Ried Hoffman, founder of LinkedIn, is quoted as saying, "If you are not embarrassed by the first version of your product, you’ve launched too late."

This encapsualtes one of the core principles of lean startups, which you can learn about here. (More free courses for entrepreneurs here.)

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According to the Times, Silicon Prairie is the big new thing, and I'm proud of the fellow Iowans who got the paper to run a story making that claim (admittedly, on a holiday weekend, but still).  Here's the evidence that Iowa, Nebraska, and Missouri have become a hub of entrepreneurial tech:

Although a relatively small share of the country’s “angel investment” deals — 5.7 percent — are done in the Great Plains, the region was just one of two (the other is the Southwest) that increased its share of them from the first half of 2011 to the first half of this year.

That's it.  The rest is just anecdote, layered with plenty of hedging.  You can, however, tell yourself a story why Silicon Prairie might be real.  Tech can be done anywhere, and so might as well be done on a flat, featureless landscape; the Midwest does well in creating high quality, not-so-high-wage white collar; and universities like Iowa State (home of the first computer!) have aggresively tried to prove their worth to the state by fostering spin-offs.  

Will this conlfuence of factors create a real technological hub, to the extent that a "hub" encompassing hundreds of miles of farmland even makes sense?  My guess is that it simply reflects a transformation of the economy going on everywhere, and not just in the fields of dreams.  But it is nice to have a label.

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The latest edition of The Economist has a fascinating article on “Chilecon Valley” that discusses the emergence of a startup community in Chile. The article focuses on a unique program of Startup Chile (a new Chilean governmental body) that gives grants to entrepreneurs in the United States and elsewhere to move to Chile for several months as they work on building their company and developing their technology. The grant recipients are then expected to network with, speak to, and mentor Chilean entrepreneurs.

The article touches on how law can foster or hinder the growth of a startup community, including by liberalizing immigration laws and allowing failed ventures to get a fresh start in bankruptcy.

Chile is making considerable efforts to diversify its economy beyond extractive industries like mining and agriculture. My spouse is co-organizing a fantastic three-day conference in Santiago from November 28 to December 1st that will focus on social entrepreneurship, sustainability, and innovation. The conference includes a fantastic line-up of speakers, including a keynote address by Al Gore, a pitch competition for social entrepreneurship startup companies, and some awesome music, including Devendra Banhart and Denver’s own Devotchka. Several panels will analyze the contribution of law to developing a entrepreneurial ecosystem in Chile.

You can check out my wife’s newly launched blog and website on the Chilean startup community here.

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Today in the Crocker Fellows class, we discussed the IMVU case study. IMVU claims to be the "world's largest 3D and dress-up community." 

No, thank you.

But I digress. The point of this post is not to direct you to IMVU, but to link to Stanford's Entrepreneurship Corner, an excellent resource for students of entrepreneurship. In fact, Eric Reis talks about his experiences building IMVU in several videos on ecorner.

Not as flashy as TED, but good stuff.

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This year BYU is inaugurating the Crocker Innovation Fellowships, and I am fortunate to be on the faculty, albeit in a very limited role. Nathan Furr (Business), Marc Hansen (Life Sciences), Chris Mattson (Mechanical Engineering), and Dan Olsen (Computer Science) have been pulling the laboring oars, so far, and I will make my main contributions in the fall semester.

As noted on the Fellowship website, "The goal of the course is to change the way students view the world and inspire the next generation of innovators." Closer to the ground, the year-long course begins this semester with an introduction to innovation, continues over the summer with an internship, and concludes in the fall with the students developing their own innovations. 

As a distant observer, I have been fascinated by the communications among the 20 Fellows as they build their collaborative community. They are sharing all sorts of ideas through Google Docs and LinkedIn, encouraging and correcting and building each other. Their energy is pretty infectious ... and I haven't even been able to meet them in person, yet!

Anyway, you are on notice. Watch for some great new businesses emerging from BYU in the fall 2012 semester.

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Like a lot of us, I've been traveling a lot this summer and have not been blogging the past few weeks.  My apologies. 

At the beginning of the summer, I read a book I had been wanting to read for a long time:  Me, Myself & Bob:  A True Story About Dreams, God, and Talking Vegetables.  The book tells the story of Phil Vischer, the creator of VeggieTales and Bob, the talking, singing, dancing tomato.  If you had children in the late 1990s, early 2000s, then you probably know of VeggieTales.  In these videos, vegetables appeared in stories that paralleled Old Testament stories or more general morality tales.  I knew that for awhile the videotapes and DVDs of these animated shows were ubiquitous, but I didn't know that in 1998, Big Idea (Vischer's privately-held corporation) sold 7 million VeggieTales videos or that Big Idea made the first 30-minute 3-D animated film.  I also didn't know until this year that Vischer lost Big Idea in bankruptcy, and the business (including Bob the tomato) was bought by Classic Media.  Here is an abbreviated version of the story; the book tells the whole thing.  One could chalk it up to the dot-com boom, but the story has a lot more to it.

The book touches on at least 3 themes, all of which are interesting to me:  (1) how does a company go from being a great small company to a great bigger company; (2) how does a company with a social goal avoid mission drift; and (3) how to discern what God wants you to dow with your professional life.  I'll leave #3 to some time when you catch me in person, but I'll touch on #1 and #2.

So VeggieTales was an amazingly successful small company, but tried to grow to be a bigger company.  Yes, we've all heard the stories of companies growing too big, too fast, but what does that mean?  For Big Idea, it meant that the cost-center parts of its budget grew a lot faster than the profit-centers.  HR went up, payroll went up, marketing went up, production values went up, expenses went up, but sales couldn't grow at the same rate.  Vischer talks about "Things I Learned #1:  Never Lose Sight of the Numbers" and "Things I Learned #2:  Ignore the Voice That Says "I Deserve It."  Vischer characterizes himself as a creative person and acknowledges that he lost sight of the numbers.  In his words, he was a Walt Disney who didn't have a Roy:  someone who could tell him when ideas were too expensive, too unrealistic.  He says good ventures have a Walt and a Roy.  If you read the book, you see the train going off the cliff (new fancy building, plans to have the first full-length 3-D animation movie), and you want to yell "Stop!"

The second point is one that my students and I talk alot about in my seminar Law and Microfinance.  How do pro-social firms maintain profits and even go public without losing sight of its mission or can they?  Vischer created VeggieTales because he wanted to provide children with Biblical entertainment that had one message:  God loves you.  During the rise of Nickelodeon and the Disney channel, Vischer felt called to counter what he saw as disturbing media influences on the youth.  As someone who had been obsessed with filmmaking, puppetry and animation his whole life, he thought he was in a position to change the world.  But, as the company grew and hired employees, he struggled with how to maintain this mission.  Some hires were in tune with the religious mission, but others were merely talented animators who wanted to live in Chicago rather than L.A.  Vischer wanted to keep everyone happy, so eventually none were and the watered-down mission that was left didn't inspire any of them.  Eventually, all of the top executives were against Vischer's original mission.

I recommend the book to anyone interested in animation, entrepreneurship or finding one's calling.  It reads very quickly.  Vischer is very funny.  After all, he did create talking vegetables.  One amusing tidbit:  I had always thought that VeggieTales stuck to the Old Testament to have a wider religious audience.  However, the real truth came from Vischer's mom, who told him that he couldn't do anything from the New Testament.  Jesus could not be a vegetable!

In case you're wondering what became of Phil Vischer, he now owns JellyTelly, which produces the fabulous and hilarious What's in the Bible.

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If you are at Law & Society this Friday and Saturday, come to the mini-conference on Entrepreneuship & Law that Brian Broughman (Indiana - Maurer School of Law) and our own Gordon Smith (BYU) have organized.  Here is the line up:

Friday, June 3, 2011

8:15 am to 10:00 am Regulating Entrepreneurs 2122 (Chair: Brian Broughman)

• Mira Ganor (Texas), The Power to Issue Stock
• Erik Gerding (New Mexico), Shadow Banking, Financial Innovation, and Regulatory Arbitrage
• Michelle Harner (Maryland), Mitigating Financial Risk for Entrepreneurs
• Poonam Puri (Toronto), The Regulatory Burden of Corporate Law
• Discussants: Kristin Johnson (Seton Hall) & Sarah Lawsky (UC Irvine)

12:30 pm to 2:15 pm Governance Structure of Entrepreneurial Firms 2322 (Chair: Brian Broughman) 

• Brian Broughman (with (Jesse Fried & Darian Ibrahim), Delaware Law as Lingua Franca: Evidence from VC-Backed Startups

• George Geis (Virginia), Organizational Contracting and Third Party Rights
• Alicia Robb (Kauffman Foundation), Entrepreneurial Finance and Performance: A Transaction Cost Economics Approach
• Discussant: Bobby Bartlett (UC Berkeley) 

Saturday, June 4, 2011

8:15 am to 10:00 am Law, Entrepreneurship, and Innovation 3116 (Chair: Gordon Smith)

• Mike Burstein (Harvard), Exchanging Information without Intellectual Property

• Sean O’Connor (Univ. of Washington), Transforming Professional Services to Build Regional Innovation Ecosystems
• Peter Lee (UC Davis), The Accession Insight and Patent Infringement Remedies
• Karl Okamoto (Drexel), Law and Entrepreneurship: An Assessment Approach

4:30 pm to 6:15 pm Global Entrepreneurship 3519 (Chair: Gordon Smith)

• Afra Afsharipour (University of California, Davis), US Private Equity Investments in India

• Sofia Johan (York Univ.)(with April Knil and Nathan Mauck), Determinants of Sovereign Wealth Fund Investment in Private Equity
• Gordon Smith, Stability and Adaptability

###

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Is it possible to have a spoiler when the story is this well known? If you don't want to know what's in the movie, don't read this post.

The Social Network begins with a frenetic exchange between Mark Zuckerberg and his soon-to-be-former girlfriend, Rachel Something, who becomes a Rosebud for the creation of Facebook. Later in the movie, Rachel utters the memorably stupid line, "The Internet's not written in pencil, Mark. It's written in ink," but that was one of the few missteps in this script. 

While the supporting actors are terrific, this movie depends on Jesse Eisenberg's portrayal of Mark Zuckerberg, and Eisenberg is terrific. I will leave the serious movie reviews to others (including Christine and Larry, who seem to have a good thing going at Illinois), but I wanted to note that The Social Network is a fabulous movie for lawyers, particularly transactional lawyers.

One of the main threads of the story is Zuckerberg's alleged theft of the Facebook idea from Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra, which I blogged about over three years ago when it led to litigation. Another thread is Zuckerberg's conflict with Facebook co-founder Eduardo Saverin, which involves an attempted dilution of Severin's shares. Then there is the angel investment by Peter Thiel and the distributions of shares to various other people, including Dustin Moskovitz, whose important role in developing Facebook is cheated in the film.

In the end, however, this film is only about one person. And his Idea. That Idea is at the heart of Facebook and the movie, and watching people grasp for a piece of it is what makes this movie fun.

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Forget Facebook with their Waiting for Godot IPO teasing!  Pandora may be going public. 

I'm a medium Pandora fan.  My colleague Tom Ulen showed it to me in Fall 2008, and I use it once a week or so.  If you live under a rock, Pandora (and it's competitor Slacker) let you create your own streaming radio station by plugging in an artist or a song title -- then the algorithms pick songs that would fit that artist or initial song.  You cannot ask the station to play a particular song, however.  I listen to music mostly when I'm running, though, and I can't take the uncertainty.  If I need something to inspire me to finish strong, Pandora may give me something less than inspiring.  Once I set up a "Thriller" station, and I had "Don't Stop Believing" followed by "Don't Stand So Close to Me."  That made me wonder if the algorithm used as a characteristic "the first six letters in the title."

What I found interesting about the article, though, was it's description of the founder, Tim Westergren, and his search for capital during its pretty lean first 10 years.  The article quotes one of his eventual venture capital investors as saying

“The pitch that he gave wasn’t that interesting,” Mr. Marcus said. “But what was incredibly interesting was Tim himself. We could tell he was an entrepreneur who wasn’t going to fail.”

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Ann points to this CNN story about entrepreneurship research: "Stubborn, delusionally optimistic, creative, fearless, flexible and focused are some of the ways psychologists and business people describe the personality of an entrepreneur. Surprisingly, another word is ignorant."

Well, that about covers it, no?

We can't agree on a definition of "entrepreneur," so it's no surprise that any attempt to describe their personality traits ends up as mush. Here's more:

Psychologist Lynn Friedman, whose clients often include entrepreneurs, said many of them are "tuned into consumer needs." They tend to grow up in nurturing families and learned to value the concept of trying new things.
...
According to Friedman, entrepreneurs "live in the world of action," and they "often need help with slowing down and thinking several steps ahead."

I understand the yearning to understand entrepreneurs through this lens, but it's futile, isn't it? Entrepreneurs -- however defined -- are so varied that any effort to profile them as a group seems silly.

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In recent months, both BusinessWeek and Inc.com have featured articles describing the explosion of merchant cash advances as a funding source for small businesses.  BusinessWeek reports that the size of the merchant cash advance industry “jumped 50% in 2007, to around $700 million.”  The industry even has its own trade association, the North American Merchant Advance Association. 

What are merchant cash advances?  Traditionally, banks have lent money to small businesses and taken credit card receivables as collateral.  As would be expected, the business pays back the loan over time with interest.  In many cases, the loan agreement specifies that payments to the bank will be taken directly from the business’s credit card collections.  Merchant cash advances are functionally very similar to credit card receivables lending – except that merchant cash providers are quick to point out that their agreements are not loans.  According to AdvanceMe, the industry leader, a merchant cash provider “purchase[s] a portion of … future credit and debit sales at a discount.”  For example, a merchant cash provider might give a business $100,000 in exchange for $130,000 of future credit card receivables.  Then the merchant cash provider collects “a fixed percentage of daily credit [card] sales” until the agreement has been satisfied.  Merchant cash providers claim they are supplying much needed liquidity to small businesses that have been squeezed by the credit crunch.

But the merchant cash advance industry is not without its critics.  Because merchant cash advances are structured as sales and not loans, merchant cash advances need not comply with state usury law.  Merchant cash advances are unquestionably more costly than traditional bank loan financing.  Inc.com reports a typical 25% fee, but other press has reported more costly advances. 

In addition, merchant cash advance agreements are treated differently from loans in bankruptcy proceedings.  Merchant cash providers contend that they can continue to collect from credit card receipts even after a business has filed for bankruptcy (when the automatic stay protects the business from most loan collection efforts).  Merchant cash advance agreements are not discharged in bankruptcy.

Of course, some courts may be willing to look beyond the form of the merchant cash advance agreement to find that the agreement is, in substance, a loan.  (Courts have long struggled to distinguish leases from loans and have generally tried to look beyond the form of the transaction to the economics of the agreement.)  If this happens, usury and/or bankruptcy laws could be applied directly to merchant cash advance agreements. 

It is also possible that the rapid growth of the industry will attract legislation.  I tend to favor free markets and believe that heavy-handed regulation here would be a mistake.  It seems to me that the case for usury laws here is weaker than for the average consumer loan because small businesses should have some financial sophistication.  Regardless of what happens, it should be interesting to watch this emerging industry.

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In Madison, we participated in the (now) annual World Largest Brat Fest, which served as a fundraiser for local charities. Here at BYU, the Collegiate Entrepreneurs' Organization (CEO) are raising money for their seed fund by holding the world's largest rock, paper, scissors tournament. (There are others?)

First prize is $3,000, and second prize is $1,500. So I am wondering, is this a game of skill?

By the wonder of Google, I am introduced to the World RPS Society, which is "dedicated to the promotion of Rock Paper Scissors as a fun and safe way to resolve disputes." The history section of the website is fascinating, and it contains a legal twist:

The Paper Scissors Stone Club was founded in London, England in 1842 immediately following the issuance of the1842 law declaring "any decision reached by the use of the process known as Paper Scissors Stone between two gentleman acting in good faith shall constitute a binding contract. Agreements reached in this manner are subject to all relevant contract and tort law." The law was seen as a slap in the face to the growing number of enthusiasts who played it strictly as a recreational activity, since for many constables it was taken to mean that the game could not be played simply for sport. The club was founded and officially registered to provide an environment free from the long arm of the law where enthusiasts could come together and play for honour.

There's more where that came from, but back to our question: is it a game of skill? The RPS Society promotes The Official Rock Paper Scissors Strategy Guide, which is 208 pages! And take a look at some of these reviews on Amazon:

"This is without exaggeration, the definitive text for all things RPS, and is a must-own book for any RPS enthusiast, regardless of experience level.... The state of the sport has never been more exciting."

"I picked up 'The Official Rock Paper Scissors Strategy Guide' last night and started flipping through it just before calling it a night. The next thing I knew it was well into the wee hours of the morning, and I still couldn't put it down."

And my favorite ...

"I bought this as a gift for my wife. Whenever it's time to clean the cat boxes or change a dirty diaper or do anything else unpleasant, She always wants to RPS for it. Now, we at least play by the rules and the decision is made fairly."

After all of that, I have no idea whether any of this (beyond the BYU tournament) is for real, but it was a highly entertaining jaunt.

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The Call of the Entrepreneur is a new paean to entrepreneurship from the Acton Institute. The Acton Institute's mission is "Integrating Judeo-Christian Truths with Free Market Principles," and this film takes that charge very seriously. Near the end of the film, for example, several of the featured commentators compare entrepreneurs to God, in the sense that each is a Creator.

One of the challenges in doing scholarship related to entrepreneurship is that so many in the field are enthusiasts for entrepreneurship. A couple of years ago, for example, the head of a major foundation asked whether I would be interested in doing a study examining how some aspect of law related to entrepreneurship. At first, I was quite excited by the proposal, until I realized that the foundation had already essentially written the "Results" section of the study.

Um, how shall I say this? I can understand why you feel that law professors routinely proceed from conclusion to premises, but that's not how it works around here.

While I am quite fond of both entrepreneurship and Judeo-Christian truths, the deification of entrepreneurs is a bit much.

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Just in time for March Madness, Sneaker Wars has just come out, recounting the modest origins of the now-multinational multi-billion-dollar sports shoe industry.  I just happened to catch the book review in this morning's WSJ.   The story begins with the Dassler brothers' little Bavarian shoe factory, started during the thick of WWII.  Fraternal rivalry caused the brothers Adi and Rudi to part company in the late 1940s, when Rudi walked across the river to the other side of town--the medieval town of Herzogenaurach--to set up a competing factory.  Adi Dassler's shoe became, of course, Adidas.  Rudi developed the Puma brand.  Together, the rivaling brothers and their rival brands came to dominate the world sports shoe industry for decades.  Adi and Rudi pioneered what are today's standard marketing strategies for sporting goods and other consumer goods, giving away free shoes to athletes and later paying stars to wear the logo.   

It's a treat for me to read about the history of Adidas.  Anyone who played grade-school basketball in the 70s remembers the dominant basketball shoes--Converse All-Stars and the Adidas Superstar, with the latter gradually overtaking the former both in the pros and in the school yard.  According to Wikipedia, three quarters of all NBA players in the mid-70s were wearing the Superstar.  I remember well getting my first pair.  They were navy felt with white stripes (I know, I know . . . but remember, this was the 70s).  I was a mediocre basketball player at best, but at least the shoes looked cool.

The sports shoe industry took a big jolt in the mid-80s, when Phil Knight signed Michael Jordon for Nike and launched the Air Jordan, which became the best-selling basketball shoe ever.  Nike has dominated the U.S. market ever since, though Adidas and Puma appear to be making comebacks.  You can read about Adidas' recent comeback efforts with its signing of David Beckham in the Prologue to Sneaker Wars.

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Over the past few weeks, I have heard several condemnations of French employment law prompted by the well-publicized inability of Société Générale to terminate Jerome Kerviel for his trading activities. The suggested lesson for Americans: we are lucky to have employment at will as the default rule because it encourages employment (and, thus, economic development).

Certainly, one of the oft-cited impediments to entrepreneurship in Europe is employment law, but it turns out that the facts underlying Kerviel's activities are messier than first presented. We have emails showing that Kerviel had an accomplice, right? Not so fast ... the purported accomplice now says that the emails were altered to make him look more involved with Kerviel than he actually was. And Kerviel's lawyer says that the accomplice is a fabrication designed to keep Kerviel locked up.

Of course, Kerviel's position remains that SocGen was complicit in the fraud. Or, in the words of Kerviel's lawyer, "everyone knew what Jérôme was doing." Which means, interestingly, that one of the live questions in the case is whether Kerviel is entitled to his year-end bonus! (French version. HT Alan Hyde)

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