All In A Day’s Work

The Iceberg Principle

Fri, 29 Jan 2010 12:32:33 -0500

Now that the euphoria of the Massachusetts election has died down some, I thought I would reflect on what business lessons might be learned from the campaign.

The heavy criticism of Martha Coakley’s inability to connect with the voters and tap into their discontent reminded me of a lecture I heard many years ago entitled, The Iceberg Principle. The story goes that there was this iceberg inhabited by penguins. The CEO penguin was prominently perched at the tip of the iceberg. Its direct reports controlled various other parts of the floating ice cube. They were responsible for providing status to the CEO. On occasion these managerial penguins would venture into the water and speak with the big fish patrolling the vast area of ice just beneath the waterline that was not visible from atop the iceberg. The big fish would filter information from the many little fish that lived at the depths and had first hand experience and knowledge of life under the sea. Now the big fish, hoping to remain on good terms with the managerial penguins, would only report the good news, or what they thought the penguins wanted to hear. The penguins in turn reported this happy news to the CEO penguin and life appeared good, at the surface. However, trouble was brewing at the depths and none of the penguins knew about it until a rouge wave wiped them clear off of the iceberg.

Though the story may seem childish and simplistic it does a pretty accurate job of describing what happens in many businesses where management loses touch with the market because it is insulated from the line employes and customers alike. Martha Coakley, who is a competent individual, clearly was not getting the whole story from her staff. She further complicated the situation by refusing to get out and get the data herself choosing rather to poke fun at her truck driving opponent’s drive across the state.

I once worked for a person who spent part of each day simply walking around the office chatting up employees, greeting customers, and keeping a finger on the pulse of what was going on. It was MBWA (Management by Walking Around) at its best. He appeared accessible to people at all levels and developed a good sense for the mood of employees, customers and competitors. This seemingly simple routine was an opportunity for him to clear his mind, build trust with various constituencies and be proactive in dealing with issues.

The election also reminded me of a very important piece of advice given to me by a former IBM HR executive, “the minute you think you’re a rooster, you wake up a feather duster.” Successful executives (and politicians) should never forget where they came from, or how they got there.

The Smartest Kid I Knew In College

Mon, 16 Nov 2009 13:45:21 -0500

I recently joined Facebook. Yes, it has taken me quite a while to get comfortable with the idea, but I made the jump. It has been a wonderful way to make new connections with old friends. Once I got the hang of things I started looking up people that I wished I had stayed in touch with over the years. One such person, Rob T., was one of the smartest, most energetic people that I knew back at Fordham University. Rob was a wiz with numbers and always seemed to be a step ahead of the crowd when it came to sighting new trends and making a buck. So I can’t say that I was too surprised when Rob wrote to me that he was leaving the U.S. and moving to Asia where he will set up a hedge fund. Why Asia? Because as famed bank robber Willie Sutton noted when asked why he robbed banks, “that’s where the money is!” It seems that many hedge fund managers have come to the conclusion that it is easier to operate offshore than in the U.S. and much easier to raise capital from various sources (read: those fleeing Switzerland for a new safe haven).

Say and think what you like about financiers in general, but ask yourself one question. What are the smartest people, with whom you went to college, doing? My guess is that many are in finance and, like my old friend Rob, are following the money.

So what does this have to do with entrepreneurship? In the 1990’s some very successful companies were started right here in Massachusetts. Many of the founders were foreign nationals. They often came to the U.S. to complete graduate studies at one of several great universities in the area then remained and built great companies.

However, as the IPO and venture markets went on hiatus for much of the current decade, these smart, motivated and innovative types began to follow the money. Some went to the west coast where the culture of swinging for the fences made raising capital modestly better, while others simply went home taking with them both their technical and business knowledge.

A former business associate of mine once commented that only menial tasks, such as quality assurance, would be done off shore, but that the more difficult work would remain in the U.S. I chuckled thinking back to when my dad would make similar comments about Japanese cars. “They’ll never make a Cadillac,” he’d say. No dad, they made a Lexus and outsold the Cadillac.

A recent Forbes.com article points out that companies such as China’s Huawei is growing faster than U.S. rival Cisco, and that Korea’s Hyundai achieved record sales this past August, and Singapore is luring biotech stars with high salaries (and low taxes), and the outcomes of heart bypass surgery are as good in India as anywhere else in the world, and Brazil's aircraft maker Embraer has taken the airplane press by storm with its innovative light jets, the Phenom 100 and 300. As an aside, Adam Aircraft and Eclipse Aircraft, both light jet start ups in the U.S., have recently gone out of business.

Venture capital, the life blood of U.S. high-tech and bio-tech start ups, appears to be moving off shore as well. Most of the top VC firms have opened offices in places like India, China and Israel, while the amount of funds in the U.S. are in decline.

In the 1970’s the innovation economy trumped incredibly poor public policy making that drove the economy into a rather deep ditch. It was during this same period that the microprocessor was born and venture capital investments served to create companies that we regard today as household names (e.g., FedEx, Microsoft, Apple).

Will entrepreneurship bail the U.S. out again?

The pundits all seem to think so, but its difficult to imagine given the constraints that poor policy has placed on small business. Sarbanes/Oxley has done its part to prevent some businesses from going public, non-competes stifle the flow of people between businesses, limits on H-1B visas further prevent companies from hiring the best talent, high taxes, limits on compensation, healthcare costs, the list goes on and on. Make it difficult and expensive to do business and the smart money and smart people will take their ideas and business elsewhere.

As my children grow older and get closer to the work world I wonder, where will they go to find the best opportunities? Will it be here in Massachusetts, in another state, or , like my friend Rob T., will it be in another country?

Innovation Under Fire

Wed, 22 Jul 2009 07:45:46 -0400

Between work and travel I’ve been remiss in keeping up with blogging. Hopefully, I’ll do a better job of keeping you entertained on a more consistent basis going forward.

Those who know me well know that I love history, especially military history. Earlier this summer my family and I visited the Normandy, where 65 years ago American, Canadian and British troops staged the largest amphibious assault in military history. It is a trip that I have wanted to make since President Ronald Reagan made one of his most memorable speeches at Pont du Hoc on the 40th Anniversary of D-Day.

I’ve read a lot about the Normandy invasion, but until I stood on the beach at Arromanches (Gold Beach) I really didn’t have a full appreciation for the logistics involved in the planning and execution of Operation Overlord.

Arrormanches was the sight chosen to build a deep water port after the initial attack. The Mulberry harbor, as it became known, was a temporary harbor developed in Britain to offload cargo and troops on the beaches.

After the failed Dieppe Raid in 1942, the Allies realized that they could not rely on penetrating Hitler’s Atlantic Wall to capture a deep water port. Therefore, the Mulberries were invented as a means to rapidly deploy a port complete with breakwater, piers and roadways. The Mulberries were developed be several different firms in Britain and towed across the English Channel by tug boats. The entire harbor had never been entirely tested, but was operational only three days after the invasion on June 6th. The completed harbor was constructed out of 600,000 tons of concrete between 33 jetties, and had 10 miles of floating roadways. Despite being destroyed by the storm of the century on June 19th, it was used to land over 2.5 million men, 500,000 vehicles, and 4 million tons of supplies necessary to support troops in France as they made their way to Berlin. The Mulberries remain one of the greatest feats of military engineering and innovation under fire.

Within a five mile distance of my home are three bridges that cross three rivers: the Sudbury River, the Concord River and the Assabet River. I would estimate the longest bridge to span about 100 feet and the shortest about 50 feet. The largest bridge took seven years and several million dollars to complete - this is not a typo. The two shorter bridges will be closed for two years for repairs. The Mulberries were constructed inside of one year and deployed and operational in less than three days! Have we lost our ability to innovate on the cheap? Have we become too reliant on an over capitalized venture capital industry to fund development projects that take years and tens of millions of dollars to complete? Where will future innovations be once the available venture capital is a fraction of what it was in past years?

Do Business Plans Matter

Fri, 15 May 2009 10:12:06 -0400

The debate as to whether or not business plans matter is one that comes up at least once a year. This week the New York Times published an article debunking the usefulness of business plans. Based on a study done by The University of Maryland that looked at how venture capitalists chose to invest, the article quotes numerous investors who say that business plans and five year projections simply don’t matter much in their decision process.

Personally, I’m not a big fan of business plans either. Especially those that are little more than marketing documents that repurpose research performed by a variety of sources that will print whatever you pay them to print. The pro forma five year financials that accompany most plans aren’t of much value either, but that’s not because its difficult to predict the future. The plans and pro forma financials alike simply lack rigor.

Market validation studies and operating plans are of much more use when deciding to start a business. I am a big believer that businesses fail for two primary reasons: 1) People dynamics; and, 2) Markets.

Most investors will admit that they spend a good deal of their due diligence hours assessing the team - its market knowledge, ability to work together, past performance. The remainder of time is spent assessing and validating the market size, growth potential, competitive dynamics, etc. If markets take too long to develop, or if competitive response is not anticipated guess what, you burn more cash.

Figuring out whether an idea is an opportunity should be where any entrepreneur invests a good deal of time before even approaching an investor. The process of digging for data, speaking with industry experts and creating one’s own view of the market and how it will evolve is time well spent. Simply regurgitating an analyst’s view of the market is a signal to me that the would be entrepreneur is intellectually lazy. Building a product or service is only half the battle. Knowing and understanding who will be there to purchase it, at what price and volume is the other half. This knowledge can only be gained by wading through the data, forming a hypothesis and testing it on many potential customers and industry experts. Only then can you confidently build an operating plan that more accurately estimates financial need, the amount of time to first sale, pricing, distribution, working capital needs, and believable estimates of cash flow break even. Perhaps a reason that many investors ignore business plans is that they sell too hard, are produced in a vacuum with little customer validation, and the numbers reflect dexterity with spreadsheets rather than being driven by estimates backed up by accepted yardsticks and fundamental analysis.

It would be wrong for any would be entrepreneur to interpret this study’s conclusions to mean that business planning doesn’t matter. Having an operating plan with financial benchmarks is certainly useful even if the numbers change over time. The knowledge and understanding gained in the creation of the plan can be the difference between adjusting the numbers after you’ve burned through the cash, or being able to anticipate the market and making changes that extend the runway and avoid the need to raise money at an inopportune time.

What’s Next In High Tech?

Sat, 25 Apr 2009 17:50:24 -0400

What's Next in Tech will be held June 25, 2009 at Boston University's School of Management Auditorium (595 Comm Ave, Boston). Here's the description:
Whether you're starting a business, investing, or looking for your next career opportunity, you won't want to miss this jam-packed evening of networking and conversation. Led by a stellar group of entrepreneurs and venture capitalists, we'll separate hype from reality -- and explore which technology areas are actually growing and creating big opportunities for the future. The evening will begin with an hour-long networking reception, continue with two high-energy discussion segments (one with venture capitalists, one with entrepreneurs), and conclude with plenty of time for Q&A from the audience. We'll talk about specific companies that are becoming leaders in our area, how hiring is happening in 2009, and what's shaking in mobile software, videogames, robotics, social media, cleantech, and other fast-growing sectors. We'll also ask you for your take on what the most promising new areas are.
Speakers will include:
★ Michael Greeley, General Partner, Flybridge Capital Partners
★ Mike Dornbrook, COO, Harmonix Music Systems (makers of "Rock Band")
★ Helen Greiner, co-founder of iRobot Corp. and founder of The Droid Works
★ Brian Halligan, social media expert and CEO of HubSpot
★ Tim Healy, CEO of EnerNOC
★ Ellen Rubin, CEO of CloudSwitch
★ Bijan Sabet, General Partner, Spark Capital
★ John Simon, Managing Director, General Catalyst Partners
The conversation will be moderated by Scott Kirsner, Innovation Economy columnist at The Boston Globe.
This should be a great opportunity to network with Angels, VCs and entrepreneurs. Ahead of the conference, I’d like to hear what you think is the next New New Thing.