Monday, November 29, 2010

Shameless Pitch: Stanford Marketing Course, BUS213

Starting January 11, 2011 I'll be teaching a six week evening course called "Monetizing Marketing Models" (Course Code: BUS213) as part of Stanford University's Continuing Studies program.  The course is designed to teach strategic marketing concepts and frameworks that can be used to evaluate the money making potential of a new business idea, whether as a startup, a new venture inside a corporation, or as an investment.

We'll be covering product/market fit and exploring different ways to analyze business models.  The course assumes no previous experience in marketing. We'll be using Customer Development as the backbone methodology, focusing primarily on the Customer Discovery phase.  Our course text will be a great little book called The Entrepreneur's Guide to Customer Development, by Brant Cooper and Patrick Vlaskovits, both of whom will be speaking at the final course session on February 16th.

If you're interested, you can register online starting November 29, 2010 at the Stanford Continuing Studies website.  Here is the direct link to the course.

Hope to see you there!

Monday, November 22, 2010

Small Business vs. Scalable Entrepreneurship

Two weeks ago in my post Education, Entrepreneurship, and Employment we started to distinguish between scalable entrepreneurs (i.e. those seeking to start large businesses) and small business entrepreneurs (i.e. those seeking to start lifestyle or small businesses). What are the similarities and differences between the two?  What does this mean in terms of skill sets and education?

At the risk of oversimplifying, let's start with...
  • Scalable:  Making a large impact, prospect for significant wealth
  • Small Business:  Supporting self and/or family with an eye to a particular lifestyle
This leads to a...
Strategic Path
  • Scalable:  Identify a business model that can be systematized, scaled up, and ultimately lead to a market leadership position both in scope and share.
  • Small Business:  Identify a business model that can be sustained and defended.  The degree to which the business is systematized and scaled up is determined by the lifestyle objective.
Which means one needs the following...
  • Scalable:  Hiring specialists capable of developing the initial product or service, achieving product/market fit, and sales traction followed by different specialists capable of building scalable business processes and infrastructure able to facilitate growth.
  • Small Business:  Hiring specialists but with a broader set of generalist skills; the proverbial "T-shaped" person.
Which in turn leads to requirements for...
Capital Financing
  • Scalable:  External financing usually from institutional equity investors (e.g. VCs) to get the business to where it can generate sufficient cash to sustain operations and reach its scale objectives, often augmented by institutional debt financing as well.
  • Small Business:  Friends and family money (either equity or loans) to get the business to where it can generate sufficient cash to sustain operations.  Lines of credit or small business loans may augment the capital structure.
Which dictates a path for...
  • Scalable:  External equity financing implies being able to deliver growth rates fast enough to achieve the high levels of return associated with the risk.  It also means the company must plan on a liquidity event either in the form of an initial public offering (IPO) or strategic sale.
  • Small Business:  As long as the business generates cash sufficient to meet its expenses plus any external debt financing obligations (if any), the rate of growth is determined by the lifestyle objective.
Which means you will have the following...
  • Scalable:  Investors as represented by a board of directors, employees, creditors
  • Small Business:  Owners (self+), employees, creditors, customers
Therefore to succeed, entrepreneurs should have the following....
Critical Business Skills
  • Scalable:  Ability to recognize opportunity, devise a product or service vision powerful enough to attract the specialists, investors, and other resources needed to make the concept a reality, create a scalable business model, acquire customers, and generate the initial momentum towards scale.
  • Small Business:  Ability to recognize opportunity, devise a product or service concept, pull together the initial people, money, and other resources needed, create a sustainable business model, acquire customers, train employees, and operate the business.
While many of the critical skills are the same, there are slight but important differences.  These in turn lead to difference with respect to their needs in an...
Educational Curriculum
  • Scalable:  Marketing (Strategic), Finance, Business Development, Legal (Intellectual Property, Contracts, specific regulatory), Organizational Development, Leadership, Communications, Corporate Governance
  • Small Business:  Marketing (Promotion), Accounting & Cash Management, Sales, Legal (Contracts, Employment Law), Small Group Dynamics, Operations specific to their businesses value proposition, Customer Service
In short, scalable entrepreneurs need an education that helps them pull together resources and lead a company towards rapid, institutional growth.   They will largely be coordinating and working through others.  They need skills, not just at the initial startup level, but enough beyond that they can get the company moving up the scaleup path, even if they plan to bring in others to drive the scaling process.

Small business entrepreneurs need a specialist skill in the principle area of the businesses value proposition, plus a generalist education that helps them sustain the healthy operation of the business.  They will often be much more hands on in the delivery of the product or service to customers.


Sunday, November 14, 2010

The Creative Economy

This week, I had intended to explore the similarities and differences between the skills needed by scalable vs. small business entrepreneurs.  But in exploring the interplay between education, entrepreneurship, and employment, I got caught up re-reading a book, originally published in 2002, called the Rise of the Creative Class, by Richard Florida, a professor at George Mason University.  I highly recommend it for anyone interested in what the future will look like for our children and indeed what our society is changing towards right now.  In my mind, it should be required reading for anyone in government in a position to influence public policy.

The Rise of the Creative Class: And How It's Transforming Work, Leisure, Community and Everyday LifeFor those who have heard me teach or speak, they know that I believe that the 2008 Great Recession marked the final death of the Industrial Era as the driving force in our economy and society, just as the 1929 Great Depression marked the ascendant dominance of the Industrial Era over the Agricultural Era.  In both cases, the trends were evident for many years prior to the final shift.  In the case of Industrial over Agricultural, this trend was visible for almost 300 years before the Great Depression nailed the coffin shut.  In the case of latest shift, the trend towards what has been called the Information Era has been evident since the late 1800s.

But the term Information Era has always struck me as a misnomer given that most(1) of the service jobs created under this label were actually low level, "deskilled" positions that require very little engagement on the part of workers to apply information.

The Great Reset: How New Ways of Living and Working Drive Post-Crash ProsperityInstead, Richard Florida has coined the term "Creative Economy" which I believe is a much better term to describe the post-Industrial era that the most advanced economies, including the United States, are becoming.  In his writings, including his most recent The Great Reset,  he argues that it is creativity, not just information, that is becoming the dominant source of value generation whether it be economic or social value.

To me, here are some of the most interesting findings from Florida's work.  At the risk of oversimplifying:
  • Service sector jobs can be divided into two types.  Creative Class jobs involve high level processing of information to create value and solve problems and are often highly compensated.  Scientists, artists, engineers, architects, doctors, lawyers, and managers are typical of this class.  Conversely, Service Class jobs involve the execution of deskilled tasks, often in support of people in the Creative Class. These are lower wage jobs like food service, security guards, and janitorial work.  Now I am not denigrating the dignity and worth of these jobs; they need to be done.  But the fact of the matter is that today it is very difficult for people in these positions to earn a living wage.  This was not the case with Industrial Era "blue collar" jobs.
  • During the Industrial Era, socioeconomic stability came to be built around private enterprise, in particular, large corporations.  Salary, health benefits, and pensions were predominantly provided by private employers.  Much of this infrastructure came as a result of the fallout from the Great Depression and enacted during Franklin Roosevelt's New Deal.
  • During the Creative Era, socioeconomic stability is crystallizing around geographic location, not private enterprise.  Job security today is less tied to a particular company than to a particular region.  For example, one of the attractions of living in Silicon Valley, or Austin, New York, Boston, or Seattle for that matter is that even if you lose your job at one company, the chance of picking up new work at another company is better than if you live in an Industrial Era center like Detroit where the economy is dominated by a few large employers.
  • Unfortunately, at least in the United States, we have yet to put into place the socioeconomic infrastructure suitable for the Creative Era.  For example, in spite of the recent health care reform bills(2), it is still not available to nor is it affordable by a vast number of Americans.  Portability is limited to clumsy mechanisms like COBRA.  Defined benefit pensions have been replaced by defined contribution 401(k)s and IRA plans, both of which are riskier.  
Now, I'm not an expert in government or economic policy but it seems to me that if a defining attribute of the Creative Era will be more fluid economic relationships (i.e. project teams, core employees plus contractors) and frequent transitions (i.e. multiple employers and careers) what is needed is some form of offsetting, stabilizing infrastructure like portable, universal health care and "transition benefits" in lieu of the current unemployment insurance system.  (Of course one challenge in a transition benefits program would be how to provide sufficient infrastructure to foster the risk taking and retraining that may be needed to help people in transition without turning it into a welfare entitlement program.)

If location is the new locus for socioeconomic stability, this means that it is no longer possible nor sensible for private enterprise alone to provide answers.  Local government has a role.  Arts and cultural institutions have a role.  And of most interest to me personally, educational institutions have a role.

Creative Era Implications for Education?
I'm still thinking this one through, but in terms of how to educate people to navigate and prosper in the Creative Era, a couple of things seem evident to me:
  • If information is the grist for the creative mill, then education needs to better prepare people on how to search, sift, and evaluate information quality, analyze and manipulate qualitative and quantitative data, make and validate hypotheses, and how to synthesize and communicate findings.
  • Education needs to prepare people to work in a more fluid work environment.  This includes training to work as part of a project team, training in interpersonal dynamics, in creativity, in opportunity recognition, in personal self management, in risk assessment.  Unfortunately, today's educational system is structured around producing Industrial Era employees with its emphasis on standardized curriculum, testing, "command and control" classroom setup, and adherence to synchronized class period schedules.  At least this is beginning to change.  For example, in Palo Alto, where I live, my kids do a lot more group project work than I did at their age.  And I see more alternative learning options available.
  • People need to learn the rudiments of self-employment.  I'm not saying that everyone should aspire to being self-employed.  Rather I am saying that the probability that a young person starting a career today will experience a period of transition and self-employment is high.  We should prepare them for this.  Skills like networking, skills and interest self-assessment, self-presentation and salesmanship, and basic financial management are key.
Next week (assuming I don't get sidetracked again):  I intend to explore the similarities and differences between the skills needed by scalable vs. small business entrepreneurs.

(1)  According to Florida's classification of Creative Class vs. Service Class jobs to U.S. Dept. of Labor statistics, 60% of the service jobs in 1999 were the latter.
(2)  Patient Protection and Affordable Care Act; Health Care and Reconciliation Act of 2010.

Monday, November 8, 2010

Education, Entrepreneurship, and Employment

This post is going to be a bit more rambling than usual.  Bear with me.

A couple weeks ago, I had lunch with a friend who serves as a trustee for one of our local community college districts. At some point, the talk turned to the impact business and entrepreneurship education could have on creating local jobs.  While Silicon Valley appears to be recovering, like many areas around the country, it got hit pretty hard in the Great Recession;  the "official" unemployment rate still hovers around 11-12%.

As a former entrepreneur, whose current business provides services to early stage startups, and as a part-time teacher in marketing, this is an issue that I care about.  One thing that motivates me is using what I know to improve the odds of success for the entrepreneurs I work with whether as clients or students.

And as someone who adheres to a broad definition of entrepreneurship I'm a big believer in its power to create socioeconomic value. Of course, the connection between economic vitality, jobs, and startups is an article of faith bordering on dogma in Silicon Valley.

Furthermore, I believe that education can be one critical ingredient in developing future entrepreneurs or at least improving their chances of success.  Again, I'm not alone in this belief.  Stanford University, UC-Berkeley, and virtually every other institution of higher education in the San Francisco Bay Area have programs in entrepreneurship and, in many cases, not just one but several.

Silicon Valley Bias:  The Scalable Startup
Thanks to Steve Blank and others, there is now a pretty good understanding of the difference between a scalable startup that leads to a large company and a startup that ends up as a small business.  In Silicon Valley, the scalable startup is KING beloved by the entrepreneurial community, venture capitalists, and university entrepreneurship programs.  Big impact!  Big dreams!  High risk, high reward!  I mean, where else on the planet can you even have a semi-serious debate about whether a $20 million exit is a real startup or just a "dipsh--" company? (Dave McClure can carry that torch!)  And a lifestyle business?  What's that?  Is that a real startup?

Getting back to the conversation with my friend, as he was talking about what was going on at the community college level, this started me wondering.  Is this benign neglect of small business startups (which I'll define here to include lifestyle businesses) smart? Where are the jobs being created?  How durable our those jobs?  Are the failure rates different for scalable startups versus small business startups?

Facts About Startups, Small Business, and Employment
To answer the questions about the role of startups in job creation, let's start by examining an oft quoted statistic regarding small businesses and employment.
Data Source:  United States Census Bureau, 2004
While true, what's usually omitted is the last part, that these firms employ just 45.6% of the U.S. private sector workforce. This means that the majority of U.S. private sector workers are still employed by large companies.  So here's certainly one argument for promoting the scalable startup.  But 45.6% is still a big number, so the point still stands that small businesses are an important source of jobs.

Over the past few years, the Ewing Marion Kauffman Foundation has been sponsoring research to understand the economic impact of entrepreneurship as a means to guiding economic policy. (For a summary fact sheet of the Kauffman Foundation's findings go here.)

With respect to new job creation by small businesses, the studies show that it's more about age than size.  New companies, as one might expect, tend be small.  Surprisingly, the jobs created appear quite durable.
  • From 1980-2005, business startups (less than 5 years old) account for ~3% of U.S. private sector employment.  While a small percentage, without these new jobs, the net employment growth rate for the U.S. would have been negative.
  • New firms add ~3 million jobs in their first year;  older companies lose 1 million jobs annually.
  • While less than 50% of startups survive to their fifth year, 80% of the jobs created by the firms survive five years.
So there appears to be statistical support for Silicon Valley's beliefs about startups, jobs, and economic vitality.  And given the relatively safe assumption that most of these startups are not intended to be scalable (still looking for data to validate this) I would conclude that it might be smart to pay attention to these small business startups.

Educating for Small Business Entrepreneurship?
If small business startups are a meaningful element of job creation, then shouldn't we be offering small business entrepreneurs as high a quality an education as we do to those pursuing scalable startups?  Which skills are common to both?  Which are different? What would a small business entrepreneurship curriculum look like?  Who is the small business entrepreneur?  Are there different educational needs for an entrepreneur just starting out versus someone who's making a mid-career transition?

Some relevant findings from the Kauffman Foundation:
  • U.S. startup formation from 1977-2005 has been relatively constant over time at ~500,000 reported per year.  Entrepreneurial education appears to have little impact on the rate of formation but  may have a role in reducing the rate of business failure.
  • In the U.S. from 1996-2007, the highest rate of entrepreneurial activity is in the 55-64 age group.  The 20-34 age group had the lowest (surprise!)
  • The "typical" high-tech founder comes from a middle class or upper-lower class background, is well-educated (>95% with a bachelors degree or higher), is married with children, had an early interest in starting a company but over six years industry experience before actually starting.
This would indicate that in educating small business entrepreneurs, it's important to focus on training mid-career entrepreneurs business survival skills. This may also indicate that community colleges and evening continuing education programs are potentially better venues than a daytime, four-year university.  Universities still appear to be a better fit with those seeking to build scalable startups (as represented by the high tech company demographics in the Kauffman study).

Other Factors
Of course education and knowledge are merely one part of being a successful entrepreneur.  Temperament is another big part.  So are motivation, confidence, ability to recognize opportunity etc.  Then there are external factors like access to capital.  To the degree to which education can impact these, I'll be looking into these issues as well.

Next week:  I'm going to explore some of the similarities and differences between the skills needed by scalable vs. small business entrepreneurs.

Monday, November 1, 2010

Process vs. "Product" People

One of the essential skills needed in building a company is the ability to hire and fit the right people to the right job.  Most entrepreneurs spend a lot of time blending together the technical qualifications of their people.  Some of the more savvy also focus on the personality or cultural fit.  But in my experience, one of the key dimensions is whether the person is a process person or a product person.

A process person is someone who focuses on doing things the right way.

A product person is someone who focuses on getting to the end result or end "product" whatever that may be.

Now I can hear all the entrepreneurs thinking, "Of course we want product people.  It's the end result that matters, not how we get there."  And for the most part, they would be right...until it's time to scale up.

The reason I focus on this element is that while I've found that smart people can learn missing technical skills and even interpersonal skills (harder), whether someone is process oriented or product oriented seems to be hard wired.

The truth of the matter is that most teams and all companies need a mix of both types.  The actual mix depends on the nature of business and tends to evolve with time.  So how does one determine the proper mix?  Let's look at the circumstances that favor the need for a process vs. product orientation.

Product People
Product people have a natural orientation toward the end goal and are less concerned by the means to getting there.

Stereotypical product people are entrepreneurs, salespeople, and designers.  They fill out their expense reports under duress, mess up the system with special deals, or do end runs around the system altogether.  It's not that they don't appreciate the need for business processes.  Rather they recognize that at the end of the day, the goal of a process is to achieve a result.  And if that process isn't getting the results or they have what they think is a better way to achieve the result than via the process, the process is sacrificed.

Product people are usually comfortable with change, particularly disruptive change, and in fact may be the drivers of change in their organization. Change is synonymous with improvement in their minds.  Product people often prefer the blank paper approach to problem solving vs. continuous improvement because it increases their freedom of action to solve problems.

As such, they are at their best when the environment is uncertain or undergoing rapid change, the situation faced by most early stage startups or by mature companies whose industries are undergoing some type of technological, economic, or regulatory disruption.  Startups undertaking the process of developing product/market fit and proving out the viability of their business model need product people.

Unfortunately, product people tend to approach every challenge as a new problem, even when it may be similar to an already solved problem.  They may develop guidelines for solving related problems, but rarely like to sit down and document the detailed steps required to convert guidelines into processes.  As a result, there is a lot of reinventing of the wheel, details slip through the cracks, and the quality of work becomes highly dependent on that person's individual skill.  This ultimately limits the ability of a company to scale up.  A company dominated by product people can often degenerate into chaos.

Process People
At some point, someone gets fed up with the chaos.  Enter process people whose main orientation is doing things the right way. In order to do this, there first has to be a right way, so they are the ones that corral the product people into a room, lock the door, and force them to document the way things are being done in laborious, but necessary detail.  Good process people then collapse and streamline similar processes to reduce inefficiencies and link them together to eliminate dropped balls.  Because a good process eliminates most of the micro-judgments that a person has to make, less skilled people (and therefore more widely available people) can be trained to use it to achieve high quality results which makes it scalable.

When it comes to change, process people are not as comfortable with it as product people.  Establishing a good standard operating procedure is difficult and takes time to get running smoothly.  So while incremental change in the form of continuous improvement is fine, disruptive change is not.  Improvement to a process person means driving out error and waste.  And they understand the biggest source of both is the fallible human being.

Therefore, process people are at their best in more stable environments particularly where complexity is high or errors are costly like in manufacturing, financial services, health care, or the military.

Unfortunately, in their quest to eliminate error and waste, process people tend to overbuild systems.  They are the ones always saying "what if" sometimes to the point of absurdity.  Process people also equate proper operation of the system with results which is not always the case.  And as the process becomes part of the background, they often forget what the intent was behind the process and start focusing on the feeding of the system (anyone who's dealt with a government agency knows what this is like).

Getting the Balance Right: The CEO
One of my most important jobs as CEO was to get the balance right over the years I've developed some distinct biases and tricks.
  • The CEO should be a product person - Once a process is established, it tends to be self-perpetuating.  Unfortunately, things change which inevitably leads to the process becoming less effective at delivering results over time unless someone is keeping the company focused on the end results.
  • Product people should outweigh process people - I don't necessarily mean that they should outnumber them.  In fact, it is quite likely to be the other way around.  By outweigh, I mean that management's bias should always be towards someone achieving the desired result.  People should not be unduly punished for doing end runs around the system provided those end runs are not on a whim and they achieve the desired results.  (You do need to take corrective action with people who are end-running the system and making mistakes the system was designed to prevent.)
  • Business processes should be required to justify their existence every so often - In one of my turnarounds, a key issue was that the company was buried in processes.  We first identified and killed any process that no one seemed to be using and there were a lot.  Many were "CYA" processes designed to address contingencies that someone had anticipated but that had never actually occurred.  We then targeted processes that generated the most complaints from the end-victims and informed the process owners that unless they (not the victims) could justify the benefit of the process, it would be terminated.  After much screaming, this usually resulted in significant streamlining of the process rather than elimination.  Finally, after the major pruning, I made it a point to select and "pick on" a few core processes every year by making process owner performance reviews dependent on end-victim satisfaction, efficiency, and unobtrusiveness.  It's amazing how much better processes get when someone's raise depends on it.
Balance is the key.  Too many process people can efficiently run you into the ground but too many product people can effectively run you off a cliff.