Growthology

A Rising Tide Sketchbook

Growthology mentioned the release of A Rising Tide in May. The Kauffman Foundation has just released a sketchbook video about the book from author and Senior Research Fellow Alicia Robb. It is being debuted today at the We Own It Summit in New York. Embedded below is the production:

Entrepreneurial Opportunity For All: Community Colleges and the Startup Ecosystem

There is a tremendously important role for community colleges in educating a new generation of entrepreneurs, and on some campuses already there are great examples of excellence in classroom learning for current and future founders. We know at the Kauffman Foundation that community colleges around the country are leading the way in offering diverse curricula to teach students how to think like entrepreneurs, how to develop a business model, write a plan, operate a franchise, grow a venture, and more. Indeed, our investigations and anecdotal evidence indicate that the center of gravity in entrepreneurship education is shifting from four-year schools to community college campuses that are better connected to their local economies and offer increasingly diverse entrepreneurial opportunity with a lower barrier to entry to a broader segment of the population. Put simply, at their best they do it cheaper, better and faster than most alternative educational pathways to starting up. More on this in future posts.

But at Kauffman we see even greater potential for these institutions, which is why in May we announced a new initiative that we think can help move community college campuses to the center of their local and regional entrepreneurial ecosystems. Echoing a concept famously originated by entrepreneur and educator Steve Blank, for students to really understand how to start a company they’ve got to get out of the building. If we are successful, current and prospective entrepreneurs will look to community colleges not only to teach them how to start a business, but also to nurture new companies, connect them to early stage funding, to mentor the founders, equip them for growth, and in so doing, feed vibrant local and regional startup communities.

The initiative is called Innovation Fund America. We have partnered with Lorain County Community College (LCCC) to take their Innovation Fund, which has done so much for the entrepreneurial ecosystem of Northeast Ohio, and replicate it in other communities around the country. At the heart of this program’s success is a philanthropic investment fund offering early stage grants and structured investments in young technology businesses—run by either community college students or local entrepreneurs with high growth potential. Recipients, who must agree to remain in the fund’s operating region for the duration of the investment period, are incubated as they meet key milestones and prepare to seek follow-on funding, and they agree to replenish the fund if they are successful. The Lorain fund has made nearly 100 awards totaling almost $6 million, and has led to $62 million in follow-on funding, as well as creating hundreds of internships and permanent, well-paying jobs in Northeast Ohio. We hope we can be successful in reproducing it.

LCCC and Kauffman intend now to prove the flexibility of this model by piloting it in three communities, which we will identify over the next several months. In time, we look forward to helping community colleges across the country grow their own Innovation Funds in an effort that I believe will show how critical community colleges are to locally driven entrepreneur-led growth.

It is important to note that we do not intend to foist a one-size-fits-all solution onto participating schools, and that this will require considerable effort and resources on the part of any school that chooses to take this on. Lorain and Kauffman will provide extensive counsel, comprehensive tools, and, as appropriate, some funding, but to borrow a popular advertising slogan, we say – you can do it, and we can help.

I see this effort as complementary to, even strengthening a college’s existing classroom-based entrepreneurship curriculum offerings. In an immediate sense this is true because the young companies taking advantage of the Innovation Fund will be required to offer internships to local students, giving them a vital learning opportunity and an unvarnished look at life at a startup. But I think even more importantly, the Innovation Funds will create a community of high-potential startups on campus that will demonstrate to students what is possible in their community. There are, by most estimates, nearly 13 million credit and non-credit students enrolled at community colleges around the country; all of them should be exposed to entrepreneurship at its very best in their own communities. They should see real examples of entrepreneurial opportunity as they begin to plan, or repurpose, their careers. Some will seek further education by transferring to a four-year school; some will pursue mid- or early-career vocational training; but hopefully many will see entrepreneurship lessons brought to life on their campus as Innovation Fund companies and choose to follow in those footsteps.

The Innovation Funds will significantly enhance a college’s commitment to workforce development and growing the local economy. They will connect founders to mentorship and capital in areas underserved by traditional sources of both. With this initiative we seek to bridge the funding “valley of death” for startups, but also to prime the pump in capital and talent deserts, over time helping to turn these communities into vibrant entrepreneurial ecosystems.

If you are interested in learning more about the Innovation Fund America initiative or are an institution that would like to be considered for the program, I urge you to visit www.entrepreneurship.org/communitycolleges/ and complete a preliminary survey.

Rhetoric in the Congressional Budget Office's Long-Term Budget Outlook

I had missed that the CBO's update to the Long-Term Budget Outlook has been released. Brad DeLong happened to mention it yesterday. If you are unfamiliar with the report don’t be shy; I find it to be more readable than many other government policy and budgetary documents. It's an important reference document for anyone concerned with budgets and public policy.

The CBO offers two scenarios for making their projections: the extended-baseline and alternative baseline scenarios. If you follow the extended-baseline, things look okay. If you follow the alternative baseline, things don't look so good. Arguments about the validity of using one or the other proliferate. DeLong and Jared Bernstein want to believe in the extended-baseline. Bernstein says that there are erroneous assumptions in both, so why can’t we just believe in the extended-baseline? The argument hinges in which assumptions you think are more erroneous.

I'm not terribly interested in debating the mertis of using one or the other. What I did find curious is the description of the alternative fiscal scenario.

The following are direct quotes from the reports over time describing the alternative fiscal scenario. Bold is my emphasis.

June 2009:

The “alternative fiscal scenario” represents one interpretation of what it would mean to continue today’s underlying fiscal policy. This scenario deviates from CBO’s baseline even during the next 10 years because it incorporates some policy changes that are widely expected to occur and that policymakers have regularly made in the past. Different analysts might perceive the underlying intention of current policy differently, however, and other interpretations are possible.

June 2010:

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period.

June 2011:

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period.

The previous years have been pretty consistent in the high level description of the alternative fiscal scenario. Those 'widely expected changes to current law' include bits like adjusting the alternative minimum tax and the Medicare reimbursement formula to maintain current policies. Here is from this year’s report, June 2012:

The extended alternative fiscal scenario, which incorporates the assumptions that certain policies that have been in place for a number of years will be continued and that some provisions of law that might be difficult to sustain for a long period will be modified, thus maintaining what some analysts might consider “current policies,” as opposed to current laws.

Notice the change in rhetoric. It’s nuanced, but there is a big difference to me between framing changes as 'widely expected' versus 'assumed.' If things are widely expected to occur, that’s a pretty strong statement on confidence. Assuming is a weaker position. Was this purposeful, or am I reading too much into this? Why was this changed?

If I really want to spin a yarn, maybe the question is this: is there less confidence of the CBO in the ability of Congress to enact what was once routine and expected change?

Curiously, there is one instance in the 2012 report where the old language prevails, under Table 1-2. But all of the other notes on tables and charts use the newer language.

Maker Faire Kansas City

I will be at Maker Faire KC this weekend at Union Station (the Kauffman Foundation partially sponsors the event).

  by stevekc

If you live in Kansas City and have not been to a Maker Faire, you should go. If you have not been to Union Station, you should go.

For non-Kansas Citians, you can check out the main Maker Faire website to find when an event is being hosted near you.

A Reading Rainbow

Take a look.
It's in a book.
A Reading Rainbow.

Exposing my age a little bit here, I can remember watching Reading Rainbow on PBS when I was a toddler. The adored children's show starring LeVar Burton has been off the air for a number of years, but that has not stopped LeVar from continuing his work on the program. Techcrunch has a story about RRKidz, Burton's company that is relaunching Reading Rainbow. It's not going to be about physical books anymore, but instead a mobile application for the iPad and select android devices (disclosure: The Kauffman Foundation invested in this startup). The app features books, narration by Burton, educational videos, and some animations and games; it is free and comes with some limited access, but to access the entire book library will require a subscription.

A demonstration video featuring Burton is embedded here:

I imagine this app will further perplex this child about differences between physical print and iPads.

Friendship Effects in Venture Capital

Howard Aldrich, Martin Ruef, and Nancy Carter have written about homophily in startup founding teams (see the 2003 paper). They find that entrepreneurs pick founding team members based on trust and people who are similar to them, not based on filling out skills.

Knowing this, I am unsurprised to see that another group also involved in startups, venture capitalists, make co-investment decisions based on homophily. Abstract from a new paper by Paul Gompers, Vladimir Mukharlyamov, and Yuhai Xuan:

This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people’s desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision-making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based “birds-of-a-feather-flock-together” effects in collaboration can be costly.

The key finding here is that investing based on affinity with the co-investing VC correlates to poorer investment performance. I think the methodology developed by Gompers et al. would be interesting to apply to startups to see if their survival (and/or other performance measures) relates to the affinity/homophily of founders. It's easier for a startup to fail and disband than it is to get out of an investment deal, so I don't think the two are directly comparable in this sense. My guess is that there are differences among homophilous versus non-homophilous teams on survival rates and growth in the early stages (first five years?), after which the differences diminish. I've seen research on homophily and turnover within the startup team (e.g. The Founder's Dilemmas) but not on performance outcomes.

Does anyone know of a dataset on founding teams that contains the names of previous employers and degree-granting institutions for each founder?

How Many Startups Matter?

How many startups matter? How many in the Bay Area, let alone elsewhere? We have to define "matter", of course, but if we say persist, grow rapidly and are profitable, then that becomes at least a starting point.

This has been the topic of a number of recent conversations lately, with people arguing that the number is not just small (which is almost certainly is), but even smaller than most people think. Former VC Andy Rappaport once said that he had done research showing that only 6-8 startups a year matter in the Bay Area. That was it. Most of the rest would never grow fast enough to make a difference, leaving aside the many others that would simply fail.

Others have different numbers. I was recently told that in any eight-year period in the Bay Area only 8-10 companies grew from less than 50 employees to more than 1,000. I'm still trying to source definitive data, but it's an intriguing claim, one that feels right in that precious few companies go on to those kinds of numbers. 

Broadening the question, if those are the numbers in the Bay Area, which is one of the most fertile startup areas in the world, what are the numbers like elsewhere? One company a decade? One ever few years? It is an interesting question, and a good reminder, whatever the "right" answer, why we need to scale expectations and capital to the opportunity -- even if you're an optimist about growing more companies and improving their success rates. We are, after all, starting from a much lower base than most people think.

/Paul K.

In Need of Immigration Policy Reform

The National Foundation for American Policy released a new report today on immigration policy (funded by the Kauffman Foundation). Wait times for EB-1 visas may be developing, which previously had no backlog. For EB-2 visas, immigrants from countries other than India and China (who already have a backlog) will also see wait times develop. It's pretty simple: demand greatly exceeds the quotas set for each year, and demand is increasing.

High-skilled immigrants are good for America:

Some have argued that providing green cards to highly skilled foreign nationals harms the job prospects of Americans. However, that argument ignores that skilled scientists, researchers and professionals help create more jobs and innovations. Moreover, such individuals are hired as part of the normal recruitment process, complementing, not replacing, Americans.

The importance and benefits to the U.S. of high-skilled immigrants is uncontroversial at the Kauffman Foundation. Reform of the system is clearly needed. Something about immigration policy reform was featured in the Foundation's Startup Act white paper, and has made its way into the Startup Act 2.0 legislation currently under consideration in both houses of Congress.

Lesson Plans for Fixing Higher Education

A paradox of American higher education is the disconnect between our vaunted international reputation and the severe problems we face at home. America’s top research institutions consistently dominate the global rankings sponsored by organizations like Shanghai Jiao Tong University and Times Higher Education. The U.S. model of competitive research funding, merit-based hiring and promotion of faculty, and unfettered pursuit of the truth is closely watched and often imitated. From South Korea to Saudi Arabia, countries seeking to create world-class universities in an increasingly competitive global academic marketplace view U.S. institutions as the gold standard.

But the vast majority of American students don’t attend these universities. For most, the story of U.S. higher education is quite different.

Soaring tuition is a problem everywhere, as is growing student debt. Colleges have done far too little to address dismaying dropout rates, focus more effectively on student learning and workforce success, use technology more thoughtfully  to improve academic productivity, and take successful educational experiments  to scale.

There’s ample evidence that a more entrepreneurial approach to postsecondary education is overdue. While some pioneering ventures such as edX are under way, numerous barriers continue to slow innovation and thwart experimentation, both in traditional institutions and in startup ventures that aspire to disrupt the existing marketplace.

Against this backdrop, the Kauffman Foundation convened a diverse group of leading education entrepreneurs, academics, and policy analysts to examine the challenges facing U.S. higher education. We were fortunate to bring together participants including Shai Reshef, founder of the University of the People;  founders of startups 2tor, Inc. and StraighterLine; senior leaders of nontraditional universities such as Olin College and Western Governors University; the president and CEO of Kaplan, Inc.; the directors of education policy at the American Enterprise Institute, the Brookings Institution, and the Center for American Progress; and professors who both study and participate in postsecondary reform initiatives.

The results of the group’s deliberations can be found in College 2.0: An Entrepreneurial Approach to Reforming Higher Education, a just-released Kauffman Foundation report that offers a range of ambitious ideas for reinventing higher education. Along with short essays by individual authors, which I highly recommend, the report outlines a broad set of actions to improve college access, educational quality, and graduates’ success in the work force. These include:

• tackling campus-level obstacles to innovation by giving more funding to institutions with better student outcomes;
• reforming accreditation to place the fewest possible restrictions on new and existing programs;
• improving academic productivity and dramatically driving down tuition by exploring new technology-based pedagogies that have low marginal costs;
• filling information gaps by providing prospective students with far more information about the institutions they attend, including how graduates fare in the job market; and
• making it easier to start “charter colleges,” akin to K-12 charter schools, that receive significant flexibility in their operations in exchange for improved student outcomes.

This is just a taste of what can be found in the College 2.0 report. The hope it holds out is that by removing barriers to innovation, enhancing competition, and providing clear and accessible information about student outcomes, we will lay the groundwork for entrepreneurs to pioneer new models and take the most successful ones to scale. If that happens, mass-access education in the United States may one day enjoy the same successes that our most celebrated institutions do today.

How Much Should We Read Into the Fortune 500?

Well, not as much as you think.

Dane Stangler and I recently released a study where we examined the properties of the Fortune 500 list over time, and then determined how much it actually means. The report is available here and a brief discussion of it can be found over at Wired.

First Rule of Hostage Negotiations: Don't Negotiate

By now, stadium negotiations between cities and professional sports teams have fallen into a depressingly familiar routine. The team--usually through its wealthy owner--drops hints that the current stadium isn't up to par: the locker rooms have deteriorated, training facilities are anachronistic, it is out of fashion with other stadiums, the team can't be competitive without a new stadium. The city balks at first--the present stadium is only two decades old! You are a rich team and rich league! Field a better team and you'll be competitive. The team gets pushy and may even throw a tantrum or two, which culminates in the ultimate threat: we will leave this city if we do not get a new stadium. The city (or county) puts up mild resistance, but eventually capitulates and turns around and tries to coax the public into approving new bond issues or new taxes on hotel rooms, rental cars, and so on.

And so we end up with an arms race, a parallel of the incestuous dance of executive compensation, in which compensation consultants point to CEO pay at other companies to justify a hefty pay package for an executive, which in turns becomes a further milestone for the consultant to use with another company. And, of course, one CEO likely sits on the compensation committee of another company's board, and so the incest continues. Folklore provides additional support--the coincidence of new stadiums with the resurrection of competitive baseball in Cleveland and Baltimore, for example, has now been in use for nearly twenty years in Major League Baseball as justification for newer and nicer stadiums.

Several years ago, Kauffman's home city of Kansas City, Missouri, went through something like this negotiation. The baseball and football stadiums are located across a parking lot from one another, and so the teams joined together to try to convince the county and its taxpayers to help subsidize stadium improvments. And, to be fair, the stadiums needed updates and are wonderful places to watch games. But the most astonishing part of the negotiation wasn't the upkeep; it was a proposal for a rolling roof that would roll from one stadium to another. A principal justification was that "Kansas City will never host a Super Bowl without a roof." Seriously. The improvements passed, but the rolling roof did not.

Now, Atlanta and Fulton County and St. Louis are experiencing something similar. The Falcons and Rams, respectively, are demanding new stadiums. And, sure enough, we see a rehash of the same old arguments for justifying heavy public subsidies of sports stadiums. The principal argument, of course, is that this is good for the local economy.

Thankfully, the Atlanta Journal-Constitution has recently done a thorough debunking of the claim that sports stadiums are a good economic investment for municipalities. Basically: they cost cities and counties money, often for many, many years. And, before the public debt on one stadium is even paid off, teams will be demanding a new one. Oh, and the Super Bowl rationale? Hollow: Indianapolis is in the red $1.3 million for last February's affair, nearly $1 million more than anticipated. Why do cities do this to themselves? And, why do they negotiate with teams that threaten to leave the city?

Why doesn't a city or county just say no? They would clearly be better off financially. The answer, as ever, is likely prestige: it is seemingly prestigious to be host to a professional team. No mayor or county executive wants to stand for re-election and tell voters that they had to say goodbye to Team X because otherwise, in five years, they'll be cutting pensions or selling hospitals to pay for the stadium. But at a time of municipal budget crunches, can local governments afford $1 billion stadiums? Not to mention the massive shifts of wealth involved in public subsidization--already wealthy-owners and athletes benefit, and the cost is often shifted onto visitors and tourists (recall the hotel and rental car taxes) who may not  even be in the city for sports in the first place. Madness.

On the Jobs Report and Other News

I have a piece up at Forbes on the Labor Department jobs report, other mixed economic releases, and why there is a bit of optimism to be found amid the darkening gloom.

Developments in Venture Capital: Smaller Funds?

Earlier this month, the Kauffman Foundation released a report on what we have learned from our decades of experience of investing in venture capital funds. One of the primary findings of the report is that smaller funds in our portfolio tended to perform better.

Separate analysis from the Silicon Valley Bank, as well as research by Josh Lerner and Antoinette Schoar corroborate this finding about fund size and performance (see the Kauffman report for more information).

This morning, one of the authors of the report, our CIO Harold Bradley, alerted me to a new development at Sequoia Capital, courtesy of Dan Primack: Sequoia announced their next fundraising round will be split into a series of fund vehicles rather than one large fund. Primack suggests this strategy possibly draws from a reading of our report. It will be interesting to see if other major VC brands follow suit.