Pivot: The Road to Ruin for Many Startups

The word "pivot" has become part of the entrepreneurial lexicon over the past few years.   Eric Ries developed the "Lean Startup" methodology for building and launching new products.  Ries argues that entrepreneurs should work toward the development of an MVP - minimum viable product - and then listen carefully to customer feedback so that the next iteration of improvements can be put in place.  Entrepreneurs should use the minimum viable product as part of a process of disciplined experimentation, whereby they test core hypotheses about their business model.    As entrepreneurs gather feedback, they should pivot based on what they are learning.  According to Ries, a pivot is a "structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth."

In a blog post for the Wall Street Journal, serial entrepreneur and Stanford Professor Steve Blank offers some cautionary words about the "pivot" concept though.  Blank gives an example of a founder who would rush back to his startup's offices after every customer visit and initiate a fire drill of sorts. The founder would constantly be advocating changes based on his most recent interaction with a customer.  Blank explains the problem:

Pivot as an Excuse
I wasn’t surprised when he pushed back: “I’m just getting out of the building and listening to customers. All I’m doing is pivoting based on their feedback.” By now I’ve heard this more times than I liked. “Yuri, one of the things that make you a great founder is that you have insight others don’t. But like all great founders, some of these insights are simply hallucinations. The problem is you and other founders want immediate action every time you have a new idea. That’s a mistake.
“A pivot is a substantive change to one or more of components to your business model.” You’re using “Pivot” as an excuse to skip the hard stuff – keeping focused on your initial vision and business model and integrating what you’ve heard if and only if you think it’s a substantive improvement to your current business model. There is no possible way you can garner enough information to pivot based on one customer’s feedback or even 20. You need to make sure it’s a better direction than the one you are already heading in.”

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Acqui-Hires: Buying Teams of Engineers from Start-ups

The Wall Street Journal reports on the growth of an interesting phenomenon that has existed for some time in Silicon Valley. 

Established technology companies increasingly are buying—and then shutting down—early stage start-ups, mostly to acquire their software-engineering talent.  Investors, attorneys and others involved have dubbed these transactions acqui-hires.  The deals, which typically range in price from about $3 million to $6 million, started to become commonplace in Silicon Valley last year as demand for software engineers soared.

The paper reports that the deals come with some strings attached (naturally).   The employees may have to sign agreements to stay on board at the acquiring company for a few years.   They also may have to sign noncompete agreements that kick in if/when they leave for another firm. 

Even with these types of "strings" attached to a deal, I think these types of acquisitions come with some risk.  On the plus side, you are acquiring a team of engineers that is comfortable and experienced working together.  You are getting more than talent... you are getting a potentially terrific team.  On the downside, you are not much buying much other than the people.  Yes, you can stop them from walking away, or from going to a direct rival (although non-competes can be tough to enforce).  However, just keeping them there contractually does not insure that they will be productive.  You have to keep them happy.  If they have walked away from an entrepreneurial dream, then the task of keeping them engaged and fulfilled may not be easy.  

What do you have to provide for these folks?  It's more than good compensation.  You have to provide them interesting projects on which to work - fulfilling, meaningful work.  You have to make them feel like they are contributing to something bigger than themselves.  You want them to feel ownership of the product or service on which they are working.  It's a tough task, but it's critical if firms wish to make these types of acquisitions successful. 

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When Should an Entrepreneur Pursue a Freemium Business Model?

Yesterday the Wall Street Journal published an article about how many companies with "freemium" business models have failed to become solidly profitable.  Freemium refers to the idea that some firms give away a basic version of their product or service, in hopes that some significant fraction of consumers will upgrade to the paid version.   According to the Wall Street Journal article written by Sarah Needleman and Angus Loten, "The 'freemium' strategy is turning out to be a costly trap, leaving them with higher operating costs and thousands of freeloaders."  

Of course, some companies have enjoyed spectacular success with a freemium business model.  Take LinkedIn, for example.  Most people use the free version.  However, LinkedIn generates significant revenue and profits by offering a premium service, which has become very attractive to company human resource departments that use LinkedIn as part of their recruitment and hiring strategy. 

What types of firms should consider a freemium strategy?   I think there are two key attributes that entrepreneurs should consider when determining whether a freemium approach suits their business.  First, is there economic value (and early mover advantage) to be derived from a "get big fast" strategy?  Specifically, are there strong network effects in the business?  If so, then attracting high numbers of users can enhance the perceived value to each user.   Second, are the marginal costs of providing the good or service  close to zero?  If so, then adding a new non-paying user doesn't drain the company's finances. If, however, there are some incremental costs that will be incurred, then the firm may have a serious problem with a freemium approach.  The problem, of course, is that many start-ups assume that marginal costs are zero, when in fact there are some hidden costs for each additional user for which they have not accounted properly.

For more on freemium business models, see the video below featuring Chris Anderson, author of Free: The Future of a Radical Price.

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Fewer Startups in Japan: Lessons for all Nations

I'm here teaching in Tokyo for a week, as I have each July for the past decade.   Therefore, I thought it would be appropriate to offer a reflection related to Japanese business.  Adam Acar, Associate Professor of Communication at Kobe City University of Foreign Studies in Japan, published an interesting op-ed today in The Japan Times.  The article was titled, "Why Japan Hosts Fewer Startups."  He cites the fact that a study by the Global Entrepreneurship Monitor found that Japan had the lowest entrepreneurship activity of 37 countries studied.   Professor Acar offers several possible explanations for the low rate of startup activity in Japan:

1.  Japan is a collective society, with less emphasis on individual self-achievement.

2.  Japan is a "high power distance" society, meaning that it's tough for young entrepreneurs to deal directly with senior executives at various organizations that might provide financing, supply key inputs for their products, etc.    

3.   Many Japanese value job security a great deal, perhaps even more so than securing the highest compensation possible.  

4.  Many Japanese worry about disappointing others and worry that a failed startup would harm many peers and colleagues. 

5.  Japan's low rate of social network usage relative to many Western nations means that potential entrepreneurs have lower social capital to draw upon as they seek customers, partners, investors, suppliers, employees, and the like. 

One may or may not agree with each of these explanations, or characterizations of Japanese society.  However, I do think all countries and regions should consider these hypotheses as they think about how to stimulate entrepreneurial activity.  

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Shouldn't Our Best & Brightest Be Doing Something More Substantial?

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Bill Rasmussen: Founder of ESPN - Great Entrepreneurial Story

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Bryant Collegiate Entrepreneurs Organization

I'm very proud to be the faculty adviser to this terrific group of young aspiring entrepreneurs:

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Do Older Entrepreneurs Have an Edge?

Marc Freedman, author of The Big Shift: Navigating the New Stage Beyond Midlife, has published an interesting blog post over at Harvard Business Review.  The post is titled, "Why Older Entrepreneurs Have an Edge."  The article cites research indicating that many entrepreneurs are older than we might think:

The findings reinforce consistent research from the Kauffman Foundation, which shows that for 11 of the 15 years between 1996 and 2010, Americans between the ages of 55 and 64 had the highest rate of entrepreneurial activity of any age group. The National Journal reports that 9 of the nation's 15 million small-business owners were born before 1965.

Freedman does acknowledge, though, that many of these new start-ups are sole proprietorships or very small businesses.  Still, he points to research showing that certain kinds of creativity and innovation do increase later in life.  Freedman points to the work of University of Chicago economist David Galenson.  His research distinguishes between "conceptual geniuses" and "experimental geniuses."   The former produce breakthrough insights, and they tend to do so early in life.  The latter refine their ideas through trial and error over time, and they tend to come up with their innovations much later in life.   Experimentation and refinement take time.

I like the blog post, but I really do think the focus on physical age is not critical.  The most important factor driving whether you can be a successful entrepreneur is your mindset, not your age.  Are you open to new ideas?  Are you willing to take risks and try new things?  Are you always learning?  Do you engage in disciplined experimentation?   These kinds of questions determine whether you have the mindset to be a successful entrepreneur, whether you are 25 or 65 years of age.  

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Growth Lessons from Gilt Groupe Co-Founders

Alexis Maybank and Alexandra Wilkis-Wilson are the co-founders of Gilt Groupe, a company that specializes in online sales of luxury apparel at discount prices.  Maybank and Wilkis-Wilson described to Forbes why they have been so successful.  At first glance, they seem remarkably similar.  They even look alike!  However, the two co-founders argue that their differences make them stronger.  However, it's not just that they have different strengths, but that their abilities and personalities are quite complementary.  One plus one equals three, if you will.   Here's an excerpt from the Forbes article.  A short video is below as well.

“It’s very much like discovering your latter-day stunt double,” Maybank says of finding the right cofounder. Wilkis-Wilson is detail-oriented, a task-master who keeps everything running according to schedule, while Maybank is a self-described “big picture thinker” who is referred to throughout the new book, out in stores this week, as the “impulsive” one. “Our differences haven’t just made us a much stronger team but they’ve allowed us to see what we’re missing and who [else] we need to bring around us as part of our founding team.”

The story, though, is not as simple as selecting a partner who is different than you.  You definitely need someone who shares the same passion for a particular product, technology, or business model.  Both co-founders need to care deeply about what they are doing.   They have to be passionate about the broader purpose of the enterprise.  Moreover, they have be able to communicate well with one another.  In this case, the training at Harvard gave them a common language system that certainly facilitated their communications with one another.  Finally, both parties have to share a similar work ethic and willingness to carry their share of the load. Once you have those foundations in place, then the complementary strengths can become a huge asset. Without that foundation, though, simply finding someone with complementary skills won't lead to success.

 

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Do Friends Encourage or Discourage Us From Becoming Entrepreneurs?

Harvard Business School Professor Josh Lerner and his co-author Ulrike Malmendier have written a fascinating new paper about how our friends may affect our propensity to become entrepreneurs.  They studied a decade worth of students in the first-year curriculum at HBS.  Those students take all their first-year classes in the same section of 80-90 students.  Thus, they spend a great deal of time inside and outside of class with that group, and many of them become quite friendly.   Lerner and Malmendier examined the students' backgrounds prior to HBS as well as what they did after graduation.  Here is the abstract of their paper:

To what extent do peers affect our occupational choices? This question has been of particular interest in the context of entrepreneurship and policies to create a favorable environment for entry. Such influences, however, are hard to identify empirically. We exploit the assignment of students into business school sections that have varying numbers of classmates with prior entrepreneurial experience. We find that the presence of entrepreneurial peers strongly predicts subsequent entrepreneurship rates of students without an entrepreneurial background, but in a more complex way than the literature has previously suggested: A higher share of entrepreneurial peers leads to lower rather than higher subsequent rates of entrepreneurship. However, the decrease in entrepreneurship is entirely driven by a significant reduction in unsuccessful entrepreneurial ventures. The effect on the rate of successful post-MBA entrepreneurs, instead, is insignificantly positive. In addition, sections with few prior entrepreneurs have a considerably higher variance in their rates of unsuccessful entrepreneurs. The results are consistent with intra-section learning, where the close ties between section-mates lead to insights about the merits of business plans.

The finding regarding the "discouragement effect" proves rather surprising and perhaps disappointing to some observers.  However, the finding regarding intra-section learning proves much more encouraging (i.e. the reduction in entrepreneurship is entirely driven by a decrease in unsuccessful start-ups, suggesting that students may learning from peers how to sharpen their business plans). 

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Non-Compete Agreements and Innovation

New research by Harvard Business School Professor Lee Fleming and co-authors Matt Marx and Jasjit Singh examines the impact of laws regarding non-compete agreements.   In some states, non-compete agreements are essentially illegal.   In other states, they are legal.   Not surprisingly, their research shows that inventors migrate to states which ban non-compete agreements.   In fact, the most productive innovators tend to be most likely to be attracted to states which do not allow non-compete agreements.  The researchers point out that California, for instance, does not allow non-compete agreements.  Not surprisingly, then, Silicon Valley attracts so many entrepreneurs.   Here in Massachusetts, journalist Scott Kirsner has been pushing for the state to get rid of non-compete agreements so as to foster innovation and entrepreneurship more effectively.  This study should provide more support for Kirsner's argument. 

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