Archive Page 2

Inventions That Didn’t Change the World

Inventions That Didn’t Change the World” sounds like a book-length version of our Vintage Future series.

inventions-that-didnt-change-the-world-2-638Author Julie Halls comes to the defense of such Victorian era oddities as “an improved pickle fork” and “an elastic dress and opera hat.”

Trifling or otherwise, these designs provide a fascinating insight into the social history and technology of the period.  Some seemingly inexplicable inventions make sense within their historical context.”

It’s not hard to imagine our great grand children chuckling at more than a few of the apps created in our present “historical context.”

But as this review points out, all that stupid experimentation and unexpected discovery may seem pointless, and, in hindsight, laughable; but one could say it had a pretty important side effect:  progress.

Though human ingenuity reaches back into the dimmest past, the intensive production of inventions only began in the past few centuries…

In a Darwinian mood, one might contemplate these trusty devices as living fossils of invention, the flotsam left behind during the evolution that finally brought us smartphones. As one realizes in reading Ms. Halls’s book, the 19th century really invented invention itself, not just the production of occasional new devices but the unremitting, self-reinforcing stream of novelties that generated our present expectation of innovation as the normal state of affairs. We have become so accustomed to this process that we may forget to wonder when and how it gathered steam (literally and figuratively). Whatever may be the fate of any particular innovation, for good or for ill, we may never leave the age of invention.

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The innovator’s blind spot

Pets.com sock puppet spokesdog.  (PhotoTurns Out the Dot-Com Bust’s Worst Flops Were Actually Fantastic Ideas – or so argues Wired magazine.  There remain “many deliciously ideal symbols” of the epic failures during the bust, but “the irony is that nowadays, they’re all very good ideas.”

Now that the internet has become a much bigger part of our lives, now that we have mobile phones that make using the net so much easier, now that the Googles and the Amazons have built the digital infrastructure needed to support online services on a massive scale, now that a new breed of coding tools has made it easier for people to turn their business plans into reality, now that Amazon and others have streamlined the shipping infrastructure needed to inexpensively get stuff to your door, now that we’ve shed at least some of that irrational exuberance, the world is ready to cash in on the worst ideas of the ’90s…  (Emphasis added – ed)

The lesson here is that innovation is built on the shoulders of failure, and sometimes, the line between the world’s biggest success and the world’s biggest flop is a matter of timing or logistics or tools or infrastructure or luck, or—and here’s the lesson that today’s high flying startups should take to heart—scope of ambition.

Maybe if Pets.com had kept its head down and worked harder on getting the dog food to our doors than assaulting U.S. airwaves with ads like the one below, they would have made it.

In Pitfalls of entrepreneurship, ecosystems of innovation, we discussed the book The Wide Lens and what author Ron Adner termed “the innovator’s blind spot: failing to see how success also depends on partners who themselves need to innovate and agree to adapt.”  Here’s Adner:

Companies understood how their success depends on meeting the needs of their end customers, delivering great innovation, and beating the competition…  To be sure, great customer insight and execution remain vital, [but] two distinct risks now take center stage:

  • Co-Innovation Risk: The extent to which the success of your innovation depends on the successful commercialization of other innovations.
  • Adoption Chain Risk: The extent to which partners will need to adopt your innovation before end consumers have a chance to assess the full value proposition.

…When you try to break out of the mold of incremental innovation, ecosystem challenges are likely to arise… a strategy that does not properly account for the external dependencies on which its success hinges does not make those dependencies disappear.  It just means that you will not see them until it is too late. … Dependence is not becoming more visible, but it is becoming more pervasive. What you don’t see can kill you.

Adner serves up an easy-to-grasp example, a 1998 precusor to iPods called “MPMan:”

It sold 50,000 players globally in its first year. But [it was very different than the Walkman] 20 years earlier.  You couldn’t purchase them in traditional retail settings.  Downloading an album – legally or not – could be a multi-hour affair. It didn’t matter that MPMan was first – it wouldn’t have mattered if they were 6th, 23rd, or 42nd. Without the widespread availability of mp3s and broadband, the value proposition could not come together.

For more examples, check out our Vintage Future series – a tongue-in-cheek-yet-barbed reminder that predicting technology trends is not for the weak at heart.  (And that’s before one tries to protect the IP and find a way to profit from it.  There are reasons we affectionately call the really early stage of investing adventure capital.)

It’s a long and difficult journey from idea to successful business, involving many inter-related factors.  The best products don’t always win.  Compelling innovations can and do fail after launch – as did this 1997 precursor to Facebook.

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“We challenged that dogma, and it was incorrect.”

ED-AT003_winter_M_20141205170433The Weekend Interview in Saturday’s WSJ – “The Oilman to Thank at Your Next Fill-Up” – provides an absorbing look at the “shale revolution” and touches on several of our favorite themes:  iterative collaboration, how to fail the right way, the incremental, adaptive ways by which success is achieved, and even the role of luck – although we’d describe it a bit more favorably as “serendipity.”

The pioneering company featured prominently in the article is EOG Resources, a former division of Enron discarded in 1999 when that company “decided to jettison tangible assets as they evolved into a trading company.”  By 2007 – one year after the last remaining piece of pre-bankruptcy Enron had been sold off – the former red-headed stepchild had become an industry leader.

(That particular charming detail brings to mind one of our very first posts, Built to Flip or Built to Last, in which we mused about an alternate history in which Hewlett and Packard sat in their garage, sipping lattes, saying to each other, “If we do this right, we can sell this thing off and cash out in 12 months.”)

Flush with success, EOG looked at their innovation and thought: we’re doomed.

“About 2007,” (CEO) Mr. Papa recalls, “I looked around and said, EOG has found so much shale gas, but there are a whole lot of other companies that have found vast amounts of shale gas. All the other companies were ecstatic, and their whole business strategy was, ‘We’re going to find more shale gas.’ I stood back and said this probably doesn’t bode well for natural-gas prices in North America.”

So rather than cling to their initial intuition they tried something impossible:

If gas prices would remain depressed due to a glut, as in fact they would, Mr. Papa’s insight was that perhaps oil, as well as gas, could also be coaxed from shales. Oil molecules are several times as large as gas molecules, and “because the flow paths through these shales are very small, very narrow and restrictive, the general feeling was that you could not produce oil from shales commercially.”

Mr. Papa and his team suspected this was “an apocryphal old wives’ tale,” and no one had “really done the work to prove that conclusively. So we challenged that dogma, and it was incorrect.”

EOG maintains no central research-and-development department. “Our R&D was just applied R&D,” Mr. Papa notes. “We went out there, drilled some wells, and the first eight or nine were unsuccessful. We got improvements, improvements, improvements, until we finally ended up hitting the right recipe for success.” EOG’s decentralized technical operations and “minimum bureaucracy” encouraged engineers to experiment well by well.

Late in 2006, EOG showed that shale oil was feasible in the Bakken. This discovery meant that EOG could switch to oil, with production flipping to 89% liquids (mostly crude) this year from 79% gas in 2007. More to the point, by proving everyone else wrong—again—Mr. Papa changed the domestic industry as other companies chased his achievement. To the extent that U.S. shale oil is transforming world-wide markets, he deserves a lot of the credit.

EOG is a great example of a contrarian definition of entrepreneurship:   see economic value where others see heaps of nothing, combine the self-confidence to defy conventional wisdom with the determination to overcome obstacles, and distinguish yourself more by the ability to achieve the impossible than the originality of your thinking.  They’re also a great example of stupid experimentation:

(A)t the creative frontier of the economy, and at the moment of innovation, insight is inseparable from action.  Only later do analysts look back, observe what happened, and seek to collate this into categories, abstractions and patterns.

More generally, innovation appears to be built upon the kind of trial-and-error learning mediated by markets.  It requires that we allow people to do things that seem stupid to most informed observers — even though we know that most of these would-be innovators will in fact fail.  This is premised on epistemic humility.  We should not unduly restrain experimentation, because we are not sure we are right about very much.

Mr. Papa adds that, in retrospect, they “misjudged the upward slope of technological progress” and undershot by a factor or two or three times what the effect would be on total U.S. production:

Where we sit today with shale is the same place a petroleum engineer sat in the 1940s with a conventional sandstone reservoir,” Mr. Papa says. The best recovery rate then was 10% to 15%, leaving the rest underground, much like shale now—but since has climbed to 40% or 50%. The technology doesn’t yet exist for shale to yield similar shares, but Mr. Papa is confident that over the next 10 years it will emerge, “which basically means we’re going to double or more the amount of oil we’re going to recover. . . . Technology is always going to find a way to unlock each increment of resources.”

Mr. Papa discounts what could be considerable political risks to the energy boom, like some carbon tax or a federal takeover of fracking oversight. On the latter, he thinks the business is well regulated by the states and “there’s been a million frack jobs performed in the U.S. with zero documented cases of damage to the drinking-water table. For my set of statistics, those are pretty good odds.”

As for everything else that might come out of Washington, Mr. Papa says: “It’s my belief that for likely the next 40 or 50 years, we’ll continue to be in a hydrocarbon-powered economy, the main drivers of which are natural gas and crude oil. . . . You have to rely on the logic of the American people and our legislators to say, look at the economic benefits. The benefits are so obvious that an objective person would question whether we want to impose punitive regulations that will diminish what’s accrued.”

Mr. Papa reels off a few examples: A new burst in employment, business investment and GDP. Self-sufficiency in natural gas “for probably the next 50 years” and a two- or threefold competitive price advantage over Europe and Asia, leading to a revival of in-sourced manufacturing. A state and federal tax-revenue bonanza. Diminishing the importance of Persian Gulf and Russian energy dispensations in foreign policy.

Mr. Papa observes that these disruptive gains confounded the zodiac readings of the experts. The gains were driven by smaller, independent, nimbler companies, risking their own capital on potential breakthroughs across mainly state and private lands without federal subsidies.

“If you want to point to a success of private enterprise, and how the capitalist system works for the benefit of the total U.S. economy,” he says, “I can’t come up with a more glowing example.”

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Thanksgiving: the forgotten entrepreneurial tale

Every child in America learns of the hardships endured by the Pilgrims as they established Plymouth Colony.  Some lucky ones even learn how the Pilgrims found salvation via private property, division of labor, and capitalism.  The luckiest ones of all learn about capital preservation when a venture capital investment fails.

mayflower3

Mayflower with shallop – William Halsall, 1882

When a group of Puritans known as “Separatists” fled England they first settled in the Netherlands, where they took menial jobs and over time grew to miss their native culture.  They lacked the resources for a passage to North America, so they sent two entrepreneurs from their congregation to London to seek financial backing – a successful merchant named John Carver and Robert Cushman, a “wool comber of some means.”  While those two were in London, an ironmonger (a dealer in metal utensils, hardware, locks, etc.) from that city named Thomas Weston was visiting one of Carver’s in-laws in the Netherlands and learned of the Pilgrims’ need for funds.

Whether we call that serendipity or opportunistic networking, it resulted in Weston putting together an investor group to back the voyage.  Weston and his London Merchant Adventurers put up 7000 pounds and also recruited experts to assist with the enterprise:  roughly 50 additional settlers with the vocational skills to help build a colony in the new world.  These “non-Separatists” crammed aboard the Mayflower with the Separatists and together became known as the Pilgrims.

What happened to that £7000 investment, you ask?  Here is the story as told at encyclopedia.com

Weston and his fellow investors were dismayed when the Mayflower returned to England in April 1621 without cargo. The malnourished Pilgrims had been subjected to “the Great Sickness” after the arrival at Plymouth, and the survivors had had little time for anything other than burying their dead and ensuring their own survival. Weston sold his London Merchant Adventurer shares in December, although he did send a ship, the Sparrow, in 1622 as his own private business venture.

The Pilgrims attempted to make their first payment by loading the Fortune, which had brought 35 additional settlers in November 1621, with beaver and otter skins and timber estimated to be worth 500 pounds. The ship was captured by French privateers and stripped of its cargo, leaving investors empty-handed again.

A second attempt, in 1624 or 1625, to ship goods to England failed when the Little James got caught in a gale in the English Channel and was seized by Barbary Coast pirates. Again the London Adventurers received nothing for their investment. Relations, always tempestuous between the colonists and their backers, faltered.

Facing a huge debt, the Pilgrims dispatched Isaac Allerton to England in 1626 to negotiate a settlement. The Adventurers, deciding their investment might never pay off, sold their shares to the Pilgrims for 1,800 pounds. Captain Smith, of the failed Jamestown venture, felt the London Merchant Adventurers had settled favorably, pointing out that the Virginia Company had invested 200,000 pounds in Jamestown and never received a shilling for their investment.

By our back-of-the-envelope calculation, the investors got back 26% of their invested capital.  If only they’d kept their long-term perspective…

On a more serious note, that outcome fits into the first category of entrepreneurial failure listed in Fail the Right Way and reflects well on those involved:

1. Liquidate all assets, investors lose most/all money: 30-40%
2. Not realizing the projected return:  70-80%
3. Falling short of initial projections: 90-95%

With “failure” this common, he urges executives to distinguish between business failure and personal failure.  It’s vital to not let the former, which can be a valuable learning experience, pressure you into the latter, which can become a career-damning ethical lapse:

Although the original backers did not get the return for which they’d hoped, the endeavor ultimately succeeded thanks to the intrepid settlers who displayed many of the noble traits found in entrepreneurs:  flexibility (they had to settle further north than intended), persistence (through brutal hardships), the value of good partners (Squanto and the Wampanoag tribe), and the courage and optimism necessary to accomplish the impossible and stupid.

All great and honorable actions are accompanied with great difficulties, and both must be enterprised and overcome with answerable courage.

- William Bradford, 2nd, 5th, 7th, 9th & 11th Governor of Plymouth Colony

Our business – like every business – has its ups and down, but we have much to be thankful for.  Much.   So we’d like to take this opportunity, here at NVSE, to give thanks for the trust and patience of our Limited Partners, the initiative and dedication of our entrepreneurs, the support provided to them by the many friends in our network, and the nation that offers the freedom to pursue happiness.  We love our work, have been blessed with terrific successes and honorable failures, and get to do it all with great people in beautiful weather.   God Bless you and your families – we hope you have a wonderful Thanksgiving.

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Regulation of complex adaptive systems

Chess in the Dark / Complexity26

Chess in the Dark / Complexity26

Why do regulatory measures implemented in the wake of one crisis inevitably fail to prevent the next one?

Kevin D. Williamson writes that regulation of complex adaptive systems (such as financial markets) present a challenge that is seldom appreciated or understood:

Every regulatory regime is explicitly or implicitly based on a model of how a particular system functions, but, for any system of meaningful complexity or sophistication, it is virtually impossible to develop a regulatory model that accounts for the effects of the regulatory regime on the system being regulated. (This is sometimes analogized to Kurt Gödel’s incompleteness theorems; whether that is an appropriate analogy I leave to the mathematicians.) The complex structured finance of the sort associated with mortgage derivatives and the like did not develop ex nihilo — it developed as a response to regulation and to political attempts to steer markets. We attempt to regulate markets as they exist, failing to account — and probably unable to account — for how regulation will change the behavior of the markets

Rather than admit that regulation is having unintended effects, Professor Taub retreats into moralizing, denouncing the banks’ behavior as “accounting tricks” and “gaming the system.” But these are not tricks or loopholes or games — they are the laws of the land and the products of regulators. If we could for a moment set aside the cheap homiletics, we could meditate on the fact that our current regulations are having certain effects, some of which are other than what was intended, and that other regulatory innovations also will have effects other than those intended, and that our power to regulate is limited by our inability to predict or account for how markets and institutions will react to that regulation.

Andrew Haldane (currently the Chief Economist at the Bank of England) similarly argued that regulations become less effective as they become more complex and likened it to a playing Frisbee with a dog.  Despite the complexity of the physics involved, catching a Frisbee can be mastered by an average dog because he has to keep it simple:

The answer, as in many other areas of complex decision-making, is simple. Or rather, it is to keep it simple. For studies have shown that the Frisbee-catching dog follows the simplest of rules of thumb: run at a speed so that the angle of gaze to the Frisbee remains roughly constant. Humans follow an identical rule of thumb.  Catching a crisis, like catching a Frisbee, is difficult. Doing so requires the regulator to weigh a complex array of financial and psychological factors, among them innovation and risk appetite. Were an economist to write down crisis-catching as an optimal control problem, they would probably have to ask a physicist for help.  Yet despite this complexity, efforts to catch the crisis Frisbee have continued to escalate. Casual empiricism reveals an ever-growing number of regulators, some with a Doctorate in physics. Ever-larger litters have not, however, obviously improved watchdogs’ Frisbee-catching abilities. No regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight.  So what is the secret of the watchdogs’ failure?  The answer is simple. Or rather, it is complexity. For what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub-optimal for crisis control. In financial regulation, less may be more.

Haldane warned that “fundamental limitations of the human mind” thwart increasingly complex (and sometimes frivolous) attempts at regulation.

In one of our earliest posts in 2009 we asked the same question, from the viewpoint of a board of directors:

The end of every boom-bust cycle during my lifetime has included a fin de siècle scandal:  insider trading punctuated the ’87 crash, accounting irregularities (think Enron and Worldcom) helped pop the tech bubble of the ’90s, and our most recent bust was characterized by lax governance at Fannie & Freddie and more than a few banks.

We all understand the business cycle, and we all understand human nature… but what about all those good governance measures that get implemented in the wake of each meltdown?  Why do they inevitably fail to prevent the *next* crisis?

Presumably, those companies and regulatory bodies have boards comprised of accomplished and highly intelligent members, with personal wealth at stake.  Weren’t they paying attention to, and paying consultants to implement, best practices in good governance?  Ethics codes, audit and compensation committees,  Independent Directors, regular meetings, well constructed board packages…

It’s conceivable that a board member here or there could be corrupt or asleep – but entire boards?  Across multiple companies and regulatory agencies?  Unlikely.  It’s more likely that they were following the current and best practices for strong and effective board oversight.

There is more to strong board performance than best practices.  The critical factor is a ‘robust social system’ in which members’ informal  modi operandi ensure that all the well-designed board processes function properly.   Good boards combine tension and mutual esteem.

This is especially true when dealing with complex and detailed regulations, which increase the likelihood a board will mistake process for purpose and inadvertently tiptoe close to where a crisis can be triggered.

 

 

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Vintage Future VII

Our Vintage Future series takes a tongue-in-cheek look back at the failed predictions of past generations of investors and futurists, and the sometimes tortuous routes to success of unlikely ideas.

In our line of work it’s good to guard against the hubris inherent in projecting conventional wisdom too far out into the future, and to remind ourselves that today’s trend can be tomorrow’s punchline – and vice versa.

Our VIIth installment takes a look at “the greatest thing” ever invented and a simple innovation that dramatically altered how we see the world.

Even sliced bread took 18 years to succeed.  Otto Frederick Rohwedder, a jeweler from Missouri, built his prototype “Machine for slicing an entire loaf of bread at a single location” in 1912 but saw it destroyed in a fire.  15 years later he filed his patent, but the end product languished due to its untidy appearance and concerns about freshness.  One year later a St. Louis baker named Gustav Papendick put it in cardboard trays and wrapped it in wax paper, yet even then it didn’t take off until it helped a little company called Wonder Bread go national in 1930.

bwhite

Grok this:  Betty White is older than sliced bread!

Except for a brief ban during WWII (the steel used to build the slicers had more pressing uses), sliced bread grew quickly and became a platform on which others could dream and build – in this case new types of spreads and jams.

Sometimes a simple idea – like digging ditches – can change the world.  Before most cables ran underground, all electrical, telephone and telegraph wires were suspended from high poles, creating strange and crowded streetscapes.

 

Stockholm c.1913

A phone tower with 5000 lines in Stockholm, Sweden in use 1887-1913

Boston 1881

Pearl Street train station after a hurricane, Boston 1881

New York City c.1903

Telephone pole line construction, New York City c.1903

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A startup must have good answers to seven questions

All happy companies are different because they found something unique that gives them a vision and a monopoly of sorts;  all unhappy companies are alike because they’ve failed to escape the essential sameness of competition.”

So says Peter Thiel – business subversive, founder of PayPal, first outside investor in Facebook, one of Silicon Valley’s leading investors, thinkers, and, since finding himself portrayed in the movie The Social Network, celebrities.

In the interview clip below, Mr. Thiel also says that we have “a very powerful but very narrow cone of progress around the world of bits, not so much in the world of atoms.”

The entire Uncommon Knowledge interview – which discusses competition in business, the value of monopolies, and the battle between humans and computers – can be found here.

Explosions of Creativity, a review of Peter Thiel’s Zero to One – Notes on Startups, or How to Build the Future a book based on “careful” notes taken by a student during a course on innovation Thiel taught at Stanford in 2012.

One suspects that the course was more a seminar bull session than a rigorous academic analysis (not that there’s anything wrong with that!) and it does not escape the genre, set forth in the subtitle, of “Notes.” The result is a loose collection of aphorisms and bits of wisdom, not a sustained inquiry.  Nor does the book probe deeply into Thiel’s own experience. There are occasional references to PayPal, but the bloody details of entrepreneuring in one of the most cutthroat eras of business history are omitted…

To Thiel, the only valuable ideas are those that most other people disagree with, and the initial point for successful entrepreneurs must be: “What valuable company is nobody building?” He thinks the dot-com crash taught the wrong lessons: It convinced Silicon Valley to eschew grand visions, avoid plans in favor of opportunistic flexibility, focus on improving on existing products already offered by competitors, and avoid products that need intensive sales efforts.

All of these ideas are wrong. A great startup must have a vision and a plan, it must avoid competition, and it should recognize that if a better mousetrap falls in a forest and no one knows about it, it might as well not exist.

***

To have a shot at success, a startup must have good answers to seven questions: Engineering — can you create a breakthrough, not just incremental improvements? He uses the figure that technical improvements must be ten times as good as incumbents to succeed. Timing — is now right? Monopoly — are you starting with a big share of a small market? People — do you have the right team? Distribution — can you deliver the product? Durability — is your market position defensible over time? The secret — have you identified a unique opportunity that others do not see?

The goal is market power, usually based on combinations of technical superiority, network effects, scale economies, and branding.

These are not earth-shaking insights, but it is useful to be reminded of them, because they are regularly ignored. Thiel notes the problem with the wave of green tech that swept over Silicon Valley in the Aughts: The companies lacked good answers not just to one or two of these questions; they had bad answers for all seven.

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Where are the start-ups?

The entrepreneurship rate, defined as the number of new firms in a given year as a share of all firms, has been in persistent decline for decades (15% in the late 1970’s, 8% in 2012).  It has been punctuated by tech surges – but those decline after a time lag (e.g., the dotcom boom/bust).  However one defines high-growth firms, their share of the economy is declining.  So argues this excellent AEI podcast about job creation, innovation, productivity, and national wealth.

High profile firms such as Google and Facebook (hardly start-ups, anymore) enjoy outsized awareness because they’re personal and omnipresent, and belie the fact that the data show declining business dynamism overall and for start-ups specifically.  No one knows at the outset which high growth firms will explode and disrupt – so we need “more shots on goal.”

As we once wrote:

There’s a heroic assumption propping up that line of thinking:  that there will always be a nicely growing economy, with plenty of opportunity, and no shortage of entrepreneurs.  We believe it is not safe to assume that entrepreneurs will continue to risk their wealth and careers, expend the energy, and make the enormous sacrifices required to build a business no matter how big a bite the taxman takes out of their eventual reward.  It’s fine to say investors will look for the best opportunity regardless, but if there are fewer entrepreneurs there will be fewer opportunities, and the economic pie will start to shrink…

“Terrific” ideas will still find willing investors, but what about all the not-obviously-terrific-but-still-really-good ideas?  For every Facebook there are hundreds of other early-stage companies who receive financial backing and grow nicely…  The economy is not built on a series of towering home runs that clear the fence no matter how strong the wind is blowing into the park.  Winning takes singles, doubles, walks, anything that advances runners and scores runs.  Over-regulating (or over-taxing) early-stage investment activity is like building a pitcher-friendly park and keeping the infield grass long:  you better plan on low-scoring games.

Hathaway believes over-regulation is a significant problem; particularly, how specific regulations impede firm entry and protect incumbents.  What we said in our response to a WSJ editorial about tax rates and early-stage investing is equally true of regulations:

[Large companies like] Costco may grow more slowly but will weather whatever tax regime is in place. However, small private companies (who create virtually all the new jobs in the country) lack a large company’s ability to shift income and lobby Washington, and they won’t fare so well.

(UPDATE:  As if on cue… today’s WSJ reports that Google has just become the country’s biggest political donor, knocking off heavily-regulated Goldman Sachs. – ed)

He also spends some time on the importance of the entrepreneurial ecosystem, the “networks and community, the dark matter, the softer things.”

The bottom line, whether it’s taxes, regulation, or institution-building:  some forms of activity promote economic growth and ought to be encouraged.

The entire wide-ranging podcast is worth a listen.  A few other well-said points:

  • The economy needs more than a narrow rebound in tech entrepreneurship, especially since the current rebound has been accompanied by an uptick in “hardening” or consolidation as early firms are gobbled up before they boom.
  • Using job creation as a measure is problematic because fewer people work for Twitter or Facebook than their previous equivalents – by the nature of what they produce.  Michael Spence divides the US economy between the one that competes globally vs. the local market (tradeable vs. non-tradeable).  The former generates national wealth but will employ fewer and fewer people;  however, that’s what sprinkles money around the non-tradeable localities.  “Not everyone can work at Google or Apple.”
  • Innovation can be costly for individuals and firms in the short run, but is the key to wealth in the long run.  E.g., productivity enhancements in low-tech/low-wage firms, consolidation that drives out less efficient mom&pops, and innovation that pushes stale incumbents out.

 

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Why do pioneers tend to fail?

c-columbus-1Gerard J. Tellisv, in The Columbus Effect in Business, writes that “Pioneering is glorious, but later entrants are often the ones who see the true potential of discoveries.”  We made a similar point on Columbus Day two years ago:  though conventionally thought of as an explorer, Columbus might more accurately be described as an enormously influential (and lucky, perhaps even failed) entrepreneur.  Not only did he fail to achieve a blow-out IPO, he couldn’t even get the results of his project named after himself.  Here’s how Tellisy puts it:

Christopher Columbus will be feted in many places on Monday as an intrepid explorer, reviled in others as the spearhead of European colonization. But the Genoese ship captain who in 1492 sailed west to parts unknown might be best considered today for what he can tell us about ourselves. The man who successfully pioneered direct cross-Atlantic navigation also died dispossessed and embittered. In this respect Columbus represents a type, not an exception: failing pioneers.

Many scholars believe that pioneers are highly successful, have a high market share, and are long-term leaders of the markets they pioneer. Yet historical analysis shows that pioneers mostly fail, have a lower market share and rarely lead their industries. Long-term market leaders seldom are pioneers. Rather, they are ones who appreciate the discoveries of pioneers, envision the mass market and exploit it profitably.

Columbus might have fared better had he worried less about the idea and more about the execution.  As John Greathouse once put it (in the May 2012 issue of Forbes):

The second time Christopher Columbus pitched Ferdinand and Isabella (two years after his initial presentation – raising money has always taken patience and persistence), he did not need to convince them that locating a shortcut to the spice routes of India was a good idea. Rather, he had to belie their primary concerns: was he honest, tenacious and competent enough to execute the journey?

The same is true of entrepreneurs and their backers:  we want to hear about the idea – the details in the pitch reveal important things about the entrepreneur  – but the intangibles in a good long-term partnership are primary:   integritytransparency, trustworthiness, enthusiasm and tenacity, self-awareness, and flexible persistence.

Tellisy makes another point that is a favorite of ours:  business history is full of surprises.

Today’s market leaders in many categories didn’t pioneer those categories. Microsoft didn’t pioneer personal-computer operating systems (QDOS came before) or word processing (WordStar and others came before). Amazon didn’t pioneer online books stores (Books.com came before). Apple didn’t pioneer mobile music, the smartphone, the tablet ( Sony , BlackBerry and others came before). Google didn’t pioneer Internet search (AltaVista, among others, came before). And Facebook didn’t pioneer online social networks (Myspace came before).

Here’s how we covered the topic in Outcomes that feel ordained only in retrospect:

A few of the stories of these companies’ origins may ring a bell (DuPont began as a manufacturer of gunpowder, Berkshire Hathaway of textiles) but more than a few will likely surprise you:  Avon started as a book seller, Nokia in wood pulp, Wrigley in soap and baking powder, McDonald’s as a drive-in BBQ, 7-Eleven as an ice house, and Coleco made shoe leather (Connecticut Leather Company) long before it did Cabbage Patch Kids and video games.

The common theme to all these Origin Stories?  Business conditions may ebb and flow, but good managers adapt.  Tellisy, again:

Why do pioneers tend to fail in the long run? For the same reason that Christopher Columbus didn’t flourish despite his initial success: Pioneers too often cling to their initial intuition, just as Columbus clung for too long to the notion he had reached India. Pioneers focus on the small initial market, failing to envision the vast mass market that they just opened up. Pioneers stick with the initial product even when the market demands relentless innovation. All the while, a surge of later entrants learns from mistakes of pioneers, envisions opportunities and rides on the explosion of new superior technologies.

 

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A eureka moment or a slow hunch?

Great review of Steven Johnson’s How We Got to Now in the Wall Street Journal.  The author details what he calls the “six innovations that made the modern world” in chapters titled “Glass,” “Cold,” “Sound,” “Clean,” “Time,” and “Light.”     

Theories of innovation and entrepreneurship have always yo-yoed between two basic ideas. First, that it’s all about the single brilliant individual and his eureka moment that changes the world. Second, that it’s about networks, collaboration and context. The truth, as in all such philosophical dogfights, is somewhere in between…  Johnson has become one of the most persuasive advocates for the role of collaboration in innovation.  [His] method is to start with a single innovation and then hopscotch through history to illuminate its vast and often unintended consequences…

Of the six interesting chapters/innovations we’ll highlight “Cold” because it harmonizes well with things we’ve written about entrepreneurship.

In the chapter on “Cold,” he opens with the story of Frederic Tudor, an entrepreneur from Boston who “took three things that the market had effectively priced at zero—ice, sawdust and an empty vessel—and turned them into a flourishing business,” using the sawdust to keep the ice insulated while transporting it from the northeastern United States down to the Caribbean. Then we are on to the naturalist Clarence Birdseye, who noticed when ice fishing with the Inuit of Labrador that some fish froze immediately in the cold air after being pulled out of Arctic waters and that they tasted much better when cooked than fish that had been frozen more slowly. Add years of scientific noodling and you have a revolution in frozen food.

Mr. Johnson writes: “It was not a sudden epiphany or lightbulb moment, but something much more leisurely, an idea taking shape piece by piece over time. It was what I like to call a ‘slow hunch’—the anti-‘lightbulb moment,’ the idea that comes into focus over decades, not seconds.” Rather than an icy epiphany, Birdseye’s insight was an agglomeration of his experiences, his inquisitiveness and the availability of industrial technology at that time, which allowed him to build a production line to reproduce natural flash-freezing.

Entrepreneurial inspiration can come in different forms and from different sources.

Frederic Tudor was a contrarian value creator who saw economic value where others saw heaps of nothing, and who defied conventional wisdom with determination.  Some of the best entrepreneurs are distinguished more by their ability to achieve the impossible than by the originality of their thinking.  You don’t need to be a geek or a conventional innovator.

Clarence Birdseye let his unconscious mind process information in the background and saw meaningful combinations where others did not – in other words he let serendipity work for him.  Different than simple luck, and a close cousin of creativity, serendipity can be encouraged by an “optimal degree of wastefulness.”  Birdseye’s “slow hunch” and “agglomeration of experiences” could be dismissed by some as directionless activity.  But trillions of frozen peas might say otherwise.

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