Wednesday, March 26, 2008

POTW: The Psychology of Entrepreneurial Misjudgment

The Great Andreessen is at it again, tendering our post of the week: The Psychology of Entrepreneurial Misjudgment. Therein he adapts, for entrepreneurs, 25 biases identified by Charlie Munger, Warren Buffett's long-time partner and Vice-Chairman at Berkshire Hathaway. They're (we're) singing our (their) song. It's a worthy and meaty read ... take 10 minutes to dig in. In the interim, here's a digest of the biases posted by Venture Hacks:

1. Reward and Punishment Super-Response

Once you realize how much incentives influence human behavior, you need to assume their influence is even bigger than you think. Never think about something else when you should be thinking about incentives. Benjamin Franklin: “If you would persuade, appeal to interest and not to reason.”

2. Liking and Loving
Liking and loving something conditions you to (1) ignore faults of and comply with wishes of the loved, (2) favor people, products, and actions associated with the loved, and (3) distort other facts to facilitate love. Wanting to be liked by your teammates impedes you from firing people and making unpopular but good decisions.

3. Disliking and Hating

Disliking or hating something conditions you to (1) ignore virtues in the disliked, (2) dislike people, products, and actions associated with the disliked, and (3) distort other facts to facilitate hatred. Startups should focus on their customers, not their competition—whom they may dislike.

4. Doubt Avoidance

Execution is often better than further contemplation. George Patton: “A good plan, violently executed now, is better than a perfect plan next week.” Believing that something will happen, and convincing others that it will be so, makes it more likely to happen.

5. Inconsistency Avoidance

Have strong opinions, weakly held. New and correct ideas may not be accepted simply because they are inconsistent with existing ideas. Your existing ideas may be unknown to you. They may be hidden assumptions. We often make hidden assumptions about unknown unknowns. If existing customers in the market aren’t ready for a product that is inconsistent with their behavior, go after customers who aren’t in the market because they can’t afford the existing product or don’t have access to it.

6. Curiosity
Insufficient curiousity prevents you from learning. Hire curious people and discover your customer’s true needs—not what you think they need.

The clash of Kermit and Kleiner

I met with a friend yesterday who is navigating the formative financing steps of a promising green-tech company. The venture is buoyed (big time) by an affinity angel, and they’re at a critical how-to-grow juncture. Our conversation harkened a terrific special section in Monday’s WSJ, ECO:nomics, Creating Environmental Capital (click here to peruse the Journal's new Environmental Capital blog). The 18-page pullout is loaded with thoughtful interviews, including one with Kleiner Perkins Partner John Doerr. A brain-buzzing excerpt:

So what’s very attractive about the green technologies is the markets are enormous. The Internet market, $100 billion or so; the energy market, $6 trillion. This is the mother of all markets.
Kermit the Frog, ever the contrarian (or lovable curmudgeon), chimes in (in my brain, not the article), amplifying the challenge environmentalists and ecopreneurs face:
It's not that easy being green
Having to spend each day the color of the leaves
When I think it could be nicer being red, or yellow or gold
Or something much more colorful like that

It's not easy being green
It seems you blend in with so many other ordinary things
And people tend to pass you over 'cause you're
Not standing out like flashy sparkles in the water
Or stars in the sky
Wait, Kermit, what gives with the outcast, Eyeore-like tone? Being green is contemporaneously cool and prospectively lucrative, a chance to do good and make money, en la madre de mercados grandes. Kermit’s melancholy rings of social alienation and the challenge of individuality.

Doerr counters:
But the wonderful thing about working in green technologies is you can do work that’s successful and also significant. You can help engineers and scientists build great companies that will innovate fuels or batteries or storage, or even more immediately, that can enable all of us to conserve, to be more efficient.
By now Kermit is catching on, swayed by the power and influence and green of Doerr the capitalist. He continues:
But green's the color of Spring
And green can be cool and friendly-like
And green can be big like an ocean, or important
Like a mountain, or tall like a tree

When green is all there is to be
It could make you wonder why, but why wonder why
Wonder, I am green and it'll do fine, it's beautiful
And I think it's what I want to be

Friday, March 21, 2008

Credere

We are in the formative phase of launching an early-stage investment fund, as scooped by The Business Journal today. Like most everything in private equity, it’s far from benevolent: The purpose is to maximize investment returns for our limited partners, who invest because – primarily – the see the fund as a superior vehicle, vis-à-vis other investment alternatives, to make money.

Our fund, though, is a bit different. It is not a pure venture capital fund, nor a social capital variety. Instead, we’re seeking to organize and institutionalize the latency of individual investors and promising companies in overlooked markets.

Investors first: Individuals in our investment chapters (e.g., the greater Chico, Davis, Sacramento, North Bay and Monterey/Santa Cruz regions) have had few, if any, opportunities to invest in a diversified private equity fund, particularly one that focuses on their community. Companies in such communities have limited access to growth capital and resources. We bridge the market inefficiency by organizing and connecting growth capital with promising companies.

If we are successful in raising the fund and executing our investment thesis, a few cool things occur. First, wealth – that oftentimes is reinvested – will be created, both for our limited partners and the companies we back. Second, entrepreneurs will replicate. It’s trite to say, but success sires success and communities prosper. Dollars, entrepreneurs, investors and ideas will recycle. Trust too.

The formalized grassroots approach we’re deploying in overlooked markets is a bit old fashioned. In pre-Arthur Rock (one of the first VCs) days, companies raised private equity through relationships, via a handshake, and based both on the potential investment returns and the investor’s affinity for the entrepreneur’s endeavor. You have an idea and a commitment to work hard, I have money. Hand-scribbled terms on napkins, versus treatise-length term sheets, sufficed.

Which brings me to credere, the Latin phrase meaning, to believe or trust. As the WSJ shared a few weeks ago in an opinion piece, to have “credit” in a community meant that you could be trusted to pay back your debts.

Too often venture investing – viewed from both sides of the table – turns in to an us against them, adversarial relationship. VC firms have a responsibility to their LPs to maximize the return on their investment. Companies are committed to growing their enterprise. Sometimes (lots of times), dissonance over the direction of the company trumps trust. The same holds true for most any relationship, business or personal: opinions differ, communication dissipates, and trust erodes.

Back to our prospective fund. We will be as diligent and formal (legally) as any investor; ‘tis the proper thing to do, and we have a responsibility to our investors. Aside from playing the traditional game, I believe we have a sound opportunity to strengthen trust – and potential returns for all – between investors and entrepreneurs. This begins, of course, by aligning interests and motivations, and ensuring communication is clear, candid and consistent.

More importantly, the commitment theory will play a role in our alignment and connection of local investors with local companies. Trust is easier to breed and more difficult to break if and when it’s galvanized in your community. Bob the entrepreneur coaches Joe the investor’s son’s Little League team. They mingle Fridays at Rotary luncheons, bump in to each other at the local farmer’s market, and may work out at the same gym. The entrepreneur and investor are aligned professionally and personally.

The aforementioned WSJ piece profiled Muhammad Yunus’s microfinance venture, Grameen Bank. Though his is a different business than venture capital, there are parallels:

“I use to say this in my speeches: Look at the world, how funny it is. They took the word credit which means trust, and built a whole edifice of credit institutions, refined, very sophisticated, entirely based on distrust. [At Grameen] we went back to the original meaning of credit.”

Thursday, March 20, 2008

Money on the table

If doing statistics is like eating paste, pricing is analogous to chomping on Crayons. A bit tastier, but still sticky-mouth dry. While it’s easy to chomp on a few Crayons – my five-year-old son’s class is evidence – doing pricing (and doing it well) is hard. Very hard. My soiree through several dozen bplan presentations last week was evidentiary.

When companies build financial models they block and tackle through a great majority of their model building. It’s like math: Apply logic, assumptions and comparables into a template, with equations, and you’re set.

Pricing is different, and it’s confusing. Warren Buffett had a great line: Price is what you pay, value is what you get. Paradoxically, Buffett highlights the root of most company’s pricing strategy misfortunes.

Cost-plus pricing is the most common strategy. It costs me a quarter to make a bagel, I’d like to make 35 cents per bagel, and thus I charge 60 cents. Most companies do this, with a dash of comp-based pricing tossed in for good measure: If our competition is charging 60 cents, we’ll charge the same (or a few cents less). During last week’s myriad presentations, company after company took this approach.

Which is logical, but it’s an apathetic way to march forth. Smart companies employ a value-based pricing strategy. They understand value by focusing on what people are trying to do, not what they say they wish they were doing. They aim to master the current problems or critical priorities of their most viable (and underserved) customer segments. Textbook stuff, but it takes a lot of work.

Simply stated, your solution is worth what a customer is willing to pay. In B2B environments, it can be determined via a simple equation:

Worth (what a customer will pay)
=
Economic Gain
+
Strategic Value

[Perceived Risk]
+
Trust

Nail this algorithm and you will not only remove the Crayon crust from your mouth, but also ensure you do not leave money on the table.

Wednesday, March 19, 2008

POTW: An hour and a half with Barack Obama

My friend Matt likes to raise a flag -- particularly in or on his way to a state of inebriation -- when any or all of the three P's (political, personal, philosophical) are tendered. In this humble forum, I've been a bit too personal, a tad philosophical, but rarely political; if our discourse surrounds creativity, entrepreneurship, and innovation, it's tough to bridge politics.

As of yesterday, I stand corrected thanks to Barack Obama's speech on race in America and a Post of the Week (of the year?) from The Great Marc Andreessen. Obama, to me, is an entrepreneurial, creative and innovative candidate. Here's a taste of Andreessen's An hour and a half with Barack Obama:

I've tried very hard to keep politics out of this blog -- despite nearly overpowering impulses to the contrary -- for two reasons: one, there's no reason to alienate people who don't share my political views, as wrong-headed as those people may clearly be; two, there's no reason to expect my opinion on political issues should be any more valid than any other reader of what, these days, passes for the New York Times.

That said, in light of the extraordinary events playing out around us right now in the runup to the presidential election, I would like to share with you a personal experience that I was lucky enough to have early last year.

Early in 2007, a friend of mine who is active in both high-tech and politics called me up and said, let's go see this first-term Senator, Barack Obama, who's ramping up to run for President.

And so we did -- my friend, my wife Laura, and me -- and we were able to meet privately with Senator Obama for an hour and a half.

Andreessen then details his meeting with Obama, encapsulated through four lasting impressions:

First, this is a normal guy.

Second, this is a smart guy.

Third, this is not a radical.

Fourth, this is the first credible post-Baby Boomer presidential candidate.

He then ties the tales together (read the entire post ... it's terrific):

Smart, normal, curious, not radical, and post-Boomer. If you were asking me to write a capsule description of what I would look for in the next President of the United States, that would be it.

Having met him and then having watched him for the last 12 months run one of the best-executed and cleanest major presidential campaigns in recent memory, I have no doubt that Senator Obama has the judgment, bearing, intellect, and high ethical standards to be an outstanding president -- completely aside from the movement that has formed around him, and in complete contradition to the silly assertions by both the Clinton and McCain campaigns that he's somehow not ready.

++++++++
Post-script (19 Mar 08): I apathetically did not share a sampling of Obama's oratory excellence ... here's how his speech commenced:

"We the people, in order to form a more perfect union."

Two hundred and twenty one years ago, in a hall that still stands across the street, a group of men gathered and, with these simple words, launched America's improbable experiment in democracy. Farmers and scholars; statesmen and patriots who had traveled across an ocean to escape tyranny and persecution finally made real their declaration of independence at a Philadelphia convention that lasted through the spring of 1787.

The document they produced was eventually signed but ultimately unfinished. It was stained by this nation's original sin of slavery, a question that divided the colonies and brought the convention to a stalemate until the founders chose to allow the slave trade to continue for at least twenty more years, and to leave any final resolution to future generations.

Of course, the answer to the slavery question was already embedded within our Constitution - a Constitution that had at its very core the ideal of equal citizenship under the law; a Constitution that promised its people liberty, and justice, and a union that could be and should be perfected over time.

And yet words on a parchment would not be enough to deliver slaves from bondage, or provide men and women of every color and creed their full rights and obligations as citizens of the United States. What would be needed were Americans in successive generations who were willing to do their part - through protests and struggle, on the streets and in the courts, through a civil war and civil disobedience and always at great risk - to narrow that gap between the promise of our ideals and the reality of their time.

This was one of the tasks we set forth at the beginning of this campaign - to continue the long march of those who came before us, a march for a more just, more equal, more free, more caring and more prosperous America. I chose to run for the presidency at this moment in history because I believe deeply that we cannot solve the challenges of our time unless we solve them together - unless we perfect our union by understanding that we may have different stories, but we hold common hopes; that we may not look the same and we may not have come from the same place, but we all want to move in the same direction - towards a better future for our children and our grandchildren.

Friday, March 14, 2008

The book

I had a challenging meeting the other day with a team of 16 comrades seated in a semi-circle. We had a simple agenda, few rules, and one objective: Author, illustrate and publish a 32-page book. And, do it in Spanish. Eyes sparkled, hands rose, and questions were posed. Tasked with minimal direction – you can write about and illustrate anything you want -- the team scurried to their workstations and commenced work.

And work they did with nary a whine. Forty minutes later, we had the foundation of our product: Sixteen takes for the story’s introductory page, accompanied by a like number of brilliant illustrations. It was an amazingly productive and creative experience.

The coolest aspect was the lack of fear, particularly given the embryonic (to all) journey. The team put pencil and pen to paper and produced. In a few months through 15 similar sessions, a book will be produced. We will publish it and a team of 16 first-time authors will have a tangible product for the collaborative work. Not bad for a gaggle of eight- and nine-year-olds (my son’s third grade Spanish immersion class).

It was a wonderful yes, and …, non-conformist experience, and I chortle to think about a gaggle of adults embarking on a similar journey. Exception-ridden thinking would rule. I can hear Eyeore: We’re never going to get there. We’ve never created a book; we’re not authors, let alone illustrators. How are we going to orchestrate a story with 16 different authors? Where do we start? What are the rules? What if I can’t think of anything?

The kids were the opposite. Can I write about a purple dragon and a princess? What if I come up with two pages, not just one? How many characters can I have? My tribe of children had not been normalized to moan about how and why they could not do it; they just did it.

++++++++
Post-script (17 March 08): The book begins, thanks to eight-year-old Kyle's contribution (please excuse the lack of accents) ...

Habia una vez un niño. Este niño estaba en las oscuridad completa. Estaba soñando en su dormitorio. Era completamente negro. De repente, el suelo debajo de su cama comenzo a temblar. Las paredes comenzaron a romperse y a caerse. Muy pronto formo un hoyo alrededor de la cama del niño. El niño se desperto en panico. Se rompio por fin el suelo directamente debajo de su cama, y el niño se cayo tambien.

Wednesday, March 12, 2008

Now presenting

I am drowning in business plan bake-offs and investor presentations this week. BigBang! (UC Davis' business plan competition) executive summary review Monday, Golden Capital Network's West Coast VC Conference (44 cool companies; participated in two investor panels) Tuesday, UCD's Center for Entrepreneurship/Graduate School of Management's Business Development Clinic (seven presenting companies) tonight, a two-hour session with 17 Venture Island Chico contestants tomorrow eve, and Saturday morning with the Sacramento Entrepreneurship Academy (six teams pitching their companies to the board). Cool stuff.

With visions of PowerPoints dancing in my head, a few observations from the Golden Capital conference:

  • Lens: The venture-capital-or-bust mindset of many companies (and most all investors) is not healthy. If there's a there there (a business), the question should not be, Can I raise venture capital?, but instead, What's the most effective way to raise money to grow my business? Build the business and the money will come.
  • Fatheads: When you play golf or hoop with someone who's good, their game does the talking. IBID for investors; I had the pleasure of sitting on panels with private equity pros from Blumberg Capital, Khosla Ventures, and The Band of Angels, among others. Good, genuine folk sans an air of self importance. The reverse is true for fatheads: VCs who hoist their nose in the air and speak in non-deserving, demeaning, if you only knew what I know because I'm a VC and you're not tone. As my friend Anthony observed (of one such FH): He's proud of something.
  • Presentations: Too much info, too little time, too few stories. It's predictable. A few echoes:
    • I don't know if you can see the chart ... (if the audience can't see/read/absorb it, do not use it).
    • This slide is a bit confusing ... (abort the slide if it's apt to confuse).
    • Our projections are conservative ... (if so, what are your true assumptions?).
    • I won't even try to go through this ... (they why even try/show the slide?).
The most effective (and memorable) presentations were (are!) those that commenced with a handful of key points (say, three-to-five), transitioned into a story (ideally employing analogies, metaphors, parables, visual aides ... anything that helped the audience relate and remember), and then wrapped with the three-to-five key points. Such companies talked about the hole they are drilling, not the drill they're creating, and how and why it's a gotta have for customers.

A few of my favorites/companies to watch: Insera Therapeutics (a medical device to cure strokes), HauteSpot Networks (wireless broadband for secure video delivery), Zero Motorcycles (quiet, light, cool dirt bikes), Vitalea (micro-dosing in humans for clinical trials), Pediatric BioScience (diagnostics for autism in children), BazuMedia (mobile messaging for races and events; awesome), and Gydget (a cool social marketing platform; we voted it "best of show").

Sunday, March 2, 2008

Piece of cake

It's been a few moons since I purchased a cake, probably an ice-cream variety for a kid's fiesta. And, it has been even more moons since I frequented a dessert diner. My last visit -- probably somewhere in the City -- was mostly immemorable ... can't recall where we went or what I had, but I do remember my Charlie in the Chocolate Factory wide-mouthed amazement at the selection. And, most memorably, the by-the-slice ability to please (tease) your palette without having to buy a whole cake. It's a mouth-watering business proposition.

Of course, selling and buying a piece of cake is not new nor novel. Selling and buying pieces of information (or entertainment) is an increasingly contemporary pleasure.

Think back five years ago. What is commonplace today -- buying music by the song -- was embryonic. The music industry was in the dumps, an archaic institution that lost track of the value they provided (what consumers desired). Music labels thought they were in the music business (correct), selling CDs (incorrect). Consumers thirsted music by the piece (track). iTunes and file-sharing services changed the game -- consumers got what they wanted, and the music biz extended its stay in the ICU.

Music is an obvious by-the-slice (versus whole cake) choice. Television shows too; why buy an entire season on DVD when you can instantly whet your appetite with a downloadable episode? Software: Why purchase an entire application when you can taste (rent) the modules you want (software as a service)?

The by-the-slice model has hit book publishing. Random House is selling individual chapters ($2.99 a pop) of books, commencing with (ironically, my current read; the whole cake is really tasty!) Made to Stick. From a WSJ story of a few weeks ago:

Customers will receive a digital link via email enabling them to download the chapter onto their computers. Random House expects that eventually users will be able to download chapters onto other devices, such as BlackBerries.

"We want to get our content out there in new and different ways," says Matt Shatz, vice president of digital at Bertelsmann AG's Random House Inc.

In theory, a broad variety of topics could appeal to readers on a chapter-by-chapter basis, including travel, cooking, technology and health.

The incremental cost to deliver morsels of information is minimal, and you can argue (as Random House has probably rationalized) that by-the-piece sales will not cannibalize whole cake purchases. With time others will follow, including businesses outside entertainment and content. Wanna ski for an hour or two (versus buying a half-day or full-day lift ticket)? Need a rental car for a few hours (instead of buying the whole cake/whole day)? Only have time to play a few holes of golf? In instances where people have a desire to pay for and experience a slice of something, the dim-summing products and services to fit consumer needs will continue to proliferate.