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.
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:
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.
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.
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.
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.
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.
Pursue geographic expansion.
The majority of the EOY finalists surveyed included geographic expansion in domestic and international markets as part of their growth strategies.
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.
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."
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.
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
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.
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?
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.
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.
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.
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
Increase in the likelihood of two venture
capitalists working together
from a top university
from the same university
the same undergraduate school
ethnic minority group
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
Probability of investment success
from a top university
the same undergraduate school
ethnic minority group
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
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
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.
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
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
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.
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.