup to growth-stage company. Fortune. February 11, 2013.
Photo Credit: Four Seasons - Longbridge Road. joiseyshowaa Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0). See a blog about this tree.