Startups are going to save us, relax everybody

In typical Silicon Valley Breathlessness Forbes published an article by Victor W. Hwang arguing the fact the Startup movement isn’t about startups. He argues that it’s actually a movement to free people from the chains of our current economic system. I definitely don’t buy this. Most people start a company for one of two reasons, they find a problem that they have a better solution for than anything provided (or a novel solution) or to make money. Typically it’s a combination of the two. No company in existence is out there not to make money. Companies that aren’t profitable cannot stay in business for long unless you’re lucky and funded by people that thing you will eventually make them a lot of money.

An opinion piece in the NY Times from 1/2/2014 pretty much sums this fact up. You’re replaceable at a startup and likely even more so than any time in the  future of the company. It’s really easy to fire people when you have no money, especially if you are open and honest about how you go about letting people go.

Furthermore, if the startup movement was in fact about bettering the plight of people we wouldn’t be seeing the social stratification that we’re seeing in cities like San Francisco, ground zero for the startup movement. In SF some of the neo-techno-libertarian-elite are upset that they even see the poor people on their streets rather than out of the way like in cities like NYC (he issued an apology not unlike Tiger Wood’s for being a sex addict). Not only are these the people that are involved in the startup movement, but they are funding it. Yes, I know that this is only one person and on the other side you can point to Alexis Ohanian of Reddit fame, which really is doing a lot of social good.

In some ways the startup movement has made it easier for people to be cogs in the wheel. They work long hard hours, large companies like Facebook and Google push and push to get more for less. In many cases this can cause depression and the exact opposite of what the Startup movement is striving for. In fact, the goal of the Lean Startup is to make it extremely easy to ramp up new employees and ensure full coverage if something goes wrong. These companies and products are designed around the idea of building in quality rather than testing or patching it in. Of course, there’s a benefit to the employee in these cases too – they’re free to really explore new problems and create new things without needing to worry about reoccurring problems.

I do believe there are many startup founders are genuinely trying to change our society for the better, but it hasn’t been a frictionless process and will likely only get worse as we move forward. The Sharing Economy, for example, has come under fire from traditional companies, neighbors, politicians, and even members of the sharing economy. While in other cases, such as Zynga, we see companies that are essentially parasites that thrive through creating addicting games and clogging a platform with their notifications (those notifications stopped and Zynga basically died).

It’s important to be skeptical of statements that glorify any portion of our culture. The article that spurred me to write this has a similar tone as many of Thomas Freeman’s, of the NYTimes, articles, fully optimistic, but missing a broader portion of the population and the long term impact. We should be wary of these articles because we’ll end up believing that it’s more complicated to calculate a median value than an average. The startup movement is to help people start companies, some founders are dreamers, some truly try to change how work is done, but they most aren’t truly changing the world in amazing ways. We’ll be fine if reddit, AirBnB, or some other services vanishes. We were when Digg, Google Reader, Palm and any other influential company vanished.

Lean as a tool for new and mature companies

Today, I finished the book “The Lean Startup” by Eric Ries. Despite the focus on entrepreneurship, I think this book has applications at many levels. First though, I must say that I’ve been using Lean for several years and I walked into this book with an understanding of Lean and how  to apply it at a company. What does Lean mean though? Well, it certainly doesn’t mean cutting staff, reducing the amount of money you have or anything along those lines. It’s a methodology for managing projects, processes and products. It does this by basing decisions on actionable data.

What is actionable data? Well, it’s data that you can do react to quickly if the data is showing trends. This could be a positive trend or a negative trend. If you see something going well and a process is improving over time, (which is abnormal processes typically go out of control over time) then you want to understand how and why it is improving. If it is getting worse over time, you want to understand why and work to improve the process. This isn’t just for machines but also for business processes.

Once you have valid metrics there are several different things you can do. You can simply jump in and try to fix whatever problem is there or you can take a different track. The other track is to do some root cause analysis of the situation. This is called the Five Whys. This is a series of questions that ask Why to understand the real cause of the problem. In one case you may have had a new employee upload something to the production server and it kills the production server. Understanding why might not be as simple as saying, don’t do that again. First you might want to know why the action of the employee took down the server, was it something he did that no one else would have done or was it something else. As you dive down you may realize part of the problem was lack of training but there were issues that would have arisen eventually from someone else. This deeper understanding allows you to make changes at multiple levels rather than installing knee jerk reactions.

That’s a reactionary use of Lean, some other interesting uses of Lean have to deal with experimenting with your product. Ries argues that most companies wait to long to engage customers and put too much effort into the first version of the software. He argues that a company should create a minimum viable product that can be tested to get the basic point across of the end product. Doing this early allows for experimentation with customer feedback. In the software world this is pretty easy to do. You can get to something that early adopters can use and then test changes. As you can route different users to different versions of your website for the product you can have slightly different tests to see what increases the metric that matters. Getting people to continue using your product, but you need to have very targeted metrics to understand what is actually happening with your software. If you use the incorrect metric you will do a lot of work that isn’t driving usage and isn’t driving your revenue.

If you decide to change the way users interact with your GUI, it would be useful to have a goal metric to truly understand if the GUI is an improvement over the previous GUI. This could be tracking the number of clicks it takes to get to an important function. The number of times the user uses your product, the number of times a new user uses the product, but stops using a specific GUI. Once you see your metric moving in the correct direction and you can be sure that it is the result of your changes, then you should end you experiment understand why the users reacted the way they did and try to learn what you should test next.

The early goal is rapid experimentation with purpose and data to back up the decisions you make. These techniques will work with any company, but will also be very successful for a startup.

Innovation and government regulation

Yesterday during a short twitter discussion the topic of US governmental policies killing new business starts came up. With the 140 characters I wasn’t able to property address the issue that was raised. It is extremely clear that SOPA is an innovation killer, because it effectively requires everyone to have a copyright lawyer on staff at the start of any sort of web company. If you have pictures, video, commentary or whatever on your site you’ll possibly be the target of some copyright holder. This policy isn’t in place and appears, for the moment, to be killed. I expect this law to be resurrected in a year or so. Despite the face that the EU adopted a resolution against SOPA.

Let’s look beyond SOPA though, what other policies are in place that seem to prevent job growth? One of the biggest ones right now is tax levels for people making $250,000 or more. Politifact did an analysis of Congressman Boehner’s claim that taxing millionaires hurts small businesses and prevents hiring. They found this statement to be False. Of course this does depend on the definition of a small business, which Politifact expresses is difficult to define. One metric that I’m aware of is based off the annual sales, where sales over $500,000/year moves you out of the small business area. This may not be the best amount, but let’s say your company has sales of $3,000,000 a year and has enough profit to pay you $1,000,000 of that a year. This tells me that you aren’t reinvesting and trying to continue to grow your firm, probably aren’t paying your employees very well. Additionally, at this amount of sales it is likely that as an entrepreneur you’ve had to get capital investment in one of several ways, loans or from venture capital. A bank wouldn’t care if you were getting paid a million a year, but there’s no way a VC would allow you to pay yourself that if they weren’t getting a good size chunk of money too and you were still planning on reinvesting in the future enough to get a huge IPO. Now, if you’ve built this company from the ground up to this level on your own, then you aren’t paying yourself that kind of money. You would have to be re-investing that money back into the firm to get new equipment hiring the best people, etc.

Another way for companies to get started is through spin-off from another company, bootstrapping themselves to get going or spinning-out of a university. I have an article that will come out soon in the Urban times that addresses some policies that can help with the creation of Spin-outs and start-ups. In the US, we still have the best policies for this. The EU as a collective and European countries are modeling many of their intellectual property laws and funding methods off of US policies. A few examples are a very similar law to the Dole-Bayh law from the 80’s to allow universities to own IP and to give it to their employees if they wish. The creation of technology incubators – this was a truly American innovation, innovation prize contests and national seed funds. The continual reinvention of these policies in the US allows us to create more new companies than European counterparts from a variety of sources.

Are there other policies that hurt the creation of companies? Yes, sure. I’m sure there are some pollution regulations that negatively impact the survival rate of firms. However, from a purely economic perspective this regulation is forcing the company to internalize the cost of the negative externality. Which the company should innovate to reduce the amount of pollution they are creating or buy equipment that reduces their costs in other ways. Innovation to reduce pollution should reduce the cost of raw materials, because they are being used more efficiently and in lower quantities. Every company wants to be able to reduce the amount of raw materials they use. In the next few years we will see greener companies, not because they have a desire to be sustainable, but because it’s more profitable. The regulations the EPA puts into place requires companies to internalize negative externalities, which from both a evolutionary and neo-classical economic perspective is expected from the market and when the market fails then and only then the government needs to step in.

There will be regulations that are industry specific that may slow the amount of innovation and creation of firms, but some of that is surely death by a thousand paper cuts (too much paper work) and the inability to figure out a way to acquire enough funds to get the company going. Compared to European countries the US is the leader for ease of firm creation and the EU is still playing catch up in that regard.

Technology Incubators and You

So, I had a discussion on faccebook that went from discussing the cost of labor for a dutch bike mechanic (€40 for about 15 minutes for work to install wheel (i did it myself in 30 minutes instead of paying that)) to a discussion about technology incubators. It got me thinking about incubators and how people think of them. Technology Incubators come in a variety of forms and while many are attached to universities there have recently been a few where they are unaffiliated and some 18 year old kid makes one. But what is an incubator? Well, at the most basic level an incubator is a place that allows a firm to grow from an idea into an actual business. When it graduates it’s at the stage where it’s making enough money to support itself, or it has gotten Venture Capital (VC) backing so it has enough money to expand to a larger facility.

My first experience with an incubator was the Machine Assistance Center (MAC) at the University of Pittsburgh where I did my undergraduate. I thought it was the coolest idea. It was this old warehouse that was converted into separate mini-factories with a few different companies in it. The rent was free or dirt cheap, and there was equipment, like lathes, drill presses and a 6 axis CNC machine. The firms were able to rent time on these tools to create their product, make new prototypes and train new employees. The university also used these tools to train community members on how to use them to gain new skills for employment. Eventually these firms were making enough money that they were able to move out of the MAC get their own place and set up shop there.

I know that in Pittsburgh there are at least two other incubators. I’m sure there are more. Carnegie Mellon started the other two I’m aware of. However, these ones are software based start ups. So these firms have very different needs than physical product based firms. The Innovation Lab at Eindhoven University of Technology, in Eindhoven The Netherlands, where I’m pursuing my master’s degree, has a different model than either. It has spaces large enough for firms that need to manufacture products, but it also has a lot of offices for consultation firms as well. So, there are many different models for an incubator and non are exactly the same.

Ok, that’s great, why should I care about these things? Well, it matters because some of these are tax payer subsidized or were created through your tax dollars (Tax Euros? Just doesn’t sound right). Earlier this year Obama started the win the future campaign, which put a couple hundred million into both VC, public groups and incubators to help reduce the barriers to entry for new companies. Many policy makers believe that these incubators or hubs of heavy start up activity could spawn another Silicon Valley, or greatly boost the economy through job creating companies. Sadly, most of these companies actually only employ a few people and don’t become huge firms like we’d like them to be (Clarysse et al, 2005). However, this activity still can help the economy of the region to some extent.

So what do we do about it? Well, I plan on studying these and their impact for my master’s thesis, so we’ll see what I find. I probably won’t post to much about it as I might try to publish a paper about it. However, when I do that I’ll write about my findings on here. Until then, I say we should be supporting these incubators. Lowering barriers to competition will eventually lead to new products, services and lower pricing. That’s what we, as consumers, want right? Besides, I want to start a company some day and I’d like some help in getting me to the point where I can get VC funding 😉

Moar?
Here’s an article about the “Win the future” campaign from when it was first announced: http://techcrunch.com/2011/01/31/startup-america-a-campaign-to-celebrate-inspire-and-accelerate-entrepreneurship/

References:
Clarysse, B., Wright, M., Lockett, A., Veld, E. Van de, Vohora, A. (2005) “Spinning out new ventures: A typology of incubation strategies from European research Institutions”, Journal of Business Venturing. Vol. 20 pp 183-216 http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_04_228.pdf