Behind every silver lining there's a dark cloud

Much has been said about cheap foreign products sold at Walmart and
the affect on local, small businesses and the communities they
support. An undiscussed but significant downside of cheap consumer
goods is that they disempower men (and women) by making it nonsensical
for them to make anything themselves beyond a paycheck.

When a man is not at work and is in the presence of his family, what
productive, meaningful activity can a man model for his children?
He can read, think/write, (house) paint and assemble stuff bought at
the store. The first two activities appear to be ignoring one's
family and the second two are unskilled to say the least. Some of us
are lucky enough to have been taught by men now dead how to 'fix' some
of the things that break around the house. But even then, the current
definition of repairing things is largely a matter of disconnecting
the broke item, throwing it out and then replacing it with a new one.

Here is another example. Gardening been trivialized as to be the
hobby of those who buy their food at a supermarket and have the luxury
of sufficient free time to putter around outside. So rather than
growing a garden, we are reduced to pointlessly chasing a lawnmower
around a lawn so that we can pointlessly chase it again the next
weekend.

Is learning outside of the classroom 'on our own' even recognized as
learning? Or is it learning only after we receive a certificate from
some self-proclaimed Institution of Higher Education? Who writes
poetry, paints pictures, sings, plays a musical instrument, declares
themselves as a photographer or proudly proclaims themselves to be an
amateur botanist or scientist?

Now suppose a person happens to lose their job. As I see it, they are
completely disconnected from any meaningful activity. Can they make
their children's clothing, grow their own food, cut their own wood,
make their own furniture. Or does modern living just make them seem
pathetic to themselves and their neighbors?

The Anatomy of an Entrepreneur

Read with interest an article entitled "The Anatomy of an Entrepreneur" from the Kaufman Foundation site.  Wondered why Dr Wadhwa did not develop a cohort group of non-entrepreneurs and then perform a simple linear discriminant analysis.  

As far back as the late 70's, I remember conducting surveys of hospital patients to determine which responses correlated to which outcomes.  For example, we surveyed chest pain suffers and developed ten questions that predicted with ~99% accuracy whether a person was experiencing a heart attack (Group 1) or another medical condition (Group 2).  In "The Anatomy of an Entrepreneur" the Group 1 members might be entrepreneurs and Group 2 members would be non-entrepreneurs.   Clearly, the predictive questions have to have been part of the original survey but the need for a control group remains fairly obvious.   

As a serial entrepreneur myself, I think back to when I took the leap and want to share a subtle observation clealy not understood by the study organizers.  The types of parameters addressed in the survey, such as parents education, my education level, and my socio-economic status, had little impact on my willingness to leave the safety of being a wage-slave and choosing to be willing 'to eat only what I kill.'   There were many environmental influences acting on me when I elected to take the leap.  Success within a corporate climate gave me confidence.  At the same time, I was frustrated with the inevitable slowness and bad decisions made by large organizations.  I happened to fortuitously bump into a few people who were on-their-own and doing it, which gave me the idea to do it and the belief that I could succeed.  These are the types of things that were big influences at the critical time in my life that I made the decision to become an entrepreneur.  The observation, that recent events more significantly influence our decisions and the trajectory of our lives than do distant events, is carefully documented by George Vaillant in his important book Adaption to Life.  In it, he reports on three longitudinal studies (his was Harvard's 72 year Grant study of 238 classmates from the 1930's who were followed throughout their life).  He clearly demonstrates that what you did this year has more influence on your life tomorrow than what you did twenty years ago.  

I will make one last observation.  To academics and to many of the entrepreneurs they survey, the decision to become an entrepreneur looks in hindsight as very strategic.  It may even be very strategic when viewed in the context of the entrepreneur's life history.   But it feels much more tactical and provisional when you are actually making the leap.  After all, if it doesn't work out you think to yourself "I just go back and get a job working for someone else."

Fundamental Attribution Error in Angel Investing

Just for my own edification, I want to shine a light on one small
aspect of the psychology of angel investing. Specifically, I want to
address what I consider a very ripe area of research: fundamental
attribution error in angel investing.

I observe that when angel investors follow lead investors (see the
previous blog) there are many opportunities for them to make
fundamental attribution errors. By that I mean they attribute useful,
positive personality traits to others because they observe some
apparent external condition (wealth or success).

The easiest false logic is "He is rich, so he must know how to make
money."

More subtle are assumptions like …

He is articulate …

He is skeptical…

He is cynical …

He is passionate …

He is intelligent…

… so he must make good investment decisions."

He could be a member of what we call 'the lucky sperm club' (i.e.
inherited wealth). Many times the truth is more subtle. Barry
Switzer observed, "Some people are born on third base and go through
life thinking they hit a triple." Maybe he was born on second and
barely made it to third.

My point about fundamental attribution error is that other angels
assume that the lead angel has to be capable of 'hitting a triple' or
even a home run!  The reality could be the lead angel is a very
middling talent who at some point in his life was just plain lucky.
Alternatively, he may be very intelligent and very successful in his
business but not have the experience, skill, or time to do a good job
as a lead angel.

There is another source of uncertainty that exists when a syndicate is
coming together. Guys (who may be viewed as keystone investors) can
express genuine interest in investing during the early stage but elect to take a pass when the final call goes out for checks. So you thought you were in a deal with one group of people and you may find that you are in a deal with a slightly different set of investors.   That small changes may significantly affect your comfort level.  It may also effect the start-up's probability of survival.

Even if you are comfortable with the group that you invest with. How
superficial is the basis of that comfort? I think it is accurate to
say that relationships between most angels can be better characterized
as business associates rather than as close friends. (a ripe area of
research).

Many if not most of the interactions between angel investors can also
be characterized as infrequent and occurring in public venues (another
ripe area of research).

As a result of these two situations, most angels have very sketchy
information on the careers and capabilities of other angels. In
point of fact, the actual information they have may be significantly
less than is presented by any prospective employee on their resume.

So just exactly how much halo effect is attributed to a fellow angel
(to twist Mark Twain's words)… "just because he is a member of a club
to which I belong"?

Angel Investors: 'Birds of a feather flocking together'

I recently replied to a research survey on angel investing that got me thinking.  The survey was focused on teasing apart the issue of trust that angels investor had in the entrepreneur and how it affected their decision to invest.

It occurred to me that perhaps a very important underlying factor affecting the angel's (and VC's) reason to invest was being missed.  It may not primarily be the investors' comfort with the entrepreneur but his comfort with his fellow investors, particularly the lead angel, that influences the decision to invest.

Let me give you an example.  In one case, I invested in a deal not because of the entrepreneur but because I knew two investors that I really trusted were in the deal.  In fact, I have not met the president of the start-up company.  But I trusted that the lead angel would work to protect his own and my interest and would do what he could to make it a success.

This type of 'logic' (and I do use the word loosely) is more common than the case where each potential investor taking the time to get to know the entrepreneur, much less his business plan.

Can entrepreneurship be taught?

I am not sure if you can teach a person to be an entrepreneur or not.  The process of starting a company is more an art than it is a science.  Like all forms of art, it requires one to practice the craft.  As any teacher of art knows, all one can do is help a novice avoid obvious mistakes and suggest techniques or conventions that have produced favorable results in the past.  With that as background, I want to share with you a sentiment that has finally been crystallizing into an observation for me. 

My sense is that Entrepreneur Education is too frequently about analysis and not about execution.  It tends to be "thinking" and not "doing."  Not only does that not give the students a favor for what being an entrepreneur is like, it can be a real deterrent.  What helped bring this into focus was a quote I recently read from my favorite French philosopher, Henri Frederic Amiel.  He observed ..."Analysis kills spontaneity.  The grain once ground into flour springs and germinates no more."

Imagine that you, as a student, have a "seed" of a good idea.  Could it get analyzed to death by "wiser more experienced business professionals" during an analysis activity or a business plan competition?  I am not too worried about this, because I most of us who interact with college students try to be positive and upbeat, but I am trying to make a different point. -->

We are rewarding the students for telling good, bullet-proof stories rather than for doing something!  We should not be surprised if we produce a bunch of accomplished bull-shitters and possibly a bunch of future liars. 

Now imagine that the rules were that you had to make progress toward launching a new business.  So you are judged in class and in collegiate competitions on what you have done not what you have thought.  

I have a few ideas on how this might be approached but I will defer to the talented bunch of educators to whom I have lobbed this rock.  I have talked about this pitfall as "Analyzing vs doing" but I could have called it the "spectator vs the athlete."    

Hoping that we encourage a few of them to "get into the arena," I close with another of my favorite quotes.  This one from Theodore Roosevelt: 

"It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly; who errs and comes short again and again; because there is not effort without error and shortcomings; but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause, who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly. So that his place shall never be with those cold and timid souls who know neither victory nor defeat."

Bootstrapping Your Start-Up

Here are some of my thoughts on how you can start your business NOW and avoid spending the next 12 months trying (and failing) to raise venture capital. The article come from an interview conducted in April by Gene Stowe and published in the Tribune Business Weekly on March 19th, 2008. [Thanks Gene, for making my rambling conversation sound linear, if not logical.]

Seasoned entrepreneur gives advice on ‘bootstrapping’
By GENE STOWE
Tribune Correspondent

Many entrepreneurs think in three steps: 1. Have a good idea. 2. Get money to start a business. 3. Serve the customers.

Jim Larkin skips Step 2. He figures that the money will come with the customers.

Larkin should know. He started Environmental Health Laboratories (EHL) in 1986, sold the company to Underwriters Laboratories in 2001 and started Scientific Methods Inc. (SMI) the day after he left Underwriters Laboratories in 2003.


He’s active in the University of Notre Dame’s IrishAngels, a group that supports entrepreneurship, and speaks to classes about how to start their own business – but he doesn’t recommend seeking venture capital. (Not to mention that most venture capitalists made their money in businesses that did not start with venture capital.)

“Most startups are of zero interest to venture capitalists,” Larkin explains. “If you say one idea in 300 is a feasible venture capital idea, in a classroom of 30 kids there are none.”

Instead, he wants to give students a sense of the emotional and psychological aspects of running a business that they won’t find in a textbook. He promotes creative ways of low-cost startups that he calls “bootstrapping.”

“You have to be exposed to it in other ways,” he says. “It’s a little bit like describing how to ride a bicycle. There’s a lot more going on under the surface that you really have to experience yourself.

“There isn’t anybody who’s going to give you $3 million in two years to get your business off the ground. If you are successful, they will come find you.”

The question is how to be successful from the start.

“It may be possible and it may be necessary to bootstrap your own business,” Larkin says. “In almost all of these startups, there is a need to bootstrap, to get by with what you have now. If you do that for some period of time, you change the value proportion for your business.

“Every small business is different and faces different problems than other small businesses.”

One issue common to all is the importance of identifying a market. Look for the need first and tailor the product or service to meet the need, rather than creating a product or service and going in search of someone who needs it.

“One thing that’s really going to make you or break you is market,” Larkin says.

“Not always, but frequently you find the government creates the need. It’s all about matching the market needs with the capabilities.

“We need to be focused directly on identifying that customer, identifying what they need and then providing that. We make it a lot more complicated than we need to.”

One place to look is the public Federal Register that lists requirements the federal government will impose. That’s where he found that the EPA was gong to require municipalities who use surface water to test for certain protozoa. He bought the necessary equipment and offered the service.

“There is an emerging market there,” he says. “We got as much business as we could handle.”

Similar opportunities come up in transportation, agriculture, construction and other fields.

For example, a requirement that banks disclose the total amount that will be paid on a mortgage can lead to computer programming companies. A requirement that hospitals protect the privacy of patients can lead to document destruction services.

A trend toward certifiable environmentally friendly construction provides openings not only for builders and architects who get accreditations but also for those who provide the accreditation training or inspect the buildings.

“It’s not like anybody’s blocking anyone from seeing what the opportunities are,” Larkin says. “Small businesses really compete well in one of two areas” — product development or custom work, such as high-end cabinetry that will find buyers while locally produced run-of-the-mill cabinets have difficulty competing with big-box retailers.

“People don’t need to worry about small businesses going away. It’s all about being the right size for the opportunity.”

Once the idea is matched to the market, the entrepreneur can go looking for the necessary means without money.

“Find out what your needs are and find out how you can get those needs met without cash,” Larkin says. “The message is that it’s not so much you need money but you need the things money can buy.

“A lot of my talk centers on the idea of partnering. Nobody in this world succeeds by themselves. A partner is someone who benefits who you benefit. – you help produce value for me.”

Entrepreneurs shouldn’t worry that partners might steal their ideas – the partners are too busy working on their own ideas, he says.

“Most people are so frightened that somebody is going to steal their idea that they don’t reach out,” Larkin says. “The partners are going to help you grow your business – find opportunities,network, help you meet people.”

Aligning interests can replace seeking capital.

“I’m not saying there aren’t problems with having partners,” he says. “So much of it is an issue of the amount of passion that is brought to the equation. Spending money is not the only way to attract resources.”

Typically, two big needs are buildings and equipment.

“I talk about office space, for example,” Larkin says. “There is so much empty office space. Go to downtown Mishawaka (for example),” with this offer:

“‘I want to use this space. I’m not going to pay you any rent for six months, but what I will do is paint the walls and pay the utilities in the wintertime. If I’m successful, I’ll pay you rent in the seventh month. I’ll pay you more rent in the eighth month.’

“There’s a very good chance they’ll say no,” but someone else on the street might say yes to keep the lights on in an otherwise vacant building.

Larkin, who is president of SMI with Fu-Chih Shu as Director of operations and Rebecca Wong as Director of Molecular Biology, has plenty of experience getting equipment from partners. He got the use of a $200,000 piece of equipment by becoming a beta site for its manufacturer.

“We would feed back all kinds of suggestions on how to improve their software,” he says. “The other 39 hours of the week, we were using that instrument to make money.”

A Massachusetts company wants to commercialize its continuous flow centrifuge, created for blood separation, to the water-testing industry. They gave Larkin a $12,000 piece of equipment for his work.

“If you are a research organization, the customer tends to be the government,” says Larkin, whose company has won small business innovation research grants.

Entrepreneurs who start companies while holding other jobs should be prepared to focus full attention on their own business at the right time, Larkin says.

“Don’t quit your day job until you find that customer,” he says. “Then you do need to quit your day job.”