We’ve often written on the subjects of failure and success: while success is better, failure is a part of business and can be a great teacher, and it’s important to fail the right way. (See here, here, here, here, here, and here for examples of our thinking.)
The current issue of Forbes includes ”The Seven Habits of Spectacularly Unsuccessful Executives” - a recap of Why Smart Executives Fail, a book published 8 years ago by Sydney Finkelstein, the Steven Roth Professor of Management at the Tuck School of Business. Although written with larger firms in mind, the leadership lessons are relevant enough to join our collection here at NVSE. (Abridged grafs of each Habit reproduced below, please follow the link provided for complete descriptions and warning signs for each.)
Habit # 1: They see themselves and their companies as dominating their environment
Shouldn’t a company try to dominate its business environment, shape the future of its markets and set the pace within them? Yes, but there’s a catch. Unlike successful leaders, failed leaders who never question their dominance fail to realize they are at the mercy of changing circumstances. They vastly overestimate the extent to which they actually control events and vastly underestimate the role of chance and circumstance in their success. CEOs who fall prey to this belief suffer from the illusion of personal pre-eminence: Like certain film directors, they see themselves as the auteurs of their companies. As far as they’re concerned, everyone else in the company is there to execute their personal vision for the company.
Habit #2: They identify so completely with the company that there is no clear boundary between their personal interests and their corporation’s interests
We want business leaders to be completely committed to their companies, with their interests tightly aligned with those of the company. But digging deeper, you find that failed executives weren’t identifying too little with the company, but rather too much. Instead of treating companies as enterprises that they needed to nurture, failed leaders treated them as extensions of themselves. And with that, a “private empire” mentality took hold. CEOs who possess this outlook often use their companies to carry out personal ambitions. The most slippery slope of all for these executives is their tendency to use corporate funds for personal reasons… Being the CEO of a sizable corporation today is probably the closest thing to being king of your own country, and that’s a dangerous title to assume.
Habit #3: They think they have all the answers
Here’s the image of executive competence that we’ve been taught to admire for decades: a dynamic leader making a dozen decisions a minute, dealing with many crises simultaneously, and taking only seconds to size up situations that have stumped everyone else for days. The problem with this picture is that it’s a fraud. Leaders who are invariably crisp and decisive tend to settle issues so quickly they have no opportunity to grasp the ramifications.
Habit #4: They ruthlessly eliminate anyone who isn’t completely behind them
The problem with this approach is that it’s both unnecessary and destructive. CEOs don’t need to have everyone unanimously endorse their vision to have it carried out successfully. In fact, by eliminating all dissenting and contrasting viewpoints, destructive CEOs cut themselves off from their best chance of seeing and correcting problems as they arise. Sometimes CEOs who seek to stifle dissent only drive it underground. Once this happens, the entire organization falters… Eventually, these CEOs had everyone on their staff completely behind them. But where they were headed was toward disaster. And no one was left to warn them.
Habit #5: They are consummate spokespersons, obsessed with the company image
CEOs don’t achieve a high level of media attention without devoting themselves assiduously to public relations. When CEOs are obsessed with their image, they have little time for operational details… As a final negative twist, when CEOs make the company’s image their top priority, they run the risk of using financial-reporting practices to promote that image. Instead of treating their financial accounts as a control tool, they treat them as a public-relations tool. The creative accounting that was apparently practiced by such executives as Enron’s Jeffrey Skilling or Tyco’s Kozlowski is as much or more an attempt to promote the company’s image as it is to deceive the public: In their eyes, everything that the company does is public relations.
Habit #6: They underestimate obstacles
(W)hen CEOs become so enamored of their vision, they often overlook or underestimate the difficulty of actually getting there. And when it turns out that the obstacles they casually waved aside are more troublesome than they anticipated, these CEO have a habit of plunging full-steam into the abyss… Once a CEO admits that he or she made the wrong call, there will always be people who say the CEO wasn’t up to the job. These unrealistic expectations make it exceedingly hard for a CEO to pull back from any chosen course of action, which not surprisingly causes them to push that much harder.
Habit #7: They stubbornly rely on what worked for them in the past
Frequently, CEOs who fall prey to this habit owe their careers to some “defining moment,” a critical decision or policy choice that resulted in their most notable success. It’s usually the one thing that they’re most known for and the thing that gets them all of their subsequent jobs. The problem is that after people have had the experience of that defining moment, if they become the CEO of a large company, they allow their defining moment to define the company as well – no matter how unrealistic it has become.
Precisely two years ago we blogged about a VC Dispatch article on tips for pitching a venture capitalist. The hook was that it would take not 1 but 7 cocktail napkins - Pitch, People, Pain, Product, Players, Projections, Proposition.
In December’s Inc.com Josh Linkner reminds that (in Silicon Valley) “only one in 300 pitches to a venture capitalist gets funded” before offering 11 insider tips. It’s a good, if somewhat cheeky, list with a decidedly early-stage feel: “Don’t take yourself so seriously. We sure don’t! In fact, we’ll probably make fun of you the minute you leave.” (Ouch!) Even so, it does include good advice, like #9:
Tell us the “hard part.” Picking out cool colors for your new digs will be fun, but easy. All businesses have a “hard part”. Getting customers to pay a premium or attracting top talent. We’ll have fun together with the easy stuff, but we want to understand from you what the biggest challenges will be. We can plan the holiday party later.
Once you’ve digested all those tips, please enjoy this demonstration of how not to pitch a venture capitalist – also available at our YouTube channel.
As the year draws to a close, we’ve compiled the top 10 most read blog posts of 2011 for Navigating Venture – Southeast. We thank you, our readers, for reading and sharing them with friends by email, LinkedIn and other social media.
God Bless you and have a Happy New Year – The Team at Ballast Point Ventures
Thank you to all our readers for joining the conversation here in 2011. We wish you all a happy and prosperous 2012!
Offered for your reading pleasure, in case you missed any: the following summary of our twitter activity in the second half of 2011. (A summary of the first half of 2011 can be found here.)
Did David Gelernter, professor of computer science at Yale, invent a precursor to Facebook only to be undone by a failed launch strategy preferred by his investors?
The Economistreports that Dr. Gelernter’s 1991 book Mirror Worlds – which brought him unwanted and tragic attention from the Unabomber – would later inspire him to form a company of the same name that envisioned an online medium called “lifestreams.”
More than two decades ago, Dr Gelernter foresaw how computers would be woven into the fabric of everyday life. In his book “Mirror Worlds”, published in 1991, he accurately described websites, blogging, virtual reality, streaming video, tablet computers, e-books, search engines and internet telephony. More importantly, he anticipated the consequences all this would have on the nature of social interaction, describing distributed online communities that work just as Facebook and Twitter do today…
In 1997 he and his colleague Eric Freeman formed a company, also called Mirror Worlds, to develop an approach called “lifestreams”—a graphical user interface intended to replace the windows and files of conventional computer desktops with an elegant chronological stream of digital objects.
Looking like an endless Rolodex, a lifestream would extend from the moment of your birth to the day of your death, containing every document, photo, message or web page you have ever interacted with—all in a single, searchable stream, and held safely online. Individual items could be shared with other people. “When I want to make something public, I flip a switch, and everyone in the world who’s interested sees it,” says Dr Gelernter. “I could also blend millions of other streams into mine, with a simple way to control the flow of information so I’m not overwhelmed. It would be my personal life, my public life and my confidential electronic diary.”
If that sounds an awful lot like Facebook, the similarities become almost eerie when Dr Gelernter explains how he hoped to release lifestreams into the world. “I wanted the company to build software for college students, who are eager early adopters. It would be designed not only to eliminate file systems but also to be a real-time messaging medium. Social networking was the most important aspect of it. Starting with Yale, we would give it away for free to get undergraduates excited about recommending it to their friends,” he says. But Mirror Worlds’ investors decided that it would be better to focus on corporate clients, and the result was an organisational tool called Scopeware. It sold modestly to a few large American state agencies, but never took off. Mirror Worlds ceased trading in 2004, the same year that Mark Zuckerberg launched Facebook.
It’s not entirely clear from the story precisely how (and who) the launch strategy was chosen, and as the saying goes, “success has many fathers but failure is an orphan.” In our experience decisions such as that one are less about control and more a matter of chemistry: robust debate leading to some kind of consensus which includes contingency plans – with enough credit or blame to go around when the dust settles.
We’ve often written that predicting technology trends is not for the weak at heart – and that’s before one tries to protect the IP and find a way to profit from it. There are reasons we affectionately call the really early stage of investing adventure capital. It’s a long and difficult journey from idea to successful business, during which failure can be counted on to make at least a cameo appearance; so over the long term partnerships will have mistakes (and successes) that are “his, hers, and ours.”
The full article is a fascinating read about Dr. Gelernter, his belief that computers are still too hard to use, and his patent battles with Steve Jobs and Apple.
In Part II yesterday we ended with Steven Malanga’s four areas in which the state of California has sprayed “startupicide” on the economy: ”suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns, if not downright hostile to them.” Here we provide a few highlights from the original piece. The original article can be found here in the Autumn 2011 City Journal.
1. Regulation
Andrew Puzder, chief executive of CKE Restaurants, says that although the corporate headquarters remained in California, the “real job creating engine has already moved.”
Indeed, CKE has stopped opening restaurants in California, where the process can take up to two years because of regulations, and plans to open 300 in Texas, where a new place can debut in just six weeks. Because those two years are spent on expensive administrative work—everything from negotiating permits to filing planning documents—it can cost $200,000 more to open a restaurant in California than in Texas. And once open, a California restaurant costs more to operate, too, thanks in part to the state’s complex labor laws, including the requirement that employers pay overtime after eight hours of work in a day. California treats even service employers like CKE as if the harsh industrial conditions of the 1930s were still prevalent, Puzder complained: “It’s not like we have kids working in coal mines or women working in sweatshops.”
Many firms share this frustration with California’s regulations, and for good reason. A 2009 study by two California State University finance professors estimated that regulation cost the state’s businesses $493 billion annually, or nearly $135,000 per company. That weight, the study found, fell disproportionately on small firms and pushed California’s overall employment down by some 3.8 million jobs.
California’s regulations often utterly defeat entrepreneurs. John Bowen, the owner of an 82-year-old family-run business, King Kelly Marmalade, sold his firm to an out-of-state operator in 2007 after tiring of the ceaseless regulatory battle. At one point, Bowen started counting the government agencies that he had to deal with to run his business; he gave up when he reached 44. Bowen’s biggest woe was complying with the state’s aggressive air-pollution laws, wastewater regulations, and workplace rules. “I loved the work,” he says. “This decision [to sell] was largely as a result of excessive and oppressive government rules.”
2. Tax burden
Gino DiCaro of the California Manufacturers and Technology Association contends that, “The tax burden for a company to operate a business in California is 13 to 14 percent higher than the rest of the country,” and financial executives surveyed by CFO recently ranked California’s tax bureaucracy among the country’s most aggressive.”
Dave White, the Colorado Springs economic-development official, told the Orange County Register that his area offered significant savings, including income- and corporate-tax rates less than half California’s and workers’-compensation charges 25 percent lower. The only thing that cost less in California, White boasted, was “citrus.” Owners who have fled California for Colorado Springs concur. Earlier this year, when Howell Precision Machine and Engineering, a Los Angeles County–based maker of military and aerospace parts, announced that it was moving to Colorado Springs, its owner said bluntly, “Our survival depends on our relocating to another state.”
3. Expensive litigation environment
The American Tort Reform Foundation recently named California one of the country’s five worst “judicial hellholes,” in part for itslong history of “wacky consumer class actions.”
Blame the state’s infamous consumer-rights law, which allows trial lawyers to sue firms for minor violations of California’s complex labor and environmental regulations. Abuses of the law earned California the reputation of being a “shakedown state,” with lawyers regularly sending out threatening letters in mass mailings to thousands of small businesses, demanding payments in return for not suing over purported minor paperwork violations.
4. Hostile political class
Assemblyman Dan Logue says the business community can’t match the environmental lobby’s clout: “The state’s environmentalists think capitalism is harmful to the environment. They think jobs and people leaving the state are good.”
California prides itself on being a leader in the environmental movement, but now even some green manufacturers say that they can’t afford to stay there. Earlier this year, Bing Energy, a fuel-cell maker, announced that it would relocate from Chino in San Bernardino County to Tallahassee, Florida, where it expected to hire nearly 250 workers. “I just can’t imagine any corporation in their right mind would decide to set up in California today,” Bing CFO Dean Minardi said. Other California green firms staffing up elsewhere include Be Green Packaging, a Santa Barbara recycling company, which decided to build its first U.S. manufacturing facility in South Carolina; AQT Solar, an energy-cell maker based in Sunnyvale, which will employ 1,000 people at a new 184,000-square-foot manufacturing plant, also in South Carolina; Biocentric Energy Holdings, a Santa Ana energy company that moved to Salt Lake City; and Calisolar, a Santa Clara–based green-energy company building a factory in Ontario, Canada, that will employ 350 workers.
California seems to find innovative ways to expand environmental regulations every few years. Construction firms, recyclers, and other users of big off-road machinery, for instance, now face significant additional costs because new emissions standards will require them to replace much of that equipment. Executives at SA Recycling in Anaheim testified at a 2010 forum on business costs that their company had to spend $5 million for new parts and equipment to meet the standards. Of even broader concern are aggressive new environmental mandates, signed into law by Governor Brown, that require the state to produce one-third of its energy from renewable sources by 2020. In a state where average energy costs are 50 percent higher than the national average, businesses are understandably nervous about how such a shift will influence their bottom lines.
UPDATE 12/31/11: The best climate for entrepreneurs, Part I and Part II
The Autumn 2011 edition of City Journal includes three articles on the subject of businesses ”fleeing senseless regulations and confiscatory taxes.” The authors are making the case for their preferred urban policies, and they single out one state in particular, but the points raised are relevant in the broader context of regional and national economic development.
In Unleash the Entreprenuers, Edward Glaeser argues that “Bad policies are holding back the ultimate job creators.”
Such policies ignore a simple but vital truth: job growth comes from entrepreneurs—and public spending projects are as likely to crowd out entrepreneurship as to encourage it. By putting a bit more cash in consumers’ pockets, the tax cuts in the stimulus package may have induced a bit more car- and home-buying, but the next Steve Jobs is not being held back by too little domestic consumer spending. Tax credits for home buyers and the infamous program Cash for Clunkers encourage spending on old industries, not the development of the new products that are likelier to bring America jobs and prosperity.
Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy. The people who make creative leaps to solve that problem are entrepreneurs. If we want to bring America’s jobs back, our governments—federal, state, and local—need to tear down barriers to entrepreneurship, create a fertile field for start-up businesses, and unleash the risk-taking innovators who have always been at the heart of our economic growth.
In The Long Stall, Wendell Cox contends that “California’s jobs engine broke down well before the financial crisis.”
Economists usually see business start-ups as the most important long-term source of job growth, and California has long had a reputation for nurturing new companies—most famously, in Silicon Valley. As Chart 1 shows, however, this dynamism utterly vanished in the 2000s. From 1992 to 2000, California saw a net gain of 776,500 jobs from start-ups and closures; that is, the state added that many more jobs from start-ups than it lost to closures. But during the first eight years of the new millennium, California had a net loss of 262,200 jobs from start-ups and closures. The difference between the two periods is an astounding 1 million net jobs.
In Cali to business: Get Out!, Steven Malanga points out that not only has California lost a net 124,000 jobs to relocation since 1994, but even its vibrant early-stage ecosystem creates most of its jobs out-of-state.
California isn’t creating jobs in other ways, either. It generated just 285,000 more jobs from new businesses than it lost to business failures, placing 29th in the country (first-place Florida gained 2.4 million net jobs). What’s particularly disturbing… is that nearly none of those net jobs were created between 2000 and 2008, meaning that start-ups haven’t contributed to California employment for more than a decade…
California’s defenders argue that the state continues to incubate cutting-edge companies in places like Silicon Valley, where investment remains vigorous, thanks in part to the area’s muscular venture-capital industry. And it’s true that California entrepreneurs and early-stage firms still get one-third of all venture funding nationwide. Unfortunately, if those firms actually succeed and start creating jobs, California has difficulty cashing in. In 2007, California-based Google built a new generation of server farms not in its home state but in Oregon, employing 200 people. The following year, one of California’s most successful tech companies, Intel, opened a $3 billion production facility in Phoenix, Arizona. Earlier this year, eBay, based in San Jose, said that it would add some 1,000 back-office jobs in Austin, Texas, over the next decade.
Malanga goes on to identify four areas in which the state has sprayed “startupicide” on the economy: ”suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns, if not downright hostile to them.” More on that in Part III – tomorrow.
UPDATE 12/31/11: The best climate for entrepreneurs, Part I and Part III
The Small Business & Entrepreneurship Council has released its 2011 “survival index,” ranking the policy environment for entrepreneurship in the 50 states.
This year’s index has been expanded to include 44 different measures covering the broad areas of taxes, regulation, energy costs, health-insurance mandates, government spending and employment, state liability systems, education reforms, and property rights and protections. It is the most comprehensive ranking of the states in terms of policies affecting entrepreneurs and investors, and therefore the economy and jobcreation.
The SBE Council’s interactive map provides the state-by-state breakdown.
Ballast Point Ventures’ 2011 Annual Meeting featured keynote speaker Scott Rasmussen, co-founder of ESPN and founder and president of Rasmussen Reports, an independent media company specializing in the collection, publication and distribution of public opinion polling information.
Scott Rasmussen (center right) flanked by D.Graham (R), P.Johan (L), and members of the BPV team.
Mr. Rasmussen recounted how he and his father Bill founded ESPN in 1979, and differences in raising capital then and now. After being turned down by several potential investors, they successfully pitched Getty Oil (!) to back the venture - specifically, the division in charge of “non-oil operations.” It didn’t take long for the corporate and entrepreneurial cultures to clash, and as a result the partnership did not endure as a long term relationship. (The venture capital industry has come a long way since 1979, to the benefit of all…)
The story includes tales of adaptability and serendipity. Their original idea was to create a cable television network covering only Connecticut sports, but upon learning it would be cheaper to purchase a continuous 24-hour feed on the “new” satellite technology than to send the signal for a few hours via landlines, they pivoted, installed satellite dishes on a grassed-over dump in Bristol, CT, used a credit card to lease space on RCA’s Satcom 1, and began broadcasting any and all sports throughout the entire nation. Their content breakthrough came via the NCAA, from whom they negotiated the rights to broadcast 18 different sports, including (critically) the early years of ”March Madness.” Soon thereafter Anheuser-Busch agreed to the largest (at the time) advertising contract in cable television history. Yet, advertising revenue was still not enough to make the business model work so they pioneered the practice of charging subscription fees to cable companies.
Mr. Rasmussen subsequently applied his entrepreneurial expertise to the field of market research, developing automated telephone survey techniques that provide reliable data at a fraction of the cost required for traditional operator-assisted surveys. His techniques not only conduct traditional research in a less-expensive manner, they have led to the development of new research applications not possible with traditional, operator-assisted polling techniques. The company’s frequent and large sample research yields less volatile results and enables more precise measurement of narrow demographic segments of the population.
Mr. Rasmussen is frequently cited in the national media for the accuracy with which he has predicted political races, including both the 2004 and 2008 presidential contests to within a percentage point. As a result of this, several attendees used the Q&A session to ask him to handicap the current political environment. The most intriguing answers relied on data in his polling that indicate the major division in the country is no longer between parties but between political elites and the people: 67% of the ”political class” believes the country is moving in the right direction, while a full 84% of “mainstream voters” believe it is moving in the wrong direction. From this finding he made two points about the current election cycle:
An online effort to nominate a third party candidate is growing. Their goal: to allow the American people to directly nominate their own candidate (“Pick a president, not a party”), with running mate from a different party, and then put this “Americans Elect” ticket on the ballot nationwide.
Whichever candidate can best give voice to the widely-held sense among those mainstream voters that “we’re losing our country, losing what makes us exceptional” will win.
As an addendum, Mr. Rasmussen posited a theory about a “time lag” in American political movements. What we often see as a catalytic event or trigger is in reality a culmination of 15-20 years of change. Political leaders are generally slow to understand and process the citizenry’s desire for change and craft effective electoral responses. What appears to be “leadership for change” may oftentimes more closely resemble getting out in front of the parade.
Scott remains fundamentally optimistic about the country’s ability to eventually overcome its challenges. The current angst has been building for some time, and at some point we will collectively solve our problems – but there is no guarantee that it will happen in 2012 or be without some rough seas.
Which, when we think about it, sounds very much like the optimism of a successful entrepreneur.
Last week the U.S. Department of Labor announced that the economy is losing jobs at the slowest rate since it began tracking the number. That’s the good news. The bad news: the economy is not creating enough new jobs to replace even those.
The graph below is only the most recent one we’ve used to make the point that restoring a favorable and predictable business environment, with the right incentives for new business formation, is the only approach that will re-start the stalled jobs engine.
If you’d like to reference other graphs on the same topic used previously at NVSE:
