Growthology

New Census Brief

Yesterday morning, Kauffman released a report in collaboration with the Census Bureau concerning new metrics introduced to the Census' Quarterly Workforce Indicators (QWI) -- specifically, they've introduced data on firm age and firm size.  The report highlights the new capabilities afforded to researchers by these fresh data with some of the authors' own original analysis, which I explain in brief over at the Huffington Post.   

Cracking the Code: How Successful Entrepreneurs Build High-Growth Companies

A recent paper from Ernst & Young and the Kauffman Foundation looks at the cadre of 636 E&Y Entrepreneur Of The Year finalists from 2012 to see what makes them tick. These companies are high-growth and tend to produce disruptive innovations. They’re also not small – in the U.S. 95 percent of firms have fewer than 50 employees, while in this group only 18.2 percent fell into that size range.

In looking at these finalists for the Entrepreneur Of The Year (EOY) awards, eight key findings on why these companies succeed came to light that could be of use to other entrepreneurs and to would-be entrepreneurs. Here they are for this week's installment of Practically Friday:

1. Have a unique perspective on risk

   As Magnus International Group founder Eric Lofquist put it, "It's funny – looking back, I never thought any of it was risky. Feeling so strongly about something: I didn't consider it a risk." That type of attitude drives the EOY entrepreneurs to meet unmet needs and solve problems with their businesses instead of sitting back and letting someone else do it.

2. Communicate vision and instill passion in great teams.

   Finalists overwhelmingly stated that people were their leading priority, as opposed to more established companies worldwide, many of whom have been more concerned lately with efficiency and productivity increases (read: headcount losses) than developing their teams.

   
   

   
   

3. Demonstrate resilience and rapid recovery.

   As Liberty Global president Mike Fries stated, "I don’t think you can really be successful without staring into the abyss at least for a little bit. Every entrepreneur has that moment, and your goal in life is to not have it a second time." Mistakes in high-growth companies are the price of progress, while in more-established companies they often just lead to the blame game.

4. Embrace innovation.

   Established companies are often resistant to radical innovations that may benefit them in the long term but harm their revenue streams in the short term. Successful entrepreneurs know that innovation is the lifeblood of company survival and economic growth.

5. Pursue what you do best.

   Partner with existing corporations to handle infrastructure and technology needs, sales channels, administrative functions, regulatory compliance, or manufacturing and distribution (to name a few) so your high-growth company can focus on what it does best and scale more rapidly and cost effectively.

6. Pursue geographic expansion.

   The majority of the EOY finalists surveyed included geographic expansion in domestic and international markets as part of their growth strategies.

7. Secure the right capital at the right time.

   Funding sources differed by companies' level of revenue, and EOY entrepreneurs accessed a wide range of finance options to grow their businesses.

8. Preserve what you've built.

   As these high-growth companies grow and mature, EOY finalists were most concerned with preserving their company culture, attracting and retaining top talent, protecting and enhancing their company’s brand and reputation, and retaining their best customers.

While the Ernst & Young EOY finalists tended to own companies on the larger side, the findings of this survey apply more broadly to any entrepreneur wishing to grow a company. Mega-entrepreneur Richard Branson has similar advice for small businesses (it's all about the team, do what you do best…), as does entrepreneur Rosalind Resnick for home-based businesses (do what you do best, have some kind of support team, geographically expand, embrace innovation…).

As Bryan Pearce, director of Entrepreneur Of The Year put it, "Our Entrepreneur Of The Year finalists and winners have 'cracked the code' for achieving extraordinary growth in challenging economic times. Their exemplary way of doing business creates jobs and enriches communities while demonstrating how it is possible to defy the gravitational undertow of economic stagnation."

Computing, Innovation and the Cost Disease

I recently finished reading Baumol's excellent "The Cost Disease", about the happy/sad story of modern societies' reliance on sectors -- medicine, education, etc. -- with substandard productivity growth. I won't reiterate his arguments here -- many of you are already familiar, and you would be better reading the book anyway -- but I did want to briefly revisit something he uses to make one flavor of his argument.

Baumol points out that having some sectors with substandard productivity is a mathematical certainty given other sectors with rapidly increasing productivity and declining costs. In particular, he points to the IT sector, and the declining cost of computing equipment. Using some data from a 1997 Dallas Federal Reserve report, he shows how the time to buy one "MIPS" (million instructions per second") of computing power at the prevailing average wage has declined over 70 years. I updated his figures, bringing them up to do date with 2012 wages and CPUs, with the following result. It's remarkable.

Complementing Your Startup

This week in Practically Friday we're looking at a forthcoming study in the Journal of Consumer Research by University of Chicago professors Ryan Rahinel and Joseph P. Redden. It is about Tostitos, and it could have applications to your startup: if you sell two products that are consumed together, you could have an advantage over rivals that don’t. The study is not published yet, but there are press release summaries e.g. here and here.

Rahinel and Redden examine consumer preferences surrounding complementary goods—products that go together, like peanut butter and jelly, mashed potatoes and gravy, or if you are me, balsamic vinegar and anything. Rahinel and Redden specifically looked at Tostitos brand chips & salsa. In one study, they gave consumers various Tostitos chips & salsa products but gave the products fictional names. If consumers were told the foods were from the same brand, they reported liking the chips & salsa more. In a second study, consumers ate various Tostitos chips & salsa products but were told the products were from separate Brand A and Brand B. If told the brands worked together on product research and design, consumers reported enjoying them more. The bottom line is that consumers appear to want matching brands.

You might already have enough trouble developing a single product or service. But you have to differentiate yourself from your competitors, and there’s only so much you can do by specializing with one product. You could be leaving money on the table by ignoring a good or service that naturally pairs with what you are doing already. If we think outside of food/consumable products, for example, Nike started selling running shoes that paired with iPods. Lark is expanding their sleep monitoring product into a general health and well-being product. It might not be enough to just be aware of what your product or service complements; developing that complementary good could be the key to success.

Google Fiber Being Installed

A quick update--I saw some local news vans on the route to work today and the Google Fiber blog confirms officially that the first homes are completing installation of Google Fiber. There's a production video on their site of the installation process.

I am optimistic about Google Fiber, but I wonder if there are any bets to be had about how soon (barring installation day) they will start receiving calls for technical support. Is there any data out there about the typical volume of tech support inquiries a television, phone, and internet provider receives each month per customer?

Congratulations, Entrepreneurs, You're Being Bought. Now, the Lawsuits Start.

One of the best moments in an entrepreneur's working life is finding out someone  wants his or her company more than they do. In other words, they're being bought. While doing a public offering gets better press, or at least used to, next best can be selling your company (assuming you don't want to continue running it in perpetuity).

The trouble is, mergers and acquisitions now come with a growing legal price tag. It has always involved a coterie of lawyers, bankers and other fee-taking service providers, but those were mostly part of the process of getting from offer to closed deal. The difference now is that an increasing percentage of acquisitions over $100m have a large and growing additional price tag -- lawsuits from law firms representing plaintiffs alleging that the seller didn't get the best possible price. 

Why do it? Because it  pays, of course. This can be highly profitable litigation, with cases getting settled out of court more than half the time, as the following figure shows. And that represents a big change from ten years ago, when more than half of cases were dismissed and only around a quarter settled.

This is  a disturbing trend, representing a de facto entrepreneurship transaction tax, one that is hitting energy sector worst, but technology isn't far behind.

Lots more information can be found here.

Global Entrepreneurship Week 2012

Jonathan previewed Startup Battle last week; it's Monday so we are now officially in the fifth year of Global Entrepreneurship Week, the weeklong program for highlighting events for and about entrepreneurs all over the world. This year 130 countries and over 125,000 events are taking place. If you are here in Kansas City, I hope you are checking out our own Startup@Kauffman Demo Day taking place right now. We'll be hosting other events this week as well.

Prepare for Startup Battle

On any given Friday you can find teams convening at a half dozen or so Startup Weekends occurring around the globe. In these instances, the teams of developers, designers and others interested in tech startups move ideas to concepts to minimum viable products in just 54 hours. A panel of judges declares one prototype the best of the weekend, and with a bit of luck and a lot of sweat that team might turn it into the next great high-growth business.

What we’re going to see over the next two weekends is a bit different. More than 130 Startup Weekends – an unprecedented and awesome number – will kick off around the world as part of Global Entrepreneurship Week, featuring 1200 teams competing not just against those in the room with them, but against every SW team around the world. The winners at each site will go head-to-head via recorded pitches and, with the final 15 still standing, a jury of accomplished entrepreneurs and investors will pick the winner. It’s called Global Startup Battle, and there’s never been anything quite like it at this scale. Yes, there are some (pretty great) prizes for the winners, but that’s not really the point. If you’re not already participating, follow the action on the Global Startup Battle website, on Twitter and Facebook, vote for your favorite teams, and watch more than 10,000 people around the world in real time building some great products, some maybe not-so-great ones, but all diving head-first into the entrepreneurial experience.

A deeper look at the costs of affinity

Successful collaboration is critical to the entrepreneurial process.  The selection of a co-founder, an employee, or even a business partner can have enormous ramifications for the ultimate success of a new business.  An earlier post introduced an interesting paper that studies the characteristics individuals consider when they select someone with whom they will work and evaluates the impact of these selection characteristics on a team’s success.  A closer look at this paper yields important information about the tendency – and the danger – of selecting partners who share similar backgrounds rather than those with necessary skills.

Paul Gompers, Vladimir Mukharlyamov, and Yuhai Xuan at the National Bureau of Economic Research consider this issue in the context of venture capital syndication, using a dataset of 3,510 individual venture capitalists investing in 11,895 companies between 1975 and 2003. They find that individual venture capitalists are more likely to collaborate with other venture capitalists who share similar characteristics with them. These characteristics may be “ability-based characteristics” (e.g., graduating from a top business school) or “affinity-based characteristics” (e.g., a shared ethnic background or a common previous employer).

The table below presents the increased likelihood of two venture capitalists working together for five potential shared characteristics. Notably, the ability-based characteristic (degree from a top university) has a significantly weaker effect than the affinity-based characteristics in the study.

Shared characteristic	Increase in the likelihood of two venture capitalists working together
Degree from a top university	8.5%
Degree from the same university	20.5%
Attending the same undergraduate school	42.5%
Same ethnic minority group	22.8%
Common past employer	64%

Not surprisingly, the researchers also found that collaborations based on ability-based characteristics have a greater likelihood of successful performance than collaborations based on affinity-based characteristics. Success, in this study, is measured by the likelihood of an IPO of the portfolio company. The table below presents these results. The ability-based characteristic (graduation from a top university) has a positive effect on performance; the affinity-based characteristics reduce the likelihood of success.

Shared characteristic	Probability of investment success
Degree from a top university	11%
Common past employer	-18%
Attending the same undergraduate school	-22%
Same ethnic minority group	-25%

It is important to note that an individual’s ethnicity is not related to success. It is simply collaborations based on ethnic similarity that are more likely to lead to underperformance.

But why do these affinity-based collaborations see fewer successes? Are they making poor initial investment choices? Or are these partnerships characterized by poor decision-making after the initial investment?

Researchers suggest that there may be several factors at play. First, these groups are more likely to invest in portfolio companies with lower potential investment success. The researchers hypothesize that venture capitalists may approach an investment with less rigor if it involves collaboration with a partner with similar characteristics. They may enjoy the collaboration on a personal level, and therefore have lower standards for the investment, or shared affinity characteristics may make it easier for one venture capitalist to convince another venture capitalist to invest. It is also possible that entrepreneurs prefer to work with a diverse group of venture capitalists, leaving entrepreneurs of inferior companies with the affinity-based venture capital partnerships.

However, the researchers establish that the ultimate source of the cost of affinity is the poor post-investment behavior of venture capitalist teams with similar characteristics. Inferior deals play only a small role in the lower probability of success; unproductive decision-making after the initial investment is largely responsible. Researchers suggest that shared characteristics may promote social conformity and groupthink, which lead to inefficient decision-making. Affinity-based teams are also more likely to ignore the disadvantages of a choice or the advice of experts outside the partnership. Finally, they may lack the differences in knowledge, skills, and perspectives that allow for multi-dimensional decision-making.

Entrepreneurs – and, indeed, all of us – must take these results into consideration when we collaborate. While start-ups obviously differ from venture capital investments on a number of levels, these data offer an important caution about the decision-making ability of affinity-based teams. Deeper attention to our motivations when we select potential partners will allow us to have a better understanding of what we share with these individuals and how those characteristics may benefit our potential partnership.  While one might think that more traits in common will result in easier communication, better decisions, and greater success, research suggests otherwise.

Practically Friday: A Good Night’s (or Day’s) Rest

A few weeks ago the Reddit Internet Tour bus stopped at the Foundation. Over barbeque and a live twitter stream, Alexis Ohanian had a discussion with 4 entrepreneurs about what’s important in startups, community, and life.

Naithan Jones, founder of the exciting AgLocal, and former Kauffman Foundation colleague gave a piece of advice not often associated with startups: get some sleep.

Turns out, there is a lot scientific research to back him up. Besides physical health, sleep helps our memory formation and ability to learn (here, here and here), emotional processing (here) and performance in procedural skills like driving (here and here). You can’t problem solve as effectively or engage in optimal decision making when you are sleep deprived.

But when even 24 hours don’t seem to be enough to knock out your work list, shortening your working hours to 16 can be a tough sell. While significant benefits are seen after 8 hours of sleep, there are also benefits to a few hours of sleep and as little as 6 minutes of sleep. Polyphasic sleep refers to alternate sleeping schemes in which sleep is broken up into multiple sessions, usually reducing sleep time to 2-6 hours. Below is a nifty infographic outlining predominant patterns. Green dots indicate REM cycles while red space indicates the rest of the sleep cycle.

There is a catch, however. The less total sleep, the stricter the schedule must remain for naps. In the two and three nap “Everyman” variations you shouldn’t miss your nap by more than a couple of hours, and the “Uberman” method requires naps be within 30 minutes of their allotted spot. This could be difficult for many. In most workplaces in the U.S. midday naps wouldn’t be well received. However, you’re an entrepreneur and besides your consistent sleep deprivation one of the other hallmarks of your profession is that you make your own schedule.

So go ahead and take a nap.

Google Fiber Update: KC Startup Village

I've been following Google Fiber news for a while (and am still waiting for it to come to my neighborhood--Summer 2013, fingers crossed), and I read in Silicon Prairie News that the first houses in Kansas City are now being hooked up. It's becoming real.

Photo courtesy of Nate Olson, a colleague here at the Kauffman Foundation.

The homeowners are part of a group of KC startups in Hanover Heights (the first Fiberhood) that call themselves KC Startup Village. These startups have specifically moved to Hanover Heights to have Google Fiber available for their companies, and are actively recruiting other startups to join them. They've provided some cell phone video of the technician's exterior work. The KCSV blog reports as of a few days ago the interior installation was still incomplete.

In the video, the technician states [speculates?] Google Fiber is going to Dallas next, but in the SPN article Google clarifies that the next Fiber location has not been decided.