Posted: April 18th, 2012 | Author: Ted Rogers | Filed under: Entrepreneurship, Random Posts | No Comments »
I have long felt skeptical about business books, especially quasi-self-help books that state common sense with an air of discovery.
Typically, even in the best business books, the 80/20 rule applies: 80% is either recycled truisms or common sense, 20% (or less) is new or interesting.
Soft science, e.g., lack of quantitative analysis often damns these books to mediocrity.
In my opinion, one notable exception is Jim Collins. Someone recently gave me a copy of his most recent book, Great by Choice, and it is valuable. Collins and co-author Morten Hanson base all of their writings on rigorous quantitative analysis. Not all of their writings apply to startups but all of their findings are valuable.
Below is an outline of the book that I made for an internal presentation.
Great by Choice
10X Leadership:
Collins and Hanson studied a group of companies that provided shareholder returns at least 10X greater than their industry peers over a long period
Leader of 10X companies (“10Xers”) share a set of behavioral traits—fanatic discipline, empirical creativity, and productive paranoia—all held together by a central motivating force, Level 5 Ambition
Fanatic Discipline
10Xers start with Values, Purpose, Long-term goals and Severe Performance Standards and apply Fanatic Discipline to adhere to them. All of their actions are consistent with those Values, Long-term goals, Performance standards. 10Xers are relentless, monomaniacal
Empirical Creativity
In confused environments, 10Xers do not look to other people but to empirical evidence to drive their decisions
They use empirical evidence to create boundaries, within which they take bold risk
Empiricism as the foundation for decisive action
Productive Paranoia
10Xers practice hyper-vigilance even in good conditions
They believe that events/markets will inevitably turn against them and they prepare for that time
Level 5 Ambition
10Xers channel their ego into something larger and more enduring than themselves
Their ambition is for the cause, not for themselves
20-Mile March:
The 20-mile March is a set of concrete, clear, intelligent and rigorously pursued performance mechanisms that keep the company on track
One set of metrics creates a floor, a lower bound of performance not to go below and another set of metrics create a ceiling, an upper bound not to go above
If they miss the 20-Mile March metrics, 10Xers are obsessed with getting on track, no excuses
Consistently achieving the goals of the 20-Mile March builds confidence in the organization
External environment is impossible to predict and out of their control; the 20-Mile March gives the company an internal locus of control
Fire Bullets, then Cannonballs:
It is not necessary to be more innovative than your peers
Only 9% of pioneers end as final winners in their market
You must be innovative above a certain threshold but beyond that it doesn’t necessarily help
Fire bullets, then cannonballs
Fire bullets to figure out what will work
Once you have empirical evidence based on the bullets, you concentrate your resources and fire a cannonball
[Note: the Lean Startup method follows this system]
Example: The iPod was a bullet, derived from some empirical evidence, that led to more empirical evidence; then they fired a cannonball: iTunes and iPod for non-Mac computers
What makes a Bullet:
Low cost
Low risk – minimal consequences if the bullet goes awry or hits nothing
Low distraction for the overall enterprise (okay to be a high distraction for an individual)
10xers have a much higher rate of calibration before firing Cannonballs (69% vs. 22% for peer group) – example of using empirical evidence to drive decisions and contain risk
Calibrated cannonballs have a 4x higher success rate than uncalibrated (88% to 23%)
There is a danger to achieving a hit with an uncalibrated cannonball: good outcomes from bad process reinforce bad process
10xers make mistakes but learn and return to empiricism; only fire another cannonball with empirical validation
“In the face of instability, uncertainty and rapid change, relying upon pure analysis will likely not work, and just might get you killed. Analytical skills matter, but empirical validation matters much more.”
“That is the underlying principal: empirical validation.”
(Note: Lean Startup Method again…)
You don’t need to be the one to fire all the bullets, you can learn from the empirical evidence of others.
“More important than being first or most creative is figuring out what works in practice, doing it better than anyone else, and then making the most of it with a 20-Mile March.”
Questions to ask before firing a cannonball:
How can we bullet our way to understanding
How can we fire a bullet on this matter
What bullets have others fired
What does this bullet teach us
Do we need to fire another bullet
Do we have enough empirical evidence to fire a cannonball
10xers fire a significant number of bullets that don’t hit anything; they didn’t know ahead of time which bullets would be successful
Failure to fire cannonballs, once calibrated, leads to mediocre results. The idea is not to choose between bullets or cannonballs but to fire bullets first, then fire cannonballs.
Leading above the Death Line:
Productive paranoia 1: 10Xers build cash reserves and buffers before disasters happen
Productive paranoia 2: contain risk; 10Xers took less of these three risks:
- Death Line risk – failure would result in the death of the enterprise
- Asymmetric risk – the downside of failure is greater than the upside if successful
- Uncontrollable risk – risk completely out of the company’s control
10Xers also manage time-based risk – if risk is growing with time they act
quickly
“Sometimes acting too slow increases risk.”
if the risk profile is changing rapidly, then the speed of decision-making must increase.
Zoom out, then Zoom in:
10Xers remain obsessively focused on their objectives and hypervigilant about changes in their environment; they push for perfect execution and adjust to changing conditions
Zoom Out:
Sense a change in conditions
Assess time frame: how much time before risk profile changes
Assess with rigor: do the new conditions call for disrupting plans? If so, how?
Zoom back In:
Focus on Execution of plans and objectives
Not all time in Life is Equal
Some moments matter more than others
SMaC – Specific, Methodical and Consistent metrics
“We’ve found in all of our research studies that the signature of mediocrity is not an unwillingness to change; the signature of mediocrity is chronic inconsistency.”
Return on Luck:
“Resilience, not luck, is the signature of greatness.”
Who Luck – one of the most important types of luck is finding the right people then building a mutual risk your life relationship with them
Summary:
10Xer behaviors - fanatic discipline, empirical creativity and productive paranoia; Level 5 ambition, never relax when blessed with good luck
20 Mile March
Fire Bullets, then Cannonballs
Return on Luck – 10Xers don’t cause their luck, they increase the chance of stumbling on something that works by firing lots of bullets, then using empirical validation before firing cannonballs
Leading Above the Death Line - They manage three types of risk to shrink the odds of catastrophe
Zoom Out, then Zoom In
Posted: March 10th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship | No Comments »
I just got back from a couple of weeks in NY and Silicon Valley. The NY startup ecosystem is booming and Silicon Valley is, well, Silicon Valley – cutting edge, best of class and incessantly innovative.
Several Brazilian entrepreneurs were visiting at the same time and we had some conversations about whether Brazilian startups need to connect with SV or NY.
My thinking has evolved on this issue: several years ago I watched two executive teams from promising Brazilian startups take weeks away from their companies to hang out in Silicon Valley. It had no impact other than to hurt their companies. Maybe they met some people and increased their network but, so what? Their companies lost ground in Brazil and missed a window of opportunity.
Running a startup takes obsessive focus and jaunts to SV or NY can be a distraction. On the other hand, an understanding of trends in the Valley and NY can serve as a competitive advantage for startups in Brazil.
Here are some rough guidelines:
1. For a startup whose partners and customers are in Brazil: monitor developments in SV/NY online and by, maybe, going to one conference a year. But focus, focus, focus on your core market in Brazil. That will determine your future.
2. For a startup that has important partners, e.g., technology providers, in the US but whose customers are in Brazil: take more frequent visits, perhaps quarterly, network with companies/people in the industry and perhaps attend an extra conference. The primary focus, of course, should remain on your customers in Brazil.
3. For startups dependent on customers in the US: you probably need a physical presence in the US, either a satellite office or even your headquarters. I don’t mean a situation where your core customers are in Brazil and you hope to, someday, penetrate the US market. There are many companies like this and my advice is to stay in Brazil and focus. If your future depends primarily on US customers, however, then your company should probably be there. This is especially true for B2B companies as opposed to B2C.
This last point (#3) is tricky: in the first place, why are you building a business in Brazil that serves the US market? Brazil is a large and growing market, one that you know better than the US, so why are you building a business that serves US customers? What is your advantage in the US? You should have good answers to these questions before attacking the US market, much less moving there.
In reality, however, there are no clear rules on this subject. It depends on the specific situation of a given company (and, of course, Visa issues). For example, one of our portfolio companies is a games company that generates over 90% of its revenue from American users, yet they have no need to locate there. Another of our portfolio companies serves game studios all over the world; sooner or later, this company probably needs a presence in San Francisco in order to fulfill their potential.
If you have questions about your specific situation, contact me and I will try to offer feedback.
Posted: January 25th, 2012 | Author: Ted Rogers | Filed under: Entrepreneurship | 1 Comment »
Back in the early ‘90s, I had a brief and inglorious career with the Washington Redskins of the National Football League. It officially lasted only two and half years but it was a formative experience and I learned a lot in a short time.
I have found that much of what I learned in sports applies to business. For example, what I learned about the characteristics of successful athletes also applies to entrepreneurs.
Innate talent matters in both cases but less than you think — the most physically gifted athletes are often not the best players. I believe talent comprises about 1/3 of what it takes to succeed in sports or entrepreneurship. Talent derives from genetics and no player or entrepreneur has control over it.
Another 1/3 of success comes rigorous training – physical conditioning, skill development, study of the game and other things that the individual can control. The player or entrepreneur must maximize his potential in this 1/3 in order to have a chance of success.
The last 1/3 of a successful athlete or entrepreneur comes from… I don’t know. No one does. It has to do with energy, belief, destiny, love for their profession… (That last one really matters – how many people don’t love their job but still make it to the top 1%? Not many.)
I can't define this final 1/3 but it often manifests itself in two traits: inner focus and urgency.
By inner focus, I mean that all of the person’s being is directed toward the goal. Even when he is not visibly working toward it, his being is pointed toward the goal. He does nothing contrary to it. All the elements of his life fit into the pursuit the goal (not the other way around).
In that sense, pursuit of athletic or entrepreneurial success may seem to be a selfish endeavor. It doesn’t have to be, but one must surround themselves with people that support the goal and understand the sacrifice needed to achieve it.
Less obvious than inner focus, great athletes and entrepreneurs posses urgency. I don’t mean hurry or imbalance, just urgency. They live a half-step ahead of the world. They anticipate what must be done and do it. Proactively. They don’t wait, they don’t procrastinate.
Sports has a tempo, a momentum. So does entrepreneurship. An entrepreneur’s urgency pushes the tempo and maintains forward momentum in his business.
One can sense whether an entrepreneur has urgency. For example, they ask for help but don’t wait for it. They move forward irresistibly, believing the world with eventually follow. (It often does, proving the old saying, "Move and the world moves with you.")
Of course, inner focus and urgency are necessary but not sufficient traits: you also need the first 2/3 of the equation — talent and training — but inner focus and urgency are unique traits exhibited by almost all high-achieving athletes and entrepreneurs.
Posted: October 31st, 2011 | Author: Ted Rogers | Filed under: Entrepreneurship | No Comments »
I have often counseled entrepreneurs to focus more. I have never counseled them to focus less.
Like so many things in venture capital, however, “focus” is easy to see but difficult to define. How does one distinguish between an entrepreneur that is expanding intelligently and an entrepreneur that is losing focus?
Mostly, I think it is a function of timing and relevance.
Regarding timing: at the beginning, keep your goals simple and singular. Prove and stabilize one business model in one vertical before expanding into another vertical.
Then, consider relevance. Is the new vertical truly relevant to the core business? Ask yourself, how well do you know the new vertical? Are you a member of the ecosystem? Do you personally experience a pain point in that vertical that you can address? If yes, it’s relevant. If not, you are losing focus.
As an example, take one of our portfolio companies in the games space. They started as a developer of mobile games; for a year or two, they focused on churning out games. Over time, their games became more sophisticated and more successful and, eventually, they produced several massive hits on iOS and Android.
The company needed to use mobile ads to fully monetize their user base and they soon became experts in the mobile ad space, which led to a realization that a huge opportunity existed in mobile ads, especially connected to mobile games. They decided to dedicate resources to developing a mobile games ad platform.
So, a young company with limited resources pursued two lines of business simultaneously. Is there a focus problem? No.
There was/is no focus problem for two reasons: first, because the company won the market as a games developer first, before expanding into developing an ad platform. Second, the ad platform addressed need in a relevant market that the company understood extremely well.
Had the company STARTED by pursuing on two lines of business, there would have been a focus problem. They would have chased two rabbits at once and lost both of them. Instead, they caught the first rabbit (successful games development) then turned to the second (mobile ad platform).
In sum, stay extremely focused in the beginning, then expand into new verticals only if they are highly relevant to your core business.
Posted: April 16th, 2011 | Author: Ted Rogers | Filed under: Entrepreneurship, posts | No Comments »
The average VC firm probably makes an investment in 1 out of 400 deals they see, maybe less. That means 399 entrepreneurs get turned away for every one that receives a wire into their account. Many of those 399 entrepreneurs bring deals that fit exactly into the parameters listed by VCs on their websites and blogs – so why are they turned away?
In reality, a good VC deal is difficult if not impossible to pre-define. I can give all the fancy descriptions I want: “an effective entrepreneur addressing a real pain point in a huge potential market with a capital efficient business model” blah, blah, blah.
The truth is, I define a good VC investment like Justice Stewart defined obscenity: I know it when I see it. I also know when I don’t see it.
So, rather than trying to define a good VC investment, I will describe what I see, and what I don’t see, when presented with a good investment. Today I’ll address the entrepreneur/team, in the next post I'll address the business itself.
Characteristics of an Investible Team
Inevitability
In a good VC deal, I sense “inevitability” in the entrepreneur. Whether or not I invest, whether or not anyone invests, this guy will find a way to succeed. He is moving and the world will move with him.
This inevitability manifests itself in energy and confidence. The energy derives from the huge opportunity he has discovered, the confidence from the planning he has done.
Non-Arrogance
Inevitability shares many of the same molecules as arrogance but is a completely different compound.
An “inevitable” entrepreneur believes in his vision but will do whatever it takes to win, even if it means admitting wrongs and changing course. He prioritizes success over being right.
On the other hand, an arrogant person doesn’t learn well – the person is afraid to be wrong and takes criticism as personal. He will ignore good advice and make the wrong decisions at critical times.
As an aside, it’s ok to be a jerk – not preferable, not necessary, but ok – a lot of successful businesspeople are jerks. But arrogance means being a jerk without a corresponding level of competence. That’s unacceptable.
Chemistry
The team has synergy, of course, but not necessarily “resume synergy”: this guy has a programming background, that guy has business development, etc.. It has chemistry: a healthy, competent group dynamic. Each person is an expert in their role; each has respect for the others; none has the desire to encroach on the others’ roles.
This doesn’t mean they like each other, it means they believe in each other.
On the other hand, it’s important that they not dislike each other.
Dislike among founders, at the early stage, bodes ill. It’s ok that Lennon and McCartney hated each other after the White Album but, if they had felt that way in 1963, there never would have been a White Album, probably not even A Hard’s Day Night.
If, when one guy is talking, the others are sighing, shifting in their seats and looking away, if one is subtly apologizing for another’s comments when it’s their turn to talk, I get very worried.
Summary
I heard about a study that attempted to define what characteristics make up successful sports stars.
The study came to the conclusion that the most successful athletes share three traits: first, athletic genes, second, effective training and third… no one knows. The third trait of the athletic star – character, will, personality, whatever – is indefinable. But it is what separates Ronaldo from a talented soccer player that can run the 100 meters in 9.8 seconds, gets the best training and still falls short.
Having had a brief and inglorious career in professional football, with a team that won the Super Bowl, I promise you that the difference between those who make the team and those who don’t is not athletic ability and it's not training: everyone has that. The people on the team have that third, indefinable trait and so does the team as a whole.
The same applies to great entrepreneurs and their teams.
Posted: January 5th, 2011 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, posts, US Venture Capital | 4 Comments »
Interesting item from Venture Beat (I was on vacation and would have missed it had
Michael Nicklas not tweeted it):
Emerging markets drive tech adoption — The days are long gone when users in emerging countries embraced older technology. With growing middle classes in Brazil, Russia, India, and China — and plenty of wealth in other regions has well — the demand for tech goods will continue to expand. That trend has been driving sales in tech for some time — 80 percent of Intel’s sales are overseas now. But it will also happen with web services such as social network games. [emphasis added] Accel and Tiger Management’s recent $30 million investment in Vostu shows that the Brazilian social game market has a lot of potential. Success in an emerging market can generate the growth that a startup needs to get to critical mass.[emphasis added]
Two points jump out at me. First, just as the microprocessor business bloomed in the US then matured into a truly global market, so will many web services businesses (see, e.g., Facebook). It’s not an overly complex point but it’s an important one and Intel provides a nice analogy.
The second idea, that success in an emerging market can get a startup to critical mass, is more complex. Of course, growth in an emerging market can help a startup get to critical mass, but at what cost? Specifically, should a startup really think “globally” or focus on winning local markets?
Generally, I believe that a startup should focus on local markets, then expand internationally only if strategically compelled and only after reaching critical mass. Going beyond local markets requires resources that most startups don’t have – as a young company, “if you chase two rabbits, you will lose both”.
On the other hand, that applies less to web services companies and, as the Brazil and the US converge, even less to web services companies that want to address those two markets. In fact, for reasons that I’ll address in later posts, I believe that bridging the Brazilian and US markets provides huge opportunities for entrepreneurs and investors, as long as they have sufficient agility and deep knowledge of both markets.
Final caveat: some non-web services startups can/should break the “local markets first” rule but they are rare and require an inordinate amount of investment capital. I see them mostly in the cleantech area –
Amyris is an example.
Posted: February 26th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, posts | 1 Comment »
My friend
Tiago Sommacal wrote a great
comment on my last post, in which he asserted that Brazil may not have the technological innovation to support a wave of startup success similar to that in the US from 1994-1999. As I sat down to write a reply, I decided the importance of the issues merited a full blog post.
It's probably a topic many people have opinions on, so feel free to weigh in.
Tiago’s comment:
….I would add that you did not directly address Brazil's technological position. Your expectation that huge wins will take place isn't explicitly related to any specific vertical/industry. However, the dot-com bubble was strongly related to a new industry (Internet) formed by ventures bringing technologically groundbreaking products which basically shaped a whole new market [think about AOL's or Amazon's services]. These products' newness largely justify why their usage quickly took off. One can argue that Brazilian startups or entrepreneurs (including geeks) are far behind their American counterparts when it comes to the technological edge of their solutions, especially when we consider that Brazilian online ventures already compete with many US-based players [e.g., Google, myspace or PayPal] – that is, from a certain standpoint, the Internet, here, is a world-class industry.
I would definitely like to know your thoughts on Brazilian startups' technological edge in 2010 against their American counterparts in 1994 when you get a chance.
Reply:
The premise of your question is that, in order to have the huge wins that I predict, Brazil must have a technological edge or at least technological innovation. I don't think this is correct. It's true that the American boom that happened in 1994 was enabled by a technological innovation (Arpanet, which became the Internet) but the innovations that occurred with, e.g., AOL and Amazon, were business innovations, not technology ones. In fact, only one of the companies you listed, Google, succeeded because of technology innovation (search algorithms): AOL, Amazon, MySpace and PayPal (and EBay, YouTube, etc.) did not.
There were certainly many technology-based companies that did succeed back then but there were even more companies that were nothing more than imitators or aggregators (auction sites, email services, shopping aggregators, etc.). Many of these grew and were acquired at huge returns for entrepreneurs and investors.
In sum, the technology that is required for a boom is present in Brazil: broadband and great software development. What will spark the boom going forward is the confluence of other factors, including but not limited to demographics (emerging middle class, consumers), the economic environment (lower interest rates, fiscal stability) and culture (entrepreneurship, high wireless and internet usage).
Regarding US-based competitors, in the broad universe of web-based businesses only a small percentage of US companies have penetrated the Brazilian market in a meaningful way – plenty of space remains open, for now, for Brazilian companies.
Posted: February 19th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, Macro Environment, posts | 9 Comments »
Last week,
I suggested that the startup ecosystem in Brazil has reached an inflection point similar to the one reached in the United States in 1994, with the next five years promising huge wins for aggressive startups and disciplined investors.
One can certainly make a strong case against such an outlook and, below, I provide the pessimist’s viewpoint (taken from the last post), followed by its optimistic counterpoint.
A. Pessimist: Entrepreneurialism has shallow roots in Brazil and entrepreneurs are few in number and inexperienced. The startup ecosystem is nascent and scattered.
B. Response: Yes, historically, the most talented Brazilian business people have gone into large corporations or into government but this is changing rapidly: there is a large number of talented entrepreneurs, mostly below the age of 35, involved in startups or interested in making the leap. Some have already had successful exits from companies they founded. Over the next five to ten years, a larger percentage of society will become entrepreneurs, especially as they witness earlier entrepreneurs succeed.
A. Pessimist: Brazilian startups must cope with much more burdensome tax and labor regulations than their compatriots in the US.
B. Response: Absolutely true and it is one of the reasons I so respect entrepreneurs that have made it in Brazil – they have overcome immense obstacles.
I have also learned, however, that the tax and labor laws can be dealt with effectively, it just takes more time and effort than in the US. In other words, these issues are speed bumps, not walls.
A. Pessimist: Angel investor networks have yet to fully coalesce and institutional venture capital is extremely scarce.
B. Response: Yes and that is why there is still a huge opportunity for venture capital investors, especially those willing to get their hands dirty in helping early-stage entrepreneurs.
Moreover, a greater amount of angel capital exists than most people think. I have met many, many Brazilian entrepreneurs backed by high net worth angels. Many of these businesspeople also act as willing and able mentors.
A. Pessimist: Interest rates, while falling, remain high enough to compete for investor dollars – why invest in a high-risk startup when you can earn 11% a year buying a low-risk bond?
B. Response: Certainly interest rates must continue to fall or, at least, not rise, in order for the venture capital ecosystem to flourish.
Indeed, why has most of the venture capital in Brazil come from government sources (FINEP, BNDES, etc.) up to this point? Because private investors have had no incentive to take the huge risks involved in venture capital investing. They could get great returns from bonds or, if they wanted to dabble in alternative investments, private equity. The mediocre track record of VC funds in Brazil (and the US) in the last ten years has not helped the situation: for the moment, non-governmental institutions (e.g., pension funds) have no interest in putting money toward venture capital. They will only do so if 1) interest rates fall to the point where they have to take more risk in order to get high returns and/or 2) they see proof that the VC asset class can actually succeed in Brazil.
A. Pessimist: The specter of inflation never seems to go away and political risk in Brazil remains: the surprise 2% tax on FDI jarringly reminded investors of the potential for sudden moves by the government.
B. Response: Inflation risk and political risk are real but decreasing. In fact, Brazil is a nation of inflation hawks. I was shocked that, even at the height of the financial crisis, while the US was dropping interest rates to zero, Brazilian policy-makers were worried about inflation. This vigilance reflects Brazil’s painful history with inflation and will serve as a guard against inflation in the future.
Regarding political risk, only a small minority believes that the government could ever revert back to far-left or far-right policies. A large percentage of the population has seen their lives improve as Brazil has moved toward a free market economy, few will want to return to a heavy-handed, government-centric system.
A. Pessimist: There is too much optimism about venture capital in Brazil.
B. Response: This worries me but we are a still a long way from an imbalance in which too much venture capital chases too few good businesses (as exists in the US). In fact, the opposite situation exists and will continue to do so for the foreseeable future.
Of course, good investment opportunities, whether they be tulip bulbs, railroads, Internet companies or consumer real estate, inevitably become overvalued, sometimes so overvalued that a massive bubble forms and pops, leading to years of woe. Something like that may happen in venture capital in Brazil, maybe five to ten years out, but the point is to get take the ride on the way up and protect yourself on the way down.
I believe that the “ride up” is starting.
Posted: January 6th, 2010 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, Macro Environment, posts, US Venture Capital | 8 Comments »
…well, not completely dead but the upside is very limited, according to my old friend Brian Taptich, who has witnessed firsthand the rise and maturation of the Internet ecosystem in Silicon Valley.
Brian worked at Red Herring from 1994-1998, co-founded a new media startup, Alarm Clock Worldwide, and held senior executive positions at Electronic Arts and Bit Torrent. Somewhere in there, he also managed to get his MBA from Kellogg. He now consults for the new media industry.
A couple of months ago, Brian was back in DC, where he and I attended high school together (we also went to college together) and I asked him for a download on the state of affairs in Silicon Valley.
The key takeaway from our chat was this: in the ’90s, the Internet ecosystem had deep instabilities and inefficiencies, which created a massive opportunity for startups to create value and capture market share. Now, however, the ecosystem has matured, which means that opportunities for value creation are fewer in number and smaller in size. Thus, investors and employees in startups have much less upside than they used to have. This holds important (negative) implications for Internet investors and entrepreneurs in the US.
I requested a follow up from Brian and, rather than paraphrase his response, I cut and paste the email below. If you have any interest in investing in or working at web-based businesses, read on…
When the Web was born as a truly consumer platform (thanks to the Netscape browser), THE enormous problem that needed solving was the lack of structure and stability to all the component stuff – from the network level to the UI (on one dimension), and from the enterprise to the consumer (on a second dimension). Through the late ’90s, all this unstructured stuff was both stabilized and organized, and many billions (trillions?) of dollars in market capitalization was created – by companies like Cisco/Akamai at the network level to Yahoo/AOL on the front end (on the first dimension), and Oracle/Symantec in the enterprise and Amazon/Ebay with the consumer (on the second dimension). Of course these dimensions are fairly fluid, and there is much overlap.
Today, the Internet is an entirely stable platform – all of this component stuff is now every bit as dependable as most every other utility in your life (eg electricity, gas, etc). And the vast preponderance of innovation happening right now is dependent on this stability, which has led to an entire generation of startups focused on incremental opportunities (ie most every consumer internet company not called Google) – we should expect that the aggregate market capitalization that is/will be created by this generation will be at least an order of magnitude smaller than the companies born just 15 years ago. Not only will the “huge wins” be smaller compared to the ’90s, there will be far fewer of them. Case and point: The consumer internet companies widely expected to be this year’s “huge wins” – eg Facebook, Twitter, LinkedIn, Zynga, etc – are not only a relatively short list, but also are tracking to public equity valuations (should they even get there) absolutely lower than the previous generation.
This is precisely why the early stage venture capital that led tech funding in the ’90s has been desperately expanding into areas like clean/greentech or medical technologies (in which they have little-to-no domain expertise), and/or seeking out international expansion opportunities in places like China and India and Brazil (ie self-sustaining markets that are about 10 years behind Silicon Valley in terms of localized innovation) – VCs need to find the next thing that will provide their LPs a 20% annualized return…and tech investing in the US ain’t it.
This is not an entirely novel hypothesis – everybody from Mark Cuban to hedge fund investors have made similar and widely circulated diagnoses in 2009.
However, what has not been widely discussed – even amongst those who provide the fuel that runs the Silicon Valley engine (ie the employees, not the founders or investors) – is how the compensation structure for tech startups in the US has not adjusted to fit this new world order. It used to be that top talent would take a paycut to work at a startup – trading the known compensation of a stable company (higher base salary, greater benefits, etc) for the potential upside on the equity (“sure I’m getting paid less but my 0.5% will be worth millions!”). In a universe where founders aspire to create $100 million not $1 billion in value, the potential upside for an employee is significantly lower than it used to be…and there is no economic incentive to take the chance on a startup…unless the startup pays employees significantly more cash or gives significantly more equity…and they are currently doing neither.
It may be that, for now, people are fairly content just to have jobs. However, as the job market loosens, and people have the freedom to risk-adjust their opportunities, there is the likelihood of a flight to more established companies and/or a departure from tech altogether. Which could have profound implications in the business of tech innovation in 2010 and beyond.
Posted: July 16th, 2009 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Entrepreneurship, Macro Environment, posts, US Venture Capital | No Comments »
I was in Sao Paulo this week for one of six “Learning Labs” organized by the US Council on Competitiveness and Brazilian agencies (MBC, ABDI) focused on technology and innovation.
The point of the labs is to share best practices and help foster entrepreneurship and innovation.
The effort by these organizations reflects the fact that, I believe, the futures of the US and Brazil are intertwined and the success of both rests largely on how well the countries foster innovation and support entrepreneurship.
I hosted the panel on the entrepreneurial environment in Brazil and the US and stressed the following points:
Policy-wise, innovation/entrepreneurialism cannot be mandated but we can create an innovation-friendly environment by removing tax, legal and regulatory obstacles. For example, in Brazil, forming a business sometimes takes a year or more. As importantly, shutting down a business is just as difficult. Taxes can be as high as 100% of an employees salary; if you fire an employee without ‘just cause’ you can be penalized another 40%. Other barriers include a legal system that can take years to resolve a business dispute. Address these problems and I believe you will see a flourishing of entrepreneurialism in Brazil.
On the plus side, I said that Brazilian entrepreneurs are as good as any I have seen in the States. They are amazingly resourceful: imagine trying to start and maintain a business when the cost of capital is 30%, inflation is rampant and the regulatory structure is stifling. Yet tens of thousands of Brazilians did it successfully over recent years. Now, the economy in Brazil is much more healthy, in many ways healthier than the US, so Brazilian entrepreneurs should flourish. First we need to get the regulatory obstacles out of their way.
A more difficult issue is culture. A culture that encourages risk and experimentation will have more innovation than one that doesn’t, regardless of government policy. I gave an example: California has one of the least business-friendly environments in the US, yet Silicon Valley continues to lead the country’s technological innovation. I submit that the culture of Northern California, specifically the Bay Area, explains much of the Valley’s success; it encourages experimentation in every aspect of life: personal, political and business. It is no coincidence that ground zero of the 1960’s counter-culture movement is also the ground zero of technological innovation.
Many US and foreign cities have tried to become “the next Silicon Valley”. If it were simply a matter of business-friendly policies and entrepreneurial incentives, they would have succeeded by now. Culture, however, is difficult to replicate.
