Archive Page 2

PowerDMS named one of Florida’s best companies

logo-PowerDMSFor the 2nd year in a row our portfolio company PowerDMS has been named one of Florida’s best mid-sized companies by Florida Trend magazine. (They’re up to #3 this year.)

The news comes on the heels of May’s news that the company had been named one of Central Florida’s 2015 Best Places to Work by Nebraska-based Quantum Workplace, and June’s big event: the company’s relocation to the Church Street Exchange Building as an anchor tenant in the newly repurposed technology hub.  The iconic building, built in 1988, was a shopping, dining, and entertainment destination for theme park tourists until the parks caught onto the idea and built their own.  The rebirth of “The Exchange” took partial inspiration from how downtown Chicago’s “1871” building became a hub for start-ups.

We’re very proud of what Josh (Josh Brown, CEO) and his team have built, which is, in addition to being a great place to work, a visionary technology platform and the leader in the ECM/GRC (Enterprise Content Management/Governance Risk Compliance) space.

From Florida Trend:

ft_headlogoTo identify Florida’s best employers, Florida Trend partners with the Best Companies Group, which surveyed firms that chose to participate. Any firm with at least 15 employees in Florida, including firms based outside the state, could participate at no cost.

The first part of the survey involved a questionnaire about company policies, practices and demographics. The second part went to a randomly selected group of each firm’s employees, who responded — anonymously — to 72 statements on a five-point agreement scale.

The survey also included two open-ended questions and seven demographic questions. The questions focused on eight themes: Leadership and planning; corporate culture and communications; role satisfaction; work environment; relationship with supervisor; training and development; pay and benefits; and overall engagement.

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The roles of skill and luck in sports and business.

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The 2015 baseball season is demonstrating that when it comes to untangling the roles skill and luck play in sports and business, luck may play a greater role than we’d like to think.

With technology and best practices so widely and easily articulated and disseminated, the difference between the best competitors and the worst is less than in the past.  So a hot stretch of cluster luck can make the difference.

Case in point:  so many teams currently hover close to .500, in contention for the 10 playoff births, that the trade market has been slow to develop.  Teams can think in terms of limping into the playoffs and then getting hot, and so take longer to choose whether they’re buying or selling assets.

The pre-season projected standings predicted such parity, with only 23 projected wins separating the leaders from the laggards entering this season and only 2 teams projected to finish with 90+ wins.  Welcome to MLB’s 2015 Projected Standings, Where Everyone (and No One) Is a Winner:

Projection systems tend to forecast more conservative winning percentages than we’re used to seeing in the final standings. That’s because projected win totals reflect the most common outcomes of thousands or even millions of simulations, whereas a single season, with its wild fluctuations in luck, offers ample opportunity for teams to significantly exceed or fall far short of their true talent levels…  As Phil Birnbaum and Neil Paine have noted, there’s an absolute limit to the accuracy of baseball projections. Even if we were omniscient when it came to team talent levels, we wouldn’t be able to predict luck. And luck has large effects: As Birnbaum wrote, “On average, nine teams per season will be lucky by six wins or more.”

It’s not only harder to separate yourself from the pack, there’s also less incentive to do so:

Last August, Birnbaum wrote that in a rational market, an expanded playoff field should make bad teams more willing than before to spend on free agents, and good teams more willing to tighten their belts. “With more teams qualifying for the post-season, there’s less point making yourself into a 98-win team when a 93-win team will probably be good enough,” Birnbaum wrote. “And, even an average team has a shot at a wild card, if they get lucky, so why not spend a few bucks to raise your talent from 79 games to (say) 83 games, like maybe the Blue Jays did last year?” That’s exactly what we’ve seen. … (However) as soon as it sinks in that not all “postseason” spots have equal value, teams might start prioritizing division titles over coin-flip wild-card games and aiming, once again, for greatness instead of good-enough-ness.

Somewhat ironically, the team suffering the most from bad luck so far this season is the very same team who invented “Moneyball.”

Billy Beane actually built a competitive team, but one that’s had an absolutely brutal run of luck. By BaseRuns, the A’s have played .596 baseball, good for a 51-34 record that would make them the second-best team in baseball. In reality, though, the A’s are a wildly frustrating 38-47 (.447), leaving them a whopping 13 games behind their expected record. No other team in baseball is more than five games below its BaseRuns-expected record. Oakland is 6-21 in one-run games; that .222 winning percentage would be the worst figure over a full season in 80 years.

The A’s will have more luck in one-run games. And they’ll play more like the .596 team than the .447 team over the rest of the season. If anybody in baseball has faith in trusting that longer view of performance, it’s Beane. The problem, of course, is that they may be buried too far in the standings to catch up.

 

Related stories:

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Power Score – Your Formula for Leadership Success

powerscoreI don’t typically read “business books” on vacation, but I made an exception for “Power Score – Your Formula for Leadership Success”.

Power Score is the new book by Geoff Smart and Randy Street, the authors of “Who: The A Method for Hiring” (with an assist this time from their colleague Alan Foster).  “Who” has been required reading in our shop for several years and informs a lot of the questions we ask (and how we ask them) in our “people due diligence” when we are considering partnering with an entrepreneur or helping one of our portfolio companies hire a new senior executive.

So I was excited to read Power Score, which utilizes the data from 15,000 management interviews over twenty years that the authors and their team have done on behalf of corporations and private equity firms at their consulting company, ghSMART.  I love data, and I was impressed with how they mined their unique database to come up with a formula that facilitates successful leadership.

As it turns out, successful leaders get three things right:

1) Priorities – ensuring that they have priorities that are correct, clear and connected to their mission,

2) Who – making sure they have diagnosed their teams strengths and risks, deployed their people against the right priorities, and continually developed their people, and

3) Relationships – working to make sure that their culture and incentive structures support teams that are coordinated, committed and challenged and promote strong relationships with both employees and external constituencies.

The formula seems fairly simple (simple is good on vacation), but the execution is very hard, and very few leaders operate at consistently high levels in all three areas.

The authors offer a scoring system that challenges leaders and their teams to rate themselves on a 1-10 scale in each of the three areas and then multiply the scores (PxWxR) to see how they compare with the best proven leaders in the ghSMART database. (Hint:  500+ is pretty good but 9x9x9 = 729 is the Holy Grail!)  More importantly, they describe how to increase your Power Score by continuously improving in each area, and they also offer a lot of helpful real world examples of how great leaders do it.

The book is written in an easy to digest question and answer format and it won’t take long to finish, though I found myself rereading various sections throughout the book and applying them to companies I have been involved with over the years.  Much like they do in “Who” for identifying and recruiting outstanding talents, the authors offer a process that can’t help but enhance leadership success if executed faithfully.  And, again, unlike most business books it’s backed up by a lot of great data and research on what makes for a strong leader.

I highly recommend the book and plan to send copies to our entrepreneur partners at Ballast Point Ventures, all of whom are looking for that extra leadership edge in their quest to build great companies.  We’ve added it to “The Library in St. Pete” for books we highly recommend.  You don’t have to take Power Score on your next vacation, but then again haven’t you watched enough movies on your iPad during those long flights?

 

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Make soccer more American

american_soccerIn the wake of the most recent scandal news affecting international soccer, Richard Epstein of the Hoover Institution writes that FIFA could address its problems by making soccer more American.

(T)he list of particular derelictions, however long it may be, takes the worm’s eye view of the subject. This cascade of errors does not happen by accident. It takes place in large measure because of the faulty governance structure inside of FIFA. …  It would be wrong, however, to assume that the difficulties with FIFA stop at the institutional level. In the United States, the basketball and hockey playoffs have taken center stage. Anyone who watches all three sports will quickly realize that the defects in FIFA’s governance structure are not only felt in the boardroom, but also on the playing fields. As a game, I leave it to others to decide which sport they prefer. But as a set of game rules, as I have long argued, soccer is so sadly deficient that much has to be done to fix the sport. 

While it makes good sense to us that FIFA’s governance structure could be improved, we’re not so sure that would be enough.  “Good governance” reforms, implemented in the wake of a crisis or scandal, inevitably fail to prevent the next crisis or scandal because even the best procedures won’t stop a determined bad actor.  This is especially true when the institution’s culture is complacent and/or complicit – as is the case with FIFA.

As we’ve written elsewhere, in the context of a start-up company’s board, what makes great boards great are the ‘robust social systems’ in which board members’ informal modus operandi animate the formal procedures.  Transparency and a virtuous combination of tension and mutual esteem will facilitate healthy and constructive debate and improve decision making.

Epstein goes on to address what he calls soccer’s “atrocious penalty structure” with penalties “either too severe or too lax.”  He compares the situation unfavorably to hockey, in which each infraction is treated as a discrete event and the structure of the penalties create “strategic possibilities” more in proportion to the eventual outcome of the match.

Not having penalties proportionate to the offense creates perverse incentive effects on players and officials alike. The definitions of all infractions, especially those that turn on intent, are often subject to disputation. Players will try to inch closer to the line, daring the referee to respond with the nuclear option. Lower the stakes, and referees will be less reluctant to impose a penalty that now fits the offense. Players will respond by avoiding silly plays that can subject them to penalties.

This too parallels something else we’ve written, on the subject of complex financial regulations:  if regulators create the incentive to just “manage to the rules,” even a good actor may tiptoe right up to the hot red line where a crisis can be triggered by a little bad luck.  Regardless of the activity, the rules, or who’s officiating, there is always a need for good judgment.

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Just waves of confirmation bias?

We recently came across another excellent article on data, decision-making, and cognitive biases.  It’s a story about Kristaps Porzingis , a 7’1″ 19-year-old, playing in Liga ACB, perhaps the second-best basketball league in the world.  He’s “the type of prospect that has historically torn coaching staffs and front offices apart” as they try to assess his NBA bona fides before the draft.

kristaps-porzingis3All draft picks are crapshoots, but some feel like crappier shots than others. It’s uncouth to plainly say, “I have a bad feeling about this guy,” so we do our best to justify our vague inklings. The stronger our distaste, the stronger our effort. So of course it’s the foreigner with the spindly frame and the funny name who has people [grasping for answers]. … What is the draft if not complete pseudoscience?  …

He’s like a young Robin trying on Batman’s utility belt — the tools are there, and they’re incredible. They just don’t fit yet, and you can’t be too sure that they ever will. His issues on defense are the same most players his age experience. He bites on pump fakes, he gets caught ball-watching, and he can be a step slow recovering to his man. But there is a chance that, five years down the line, he’ll be doing things that only a handful of NBA big men can do at a high level.

Maybe all of that hokey pseudoscience will prove prescient. Drafting isn’t an art, and it isn’t a science, but if you squint hard enough, it can look like a happy medium. It’s all just waves of confirmation bias on both ends of the spectrum posing as data points, right? It can tell you anything you want it to if you wait long enough. But it can’t, at the very moment, tell you the fate of Kristaps Porzingis. And so, like any other year, we’ll go on trying to find some illuminating detail that will solve the puzzle once and for all, blissfully ignorant to the fact that there’s only one person with the final pieces.

As with the NFL draft, pre-draft metrics have only some predictive power.  The data don’t predict a player’s ceiling, can’t account for what kind of system a player will enter, the talent he’ll have around him, the luck he’ll have with injuries, or the intangibles he possesses.

If you’re looking for a bellwether of NBA success, look to the NCAA tournament.  Its pressure-packed contests featuring the best college players in the country in front of gigantic audiences turns out to be a meaningful simulation of NBA conditions.  Even though it’s a very small sample size – for most players just a game or two – the data show that players who move up the draft board as a result of their performance in March Madness deserve it.

The crucial distinction to remember on this topic is that Big Data has limitsWhile it may help make accurate predictions or guide knotty optimization choices or help avoid common biases, it doesn’t control eventsModels can predict the rainfall and days of sunshine on a given farm in central Iowa but can’t change the weather.  A top draft pick may or may not develop based on the system, surrounding talent, &etc.

In our experience the best results often come from a combination of deliberation and intuition.  Too much data can lead to analysis paralysis, common sense can be a shockingly unreliable guide, and those who rely on intuition alone tend to overestimate its effectiveness.

The answer for Porzingis is obvious:  enroll him in an American D-I hoops powerhouse – we’d recommend a school in the Southeast or Texas – and hope that school enjoys a deep run next March.

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The only thing he ever made fly was government money

On this day in 1906, the Wright Brothers were granted a patent for their “flying machine.” In honor of the anniversary, we reprint this – one of our most popular, most-read pieces.  

(Original publish date: April 17, 2013)

The process of productive capital allocation is a critical ingredient of innovation and job growth.   Entrepreneurs spending their own (and their partners’) money will create more jobs, more innovation, and a more vibrant economy than politicians picking winners and losers based on cronyism, campaign contributions, and constituent pork.

When government strays out from funding basic research into either applied research or the means of production, the results range from poor to scandalous.  Ideas are infinite, and in the absence of competent execution, they are worth nothing.  Even if the idea has merit, the true expertise is crowded out.  There are better ways policymakers can help encourage innovation.

The invention of the airplane provides an excellent example.  While we’re all aware it was the Wright Brothers, many interesting details about funding the innovation don’t make it into school textbooks.  In A Tale of ‘Government Investment’  Lee Habeeb & Mike Leven recount the race between the bicycle shop owner/operators and the government-backed head of the Smithsonian.

Who better to win the race [to powered flight] for us, thought our leaders, than the best and brightest minds the government could buy? They chose Samuel Langley. [The War Department gave Langley $50,000, an enormous sum at the time, which The Smithsonian augmented with taxpayer funds of its own.]  You don’t know him, but in his day, Langley was a big deal. He had a big brain and lots of credentials. A renowned scientist and a professor of astronomy, he wrote books about aviation and was the head of the Smithsonian.  It was the kind of decision that well-intentioned bureaucrats would make throughout the century — and still make today. Give taxpayer money to the smartest guys in the room, the ones with lots of degrees. They’ll innovate and do good for us.

For that Solyndra-type investment the country got the “Great Aerodrome,” which “fell like a ton of mortar’ into the Potomac River – twice.  Representative Gilbert Hitchcock of Nebraska remarked, “You tell Langley for me that the only thing he ever made fly was government money.”

Nine days after that second failed test flight, a “sturdy, well-designed craft, costing about $1000, struggled into the air in Kitty Hawk.”

How did two Ohio brothers accomplish what the combined efforts of the War Department, The Smithsonian, and other people’s money could not?  The authors cite James Tobin’s To Conquer the Air: The Wright Brothers and The Great Race for Flight (2004) to provide a few answers:

  • Langley saw the problem as one of power:  how to go from zero to 60 in 70 feet, the stress of which was too great for the materials used.  The Wright Brothers, inspired by the practical skills and insights gained from tinkering in their bike shop, understood the problem was one of balance (on a bike, balance+practice = control).  They invented the three-axis control (pitch, yaw, roll) still standard on fixed-wing aircraft today.  Their entrepreneurial technical expertise was an advantage neither the government nor other private competitors (Alexander Graham Bell) could match.
  • Since they couldn’t afford repeated test flights the Wright Brothers were forced to develop a wind tunnel to test their aerodynamics.  This saved money and time, since they weren’t bogged down repairing the wrecks of a flawed design.
  • No government money also meant no government strings.  They were freer to experiment and innovate without worrying about non-essential requests and hidden agendas.  They also managed to do more with less since they couldn’t afford subsidy-induced waste.

Habeeb & Levin also offer this fascinating, if not unexpected, coda:

Though the Wrights beat Langley and the Smithsonian, the race didn’t end there. Powerful interests vied for the patent to this revolutionary invention and, more important, for the credit for it. With Smithsonian approval, a well-known aviation expert modified Langley’s Aerodrome and in 1914 made some short flights designed to bypass the Wright brothers’ patent application and to vindicate the Smithsonian and its fearless leader, Samuel Langley.

That’s right. The Smithsonian’s brain trust couldn’t beat the bicycle-shop owners fair and square, so they used their power to steal the credit. And then they used their bully pulpit to rewrite history. In 1914, America’s most esteemed historical museum cooked the books and displayed the Smithsonian-funded Langley Aerodrome in its museum as the first manned aircraft heavier than air and capable of flight.

Orville Wright, who outlived his brother Wilbur, accused the Smithsonian of falsifying the historical record. So upset was he that he sent the 1903 Kitty Hawk Flyer, the plane that made aviation history, to a science museum in . . . London.

But truth is a stubborn thing. And in 1942, after much embarrassment, the Smithsonian recanted its false claims about the Aerodrome. The British museum returned the Wright brothers’ historic Flyer to America, and the Smithsonian put it on display in their Arts and Industries Building on December 17, 1948, 45 years to the day after the aircraft’s only flights. A grand government deception was at last foiled by facts and fate.

As for Samuel Langley, he died in obscurity a broken and disappointed man. Friends often noted that he could have beaten the Wright brothers if only he’d had more time — and more government funding.

Some things never change.

The Wright brothers’ airplane business never took off (groan) due to a combination of poor business decisions and sloppy patent work.  Wilbur sadly died young (in 1912 at age 45, of illness that some suspect was contracted due to exhaustion from the patent battles) and Orville sold the company in 1915.  So the industry grew under the leadership of other companies and other men.  (Although the Curtiss-Wright Corporation remains in business today producing high-tech components for the aerospace industry.)   One can’t help but wonder what the original inventors might have done had they been the beneficiary of a strong partnership with a VC fund…

 

 

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Sunken treasure and the limits of decision models

What $12.7 million investment in 1988 yielded a vanishing $48 million in 1991, nothing again until this year, and yet may still have fabulous upside?  As ESPN films explains in In Deep Water, a real-world “National Treasure.”

When a hurricane sank the SS Central America in 1857, over 400 lives and at least 3 tons of California Gold Rush fortune were lost.  “At least” because the steamer was also rumored to carry in its hull an additional secret 15 tons of gold headed for NY banks.  The loss contributed to The Panic of 1857, as the public came to doubt the government’s ability to back its paper currency with specie.

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1989 file photo shows gold bars and coins from the S.S. Central America

131 years after the ship was lost, oceanic engineer Tommy Thompson  and a team of “data nerds” used Bayesian modeling to find the ship and new deep-water robot technologies to recover items from the ocean floor.  We caught the 30-for-30 movie this week and it captivated us on several levels:  (a) it’s the greatest lost treasure in American history, (b) it includes important lessons about corporate governance, (c) it demonstrates the importance of intuition, and (d) the tale ends with a local twist – fugitive entrepreneur/treasure hunter Thompson was just recently captured in our backyard (Boca Raton).

The story has parallels to another favorite of ours – The Greatest Comeback Ever and the Limits of Decision Models – in which intuition augmented or even trumped the computer model.  Following a hunch they discovered her on “the edge of the probability map,” ending one mystery but starting another.

Thompson – “a combination of Indiana Jones and Tesla” – used lack of transparency and poor corporate governance to keep his investors at bay for 16 (!) years.

The first seven years were consumed by a flurry of lawsuits from 19th century insurers and not directly his fault; his backers then patiently waited for the next nine years as Thompson told them the gold had to be marketed just so.  He sold 532 gold bars and thousands of coins for $48 million in 2000, purportedly to pay loans and legal bills.  In 2005 two investors sued, in 2006 some crew members sued, and Thompson became a recluse in a rented Vero Beach mansion which he paid for with “moldy smelling” $100 bills (they’d been buried underground).  He missed a 2012 court appearance and was officially on the lam up until being caught earlier this year in Boca Raton, FL.

A new company (Tampa-based Odyssey Marine Exploration) re-started salvage efforts in April 2014 – only 5% of the wreck was excavated by 1991, and it’s been left un-touched since then. Recovery efforts will continue indefinitely (is it 3 or 18 tons of gold?) and be used in part to reimburse the original investors.

 

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Closer to a cure for cancer?

cancerThis past weekend’s WSJ had an excellent article on how recent, fascinating developments in targeted therapeutics and immunotherapy show great promise for the treatment of cancer.  It’s a must-read for anyone interested in the topic – whether you’re a patient, family of a patient, or even an investor in the technologies that are used.  (Full disclosure:  as BPV is in MolecularMD, a molecular diagnostics company that develops custom companion diagnostic products and supports clinical trial services for targeted cancer therapies.)

Memorial Sloan Kettering Cancer Center CEO Dr. Craig Thompson explains why he’s optimistic about new therapies aimed at increasing the body’s own ability to fight cancer in The Future of Cancer – Closer to a Cure.

Most people don’t acquire a significantly higher risk of cancer from the genes that they inherit from their parents. Instead, cancer arises as a result of copying errors (mutations) in the inherited genes, as our bodies make new cells to maintain our various organs. A recent widely quoted publication suggested that these errors are an inevitable consequence of trying to copy three billion bits of information as a cell divides.

That may be true, but it doesn’t mean getting cancer is inevitable. The fastest and most extensive rates of cell division occur when we are developing as embryos. Billions upon billions of cells are produced each day, yet cancer in newborns is exceedingly rare. In contrast, cell division in each of our tissues slows as we grow older, while the incidence of cancer increases with age.

What accounts for this discrepancy?  We damage ourselves through exposure to invading pathogens and other environmental threats, thereby “constantly damag(ing) our tissues, forcing restorative cell proliferation to occur in a war zone of damage.”  But recent advances in targeted therapeutics and immunotherapy “can have stunning efficacy” in the right situation without the toxic side effects of traditional chemotherapy.

It is in this inhospitable environment that most cancers arise. We have known for some time that many of these environmental exposures damage DNA, making it harder to copy and resulting in more mutations as cells divide. Recently, we have come to appreciate that during regeneration of damaged tissue, the rest of the body pitches in to keep every cell in the damaged tissue alive. Not just the healthy cells, but also the ones that have acquired mutations that render them unfit. Our immune system, which usually detects and destroys cells with excess mutations, is turned off

Patients whose cancer bears specific mutations are now more effectively treated with drugs designed to selectively reverse the effects of those mutations. Such drugs are termed targeted therapeutics. The downside of this class of drugs is that they usually don’t have any benefit in treating cancers that don’t carry that specific mutation. While we don’t yet have many therapies that target cancer-causing mutations, the results can be dramatic when such drugs are available…

Immunologists have found that our immune system has a built-in “off switch,” a checkpoint that shuts down an immune response a few weeks after it is initiated. A new and expanding class of cancer therapeutics have been developed that have the ability to block this normal shut-off switch and thus augment the ability to recognize and destroy cells carrying mutations…  Some patients with widely metastatic cancer have been rendered cancer-free with therapies aimed at increasing the body’s own ability to fight cancer.

 Dr. Thompson closes with optimism; an optimism we share, thanks to the great work done by the teams at companies like MMD.

Why is finding a cure for cancer taking so long? A major reason lies in the fact that cancer is not one disease, but many. Each tissue has its own unique progenitor cells, and each tissue uses only a subset of the genes we inherit from our parents; each tissue is exposed to environmental insults differently. We are just beginning to understand the interplay of all these factors in the origin of the many forms of cancer. Understanding these issues will ultimately allow us to optimize the treatment approach to each patient’s disease.

While we aren’t yet ready to put cancer on the extinction list along with “simpler” diseases like smallpox and polio, it is clear that with more science—the lessons learned from cancer research over the past two decades—we face the future with less fear.

Genomics vs. Genetics

On related note, the conversation about new targeted therapies includes two terms – genomics and genetics – that are mistakenly used interchangeably.  Genetics is the study of single genes in isolation, while genomics is the study of all the genes in the genome and the interactions among them and their environment(s).  Genome British Columbia has a useful explanation of the distinction:

If genomics is like a garden, genetics is like a single plant. If the plant isn’t flowering, you could study the plant itself (genetics) or look at the surroundings to see if it is too crowded or shady (genomics) – both approaches are probably needed to find out how to make your plant blossom…

In studying human disease, for example, genomics examines all the genetic information to determine biological markers predisposing an individual to disease, whereas genetics uses the information from one or two genes to explain a disease state.  Many diseases due to single gene defects have been identified. Now, geneticists want to tackle multifactorial diseases caused by the complex interactions between multiple genes and the environment.

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Google can’t save us (anymore)

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History of Google Acquisitions

Great piece by Robert J. Samuelson in last Sunday’s Washington Post about how innovation resulting from M&A activity may lift corporate profits, but only the innovation generated by fast-growing start-ups broadly raises national prosperity.

(A) larger issue transcends individual deals. The popularity of M&A actually involves economic weakness. Unable to expand internally — by creating products or entering new markets — companies rely on M&A for growth. However, what works for the firm may work less well for society. Although buying another company may enhance the acquiring firm’s innovation, it doesn’t add much to society’s. And society’s capacity to innovate is crucial. It generates the wealth needed to raise incomes and dampen social conflicts…

In our mind’s eye, the economy is swarming with entrepreneurs. Competition is intense. Old-line firms adapt, or die. Just the opposite may be happening: Evidence suggests that entrepreneurship is in decline and that U.S. firms are becoming older, more entrenched and less dynamic…

American capitalism is middle-aged. Older firms, conditioned by success, are more rigid. They’re invested, financially and psychologically, in existing markets and production patterns. They can adapt and innovate, but it’s hard. The M&A surge is one way older firms strive to overcome internal stagnation.  What’s worrisome is not the success of the middle-aged businesses; it’s the weakness of young firms and the apparent erosion of entrepreneurship. As other research has shown, start-ups ultimately account for a disproportionately high share of new job creation and innovation. The vigor of these new firms is essential for the economy to revitalize itself.

We don’t know what explains their slide, though the sheer mass of government regulations is one candidate. Older firms have the lawyers and administrators to cope with the red-tape deluge; many small new firms drown. But that’s just a conjecture illuminating the larger question. If the economy discriminates against young firms, we will all be paying the price for many years.

There’s also evidence that suggests more early-stage firms are getting gobbled up – via M&A’s – before they have a chance to boom.  Google itself may be a prime example:  since 2001 they have acquired roughly one company per month and they recently became the country’s biggest political donor, knocking off heavily-regulated Goldman Sachs.

It may seem strange to think of Google as middle-aged, but high profile firms such as it 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.  For every Google or Facebook there are hundreds of other early-stage companies, and no one knows at the outset which high growth firms will explode and disrupt – so we need “more shots on goal.”

Samuelson’s piece fits nicely with what we wrote last July in Not All Innovation Is Alike:

Some politicians think “innovation policy” means spending taxpayer money on promising young firms favored by bureaucrats. Rather, innovation policy means ensuring that the status quo is continuously challenged by upstart rivals and threat of failure. Those are the keys to the Schumpeterian “gales of creative destruction” that drive innovation, which in turn drives long-term economic growth and improvement in living standards.

National prosperity is generated by the start-ups who innovate and challenge entrenched incumbents. Anyone who’s worked for a large corporation – especially in an R&D department – would not rely primarily on that model for innovation. Anyone who’s worked for a large corporation – especially in a dying industry – would not rely primarily on that model for job growth. Yes, start-ups lack the economies of scale and R&D budgets of larger firms; but that’s the support venture capital provides. Those start-ups that do gain traction are able to raise capital, and, with hard work and a little luck, become large companies… and then face the next generation of innovators.

 

 

 

 

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Vintage Future VIII

42 years ago this past Friday, Martin Cooper of Motorola made the first ever cell phone call to Joel Engel of Bell Labs. Cooper was calling Engel to troll him about the fact that Motorola invented the thing first, although it was another 10 years before the company released the DynaTAC 8000X. So yeah…even the very first guy talking loudly on his cell was kind of a jerk about it.

That decade between trash talk and commercial introduction brought to mind our Vintage Future series in which we take 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.

Back in 2010 in “Entrepreneurial silver lining in today’s economic clouds” we mentioned that the patents for the Television, Jukebox, and Nylon were all granted during The Great Depression, and although we can’t confirm any patent information on the chocolate chip cookie, it too was invented at the same time (1930 to be precise).  In this, our VIIIth installment of Vintage Future, we share some of the less successful ideas from the Great Depression.

 

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