April 08, 2008
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.
April 06, 2008
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.
March 21, 2008
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.
Permalink | Businesses of Note| Entrepreneurs| Europe| Family| Marketing| Retailing| Sports | Comments (1) | TrackBack (0)
February 16, 2008
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)
Permalink | Employees| Entrepreneurs| Law & Entrepreneurship | Comments (0) | TrackBack (0)
November 28, 2007
For those, like me, who prefer to take in some of their information aurally, Tom Perkins discusses Sarbanes-Oxley, CEO compensation, and the latest in Silicon Valley business models here. He makes venture capital sound genial and easy, just as we've all probably suspected it is.
October 05, 2007
Gordon wondered aloud the other day whether directors who are women act differently than directors who are men. Yesterday, an article in the NYT pondered whether entrepreneurs who are women act differently than entrepreneurs who are men. Although women start businesses at twice the rate of men, almost half of those businesses have revenues of less than $10,000 and 70% have revenues of less than $50,000. The article presents the theory of one woman, Nell Merlino, who launched a microlending business designed to provide capital to female entreprenuers. She found that the greatest obstacle for these entreprenurs was not lack of capital, but lack of vision. Women started businesses to give them more freedom, but were satisfied once their business grew to a certain level. The women did not move to the next level, which would mean hiring others, delegating, and possibly more sacrifices of time. Another voice in the article questions this theory, but a recent survey by American Express of its small business owners indicates that the first goal of male entrepreneurs is "grow the business" while the first goal of female entreprenurs is "maintain the business."
Is there something different about female entrepreneurs? Probably many of those small businesses with modest revenues are "work from home" businesses such as selling Creative Memories, Pampered Chef, Tupperware, etc. Although the marketing materials tell consultants that there is no limit as to how much they can make, there are obviously limits to that business model! However, these women generally choose to be consultants because they want to work as little or as much as they want, and maybe other female entrepreneurs do the same. Perhaps many female-owned businesses still represent the "second earner" in a family and so must yield to other family responsibilities. However, is growth always the same as success? Can entrepreneurs define their own success?
The article begins with these sentences: "Somewhere out there are hundreds of thousands of women who should be millionaires. You can find them in rented executive suites and home offices — women who started down the road to riches, but who got lost along the way."
Did they really get lost, or did they just find that they liked a different part of the road?
August 08, 2007
Marc Andreessen asks an intriguing question: "Is entrepreneurship more like poetry, pure mathematics, and theoretical physics -- which exhibit a peak age in one's late 20s or early 30s -- or novel writing, history, philosophy, medicine, and general scholarship -- which exhibit a peak age in one's late 40s or early 50s?" Read the whole post.
July 19, 2007
Last night I was speaking with one of my new neighbors, who is a successful serial entrepreneur. I asked about his latest venture and whether he might be interested in taking the company public. "That's not for me," he responded. "I don't like living quarter to quarter." See Google.
Google's second-quarter revenues were $3.87 billion, up 58% over the second quarter of 2006 ... and it's stock is plummeting in after-hours trading.
The problem is pretty simple: Google's earnings came in below projections. Valleywag's account of the conference call: "Schmidt fesses up: Google has overhired, causing costs to rise. He says the company is going to be watching headcount going forward."
There's always next quarter.
Permalink | Entrepreneurs| Google | Comments (1) | TrackBack (0)
July 17, 2007
Urban Decay is a wonderful case about the obligations of founders to each other at the earliest stages of a company's existence. Facebook's founder, Mark Zuckerberg, is enmeshed in a lawsuit with some former friends from Harvard (Cameron Winklevoss, Tyler Winklevoss, and Divya Narendra), who founded a company called ConnectU. This case is scheduled for a hearing next week, and it could turn out to be the next Urban Decay.
According to a complaint filed in the Federal District Court for the District of Massachusetts, the ConnectU founders "engaged Mark Zuckerberg to complete the computer program software and database definitions" for a social networking site. Zuckerberg was given access to ConnectU's code, as it stood in late 2003. The ConnectU founders now claim that Zuckerberg misappropriated trade secrets, infringed on copyrights, breached a contract, breached an implied covenant of good faith and fair dealing, breached fiduciary duties, and committed fraud -- among other things -- in the founding of Facebook.
The plaintiffs did not allege the formation of a partnership (the successful claim in Urban Decay), despite these allegations in the complaint:
Divya Narendra asked Zuckerberg if he would like to be part of a website that Narendra and his team were developing.
Zuckerberg agreed to be a member of the harvardconnection.com website development team ..., to develop the [code], and to help launch, promote, and operate the site and business, in exchange for a beneficial interest in the website, including a monetary interest in any revenue or other proceeds or benefits from the website....
Had the plaintiffs been aiming at partnership formation, they would have benefited from an agreement to share profits, not revenues. Under the facts pleaded, it's not clear whether Zuckerberg would be a partner, but that looks like an agency agreement (which gives rise to fiduciary obligations).
The plaintiffs also failed to rely on the opportunity doctrine (perhaps because they had not formed a business entity?), but the complaint alleges that Facebook's launch "usurped [a] valuable business opportunity."
As it stands, the case is procedurally muddled. In a memorandum supporting Zuckerberg's motion to dismiss, Zuckerberg's lawyers offer arguments based on statutes of limitations and pleading requirements, and they contend that ConnectU does not own the claims because the company was not founded until later. (ConnectU addresses most of these issues in a prior filing.) If ConnectU can overcome these initial hurdles, we could have an interesting case on our hands.
Thanks to Valleywag for flagging the lawsuit and providing a gallery of wannabe Facebook founders.
Permalink | Entrepreneurs| Fiduciary Duties | Comments (2) | TrackBack (1)
June 15, 2007
Flying to Seattle yesterday, I had some uninterrupted time to read the NYT in one sitting. this made for some interesting comparisons among stories. In one article, a reporter gratuitously questions the propensity for parents in the U.S. to make their children feel important; in two others, entrepreneurship and precocious behavior of U.S. youth are praised. Disconnect?
In the Section A article that I read, In a City of Power Brokers, a Young Visitor Who is Truly Worshipped, told the story of a ten-year-old girl from Nepal who is currently visiting Washington D.C. This girl is one of a handful of girls in her country who are regarded as having a goddess residing inside them. Because they are goddesses, these girls are worshipped and prayed to by people in their country. Upon reaching puberty, the goddess is said to leave the girl and she retires with a small pension, free to marry, etc. That interesting topic aside, I was most struck by this gratuitous aside from the author of the article in describing the girl's visit to a local elementary school: "The children in Blake Yedwab’s third-grade class thought it would be cool to be a god or goddess, though some might argue that American children have already been elevated to that status." Because the author moves back quickly to the main story, I was left to make the conclusion that "some might argue" meant "this reporter would argue." That seems like unnecessary snark to me.
Then, in other sections of the NYT, two articles seemed to provide a counterargument for the "some" who "might argue" against the desirability of treating an American child like "a god or goddess." First, from Tyler Cowen, Loose Reins on U.S. Teenagers Can Create Trouble or Entrepreneurs, giving some interesting explanations as to why "the United States was unusual among developed countries in having a higher business start-up rate among its 18- to 24-year-olds than its 35- to 44-year-olds." Second, Unwelcome at Home, Student Play is a Hit in New York tells the story of current high school students in Connecticut who wrote, directed and acted in an original play based on blogposts and letters of Iraqi soldiers. This play was banned by their school, but played to three sold out or almost sold out crowds off-Broadway. Yes, in this country we may focus on the individual; and yes, parents in more recent generations have given kids more power in the family and devote more resources to their development in other areas. And, as Tyler points out, our school system leaves a lot of time in the day for independent projects and extracurricular activities. This may mean that we are grooming megalomaniacs with enough time on their hands to become mass murderers. Or, we may be giving children the confidence and the tools to take an active role in the world around them.
May 14, 2007
Yesterday, I had the opportunity to represent the College of Law at the university commencement ceremony at the University of Illinois. This honor is surprisingly bestowed on new, junior faculty. Hmmm. However, this time I think I won the coin flip.
The commencement speaker was Jawed Karim, co-founder of YouTube, who will celebrate his 28th birthday this week. Karim is the first recipient of the Chancellor's No Boundaries award here at U of I, an honor reserved for alumni under 40 "whose accomplishments refelct the Illinois heritage of excellence, service and global reach." Karim began his career as a computer science student in 1997, leaving the university in 2000 to join a start-up called PayPal. From there, he and two colleagues started YouTube, which of course was acquired by Google last year for over $1.6 billion. Although Karim had already left YouTube to begin his doctoral degree in computer science at Stanford, his shares were worth over $60 million. (The remaining two co-founders received over $300 million each.) He now plans to become a professor. So, what was his speech like? (And no, I could not find it on YouTube this morning!)
Karim's speech was great. It was short, it was funny, and it had video clips. He advised students to always be open to opportunity and to take risks while you can (like leaving college while still young to try something brand new). He apologized for ruining their gpa's by inventing YouTube! He was self-deprecating when reminding students that things don't work right away. In 1997, Karim's application to the University of Illinois' computer science department was rejected. He wrote a letter asking them to reconsider, which they did. (I would like to see a copy of this letter. I've seen letters from law school candidates asking for their admissions decisions to be reconsidered, and they generally only confirm initial judgments!) He also talked about how lame YouTube was in the beginning until users started uploading their own videos -- a concept that the founders had not envisioned.
The funniest line of the speech came when Karim explained that YouTube was launched on February 14, 2005. I am paraphrasing, but he said something akin to: "One of the best things about being a computer science major is that Valentine's Day is just like any other day."
April 06, 2007
In the 1970s, one of my favorite bands was Bachman Turner Overdrive. BTO's first album was released in 1973 and after five albums in three years, the group released "Best of BTO (So Far)" in 1976. They didn't have enough material to make a legitimate "greatest hits" album, but you probably could sing along with many of these songs: "Takin' Care of Business," "You Ain't Seen Nothing Yet," "Roll On Down The Highway," "Hey You," "Let It Ride," etc.
The band never had another hit.
I have always remembered "Best of BTO" as sort of a cautionary tale about the risks of premature celebration. (Leon Lett didn't come along until 1993.) So when I hear that the 19-year-old founder of Comcate has written a book entitled My Startup Life, my first thought is that we may be witnessing a shark jumping. But I have been reading Ben Casnocha's blog over the past few days, and I am impressed. Not just impressed in a nice-work-for-a-19-year-old way, but really impressed. Ben reads widely, and he has some interesting insights about what he reads.
Brad Feld is gushing about the book, and it is now on my summer reading list. After all, even if Ben never had another hit, the book could be worth reading.
Microfinance has received lots of attention since last year's Nobel Peace Prize was awarded to Muhammad Yunus for his work with the Grameen Bank in Bangladesh. If you want to get in on the act, Kiva.org is a website that lets you do that. Kiva links up small entrepreneurs in developing countries with you and me. It allows us to lend (in $25 increments via PayPal) to small businesses that need a few hundred dollars to expand--a food stall owner who wants to increase her inventory so she can make fewer time-consuming trips to the market each week; or a woman who makes cheese and other milk products who wants to buy her own cow.
Kiva uses local partners--microfinance organizations--to vet the borrowers. Our loans are interest-free, though Kiva and the local partners charge interest in order to make the program sustainable. Kiva admits that microfinance is expensive; charging interest assures the continuity of the program. One hundred percent of the loan proceeds go to the borrower, so the only way the program pays for itself is through interest charges. This is a nice feature, since it puts all the capital to work and improves the incentives of the local partners to screen borrowers and monitor loans.
Kiva provides pictures and some background information about each borrower. It also has a bit of Friendster-ism in it. You can see pictures of each borrower's existing Kiva lenders, as well as each Kiva lender's portfolio of Kiva loans. The home page also has a "featured lender." Most lenders are from the US, with some from Europe as well.
Kiva was recently highlighted in a NYT story by Nick Kristof (TimesSelect, which you can get for free with a ".edu" email address).
Permalink | Economic Development| Entrepreneurs| Finance| Globalization & Trade | Comments (0) | TrackBack (0)
March 14, 2007
On Friday, March 30th, I'll be speaking at the 2nd Annual Conference on Community Economic Development at the Western New England College School of Law. The assigned topic is "Urban Entrepreneurship." I offer my initial thoughts below. I still have a couple of weeks to shape my remarks, so any comments, ideas or suggestions are welcome.
I want to make four points about Urban Entrepreneurship, which I understand to mean start-up businesses that seek to operate in or serve economically-disadvantaged areas.
1. The entrepreneurial spirit is universal; what varies from region to region are the challenges to raising capital.
2. Entrepreneurs seeking capital for projects in urban areas face a difficult challenge of showing a clear path to profitable exit.
3. Traditional funding solutions include community networks and non-profits. Each has its limitations.
4. For-profit philanthropy offers a useful alternative model.
* * *
1. The entrepreneurial spirit is universal.
There's plenty of evidence of the entrepreneurial spirit anywhere you look, from places we normally think of -- like Boulder and Silicon Valley -- to big cities like LA and NY, in rural areas, in Europe and Israel, in India and China, in Africa and Latin America. Urban areas are no exception, of course.
What varies from region to region are the barriers to raising capital. Investors need a legal regime that makes them comfortable investing in a venture managed by someone else, and they need to be convinced that they can achieve a comfortable return on investment. And investors and entrepreneurs have to be able to keep returns on investment, free from severe government corruption or confiscatory taxes. The US has a legal regime that effectively supports entrepreneurship. This isn't to say that the US system is perfect. But the real challenge facing urban entrepreneurs is making investors feel comfortable that they'll get a return on investment.
Urban entrepreneurs face an enormous information barrier. Many urban business model ideas don't fit what VCs have in mind. Venture capital-backed entrepreneurship tends to focus on technology, where a successful investment can disrupt existing product markets and generate enormous returns. It's these home run investments that can justify nosebleed valuations and allow investors to swallow the losses from the significant number of investments that will fail. Many urban start-ups, by contrast, are looking for success on a smaller scale. This doesn't diminish their importance, only their chances of finding traditional venture capital.
2. No clear path to cash.
This last point - the difficulty of fitting urban entrepreneurship into the VC-backed technology entrepreneurship model - is worth some elaboration.
There are untapped product markets and underutilized labor markets in urban areas. And it's possible for VC-backed entrepreneurs to reach a portion of this market. There's no intrinsic barrier to funding; I don't think there's some conspiracy that makes profit-seeking VCs turn away from urban markets. I recently saw a pitch by a company called gourban.net, which seeks to be an internet portal and on-line retailer for the urban market. It's an interesting business model, and I suspect that particular company will find traditional VC funding ... if they can convince the VCs that the business is truly disruptive of existing product markets.
The challenge is for "slow growth" companies, like smaller retail companies, grocery stores, bakeries, laundromats, clothing stores, for-profit educators, and many service providers. Many of these companies can provide incremental improvements over the status quo, but may not disrupt entire product markets. The more logical source of capital here is from traditional corporations extending incrementally into new markets through franchises, or by opening stores into new areas, as companies like WalMart, Target, Starbucks, and Old Navy are trying to do.
So now let's suppose there's an entrepreneur who wants to open a new clothing store on 125th St. in Harlem. Should she go out and pitch traditional VCs? Venture capital isn't likely to supply the needed capital to this market. As with any other market, there's a huge information gap between the entrepreneur with the idea and the investors with the capital. No matter how impressive the entrepreneur, there's a reason that VCs won't make the investment, and that's because the business model -- clothing retail -- isn't inherently disruptive. Without the promise of a home run product, slow growth companies won't attract traditional venture capital.
3. Two traditional models used to overcome the problem are community networks and non-profits. Each has its limitations.
By community networks I mean informal networks of friends and family financing that provide capital to small business owners, even where return on investment is quite uncertain. These networks rely on non-contractual methods to guard against shirking and other moral hazard risks. Historically, these networks have tended to be ethnically homogeneous, often but not always centered around immigrant groups. In New York, for example, you've got -- just to name a few -- Korean grocers, Orthodox Jews in the diamond district, and African-American bakeries in Harlem. But family and ethnic ties extend only so far, and the model becomes less useful as our urban communities become less homogeneous. We cannot count on friends and family financing to generate the optimal level of economic activity. We must look for other intermediaries to bridge the information gap between the capital markets and promising urban businesses.
Non-profits sometime serve this role. Under the New Markets Tax Credit, for example, investors can receive a tax credit for up to 39% of their investment, over seven years, if the investment targets low-income communities and through a government-certified nonprofit intermediary. While the scheme undoubtedly lowers the cost of capital for certain projects, it's difficult to assess whether the best projects are getting funded. (For a discussion of government intervention in venture capital markets, see Ron Gilson, Engineering a Venture Capital Market. For more information on the NMTC program, see this GAO report.)
And non-profits generally tend to suffer from a lack of accountability. Non-profit managers are agents without principals - without the profit motive to guide behavior, there's a risk that non-profit managers choose suboptimal projects. It's difficult for donor/investors to monitor what's going on, and accountability mechanisms are weak.
4. For profit philanthropy presents a useful alternative model.
For-profit philanthropy, as I use the term here, means an investment guided by traditional, for-profit principles of (1) accountability and (2) return on investment, but where the primary motivation for the investment is (3) altruistic. These ventures might generate a profit, but that's just gravy. Return on investment may include non-financial measures. The real motivation is giving something back to the community; the philanthropic impulse allows the investor to stomach greater uncertainty and take on greater risk than she would otherwise take, given the expected returns.
Three examples.
Angels
The first is angel investing. Angel investors are normally thought of as for-profit investors, not philanthropists. But when you talk to angels, it becomes clear that many see their mission as broader than that. Many are former entrepreneurs, and they see angel investing as a method of giving the next generation a hand up. Once in a while, of course, an angel investment turns into millions of dollars. But it's become a method of providing both the capital and discipline of venture investing to a start-up that isn't yet ready to receive traditional venture capital.
(But cf. Darian Ibrahim's work on angel investing, suggesting rational, non-philanthropic justifications for the structure of angel investing.)
Google
The second example is Google.org. Google.org is the philanthropic arm of Google, investing in projects aimed at things like providing market-based solutions to global poverty and creating a better hybrid car. By keeping the projects under the for-profit umbrella of Google, the Google founders and managers are likely to achieve better accountability than if they made a corporate charitable contribution to an outside non-profit.
And it's worth noting that, counter-intuitively, they still get a pretty good tax break. In For-Profit Charities, Eric Posner & Anup Malani suggest that we should allow for-profit entities engaging in 501(c)(3) activities to receive deductible contributions of capital and operate free from an entity-level tax. (The mechanics are unclear from the early draft of the paper.) But Google.org also achieves the same improvement in accountability and a similar tax break without creating the same sort of administrative nightmare. When Google puts money into its Google.org subsidiary, and the subsidiary spends the money on things like R&D, the .org sub will generate operating losses. Assuming the .org sub remains part of the consolidated return, the operating losses will soak up income from Google's normal profit-making activities. Not all of the money contributed to the .org will generate immediate deductions - some investments will be capitalized, and some will later generate income. But each dollar contributed to Google.org might generate, say, 20 or 25 cents of tax benefits to Google, vs. 35 cents, at most, for a corporate charitable contribution. And Google.org can operate free from the income tax charitable deduction AGI limitations and free from the definitional constraints of 501(c)(3).
(For more on the AGI limitations, see the smarter Prof. Fleischer on Why Limit Charity.)
Magic Johnson
The third example, returning to the urban context, is Johnson Development Corporation. Magic Johnson's success is impressive, largely achieved through partnerships with Loews, Starbucks, TGI Fridays, and other traditional corporations. These various arrangements demonstrate the discipline and accountability of for-profit ventures, and indeed these ventures have proven financially successful.
But I'd be surprised if profit was Johnson's sole or even primary motivation when he first partnered with Sony Entertainment to build the Magic Johnson Theaters back in 1994. Maybe it was, but I doubt it. At the time, of course, there was extreme uncertainty about whether the business model would work. Johnson stepped in not just as a founder and capital provider but as an intermediary, bridging the gap between the other capital providers and the urban community. I think, like many successful entrepreneurs, Magic was looking to give something back to the community, and the for-profit model has made that gift more successful than a straight donation would have been. For-profit philanthropy is the gift that keeps on giving.
In sum, urban entrepreneurs operate under conditions of great uncertainty that make it difficult to raise money from traditional sources. And unlike technology entrepreneurs, who also operate under conditions of great uncertainty, they cannot tempt venture capital with the promise of disrupting entire product markets. Rather than rely on friends and family, or try to squeeze more from traditional non-profits, or curse traditional venture capital, new institutions must develop to fill the gap. I think the model of for-profit philanthropy will provide the most exciting new urban ventures in the 21st century.
November 08, 2006
The setting: A "Technology Meetup" in Boulder, where six entrepreneurs get 10 minutes each to pitch their products and get feedback from fellow tech geeks, entrepreneurs, angel investors and VCs. Every now and then I look to leave the ivory tower and find out what's happening in the real world when entrepreneurs try to finance new ventures. The focus is on product feedback, not finance, although about one in three questions was about monetization/business model. I arrive at 6 pm, coming straight from class where, as is my custom, I had worn a suit and tie.
There were about 80 people in attendance. Only three women (an interesting demographic observation that I'll write about in a different post.) I was the only person -- the only one -- wearing a tie.
Me: Hi, I'm Victor Fleischer.
Entrepreneur: [John Smith.] Good to meet you. I'm the CEO of [startup.com]. I'm presenting tonight on our new product. It protects your on-line photos.
He pauses as he looks at my tie, my usual Brooks Brothers number.
Entrepreneur (looking confused): Do you work in marketing?
Ouch. That's like getting asked if you're a used car salesman. I guess I looked a little slick for Boulder, where a worn-out fleece is the usual uniform.
The meeting, by the way, was fascinating. My favorite pitch was me.dium.
September 05, 2006
This weekend, we broke down and bought a new vacuum cleaner. Frustrated with the seemingly "disposable" vacuums that we have bought in the last ten years, we had been looking at a Dyson vacuum. Target was running a special, so now we have what seems to be the best vacuum in the world. Although I had vacuumed with our old appliance on Saturday, the Dyson picked up so much junk from our carpets yesterday that I wonder how we were living in such filth.
The literature in the box on "the Dyson story" prompted me to look around on the internet. The story of James Dyson and his vacuum seems to be a story of frustrated entrepreneurship that rivals Tucker: The Man and His Dream. After creating a prototype of his bagless vacuum that never loses suction, Dyson marketed it to both Amway and Hoover, who both eventually declined to deal with Dyson. Later, both companies would create vacuums that infringed on Dyson's patent, requiring Dyson to (successfully) fight them in court. Now, on the Dyson website, inventors can find advice on patenting their inventions and not showing them to anyone without a confidentiality agreement.
August 12, 2006
Not long ago, one of my students became upset with me when I told her that the incredible story she was telling about some entrepreneurial company probably wasn't true. So I laughed when I read this from Paul Kedrosky: "I hate the Silicon Valley founding myth garage thing. It is usually a lie, and I'd frankly find it more believable if entrepreneurs said they had been grown in moist petri dishes -- just add Ajax -- under Doerr's desk on Sandhill."
By the way, the comment was inspired by this video clip from the YouTube founders Chad Hurley and Steve Chen (whose story does not sound at all implausible) ...
August 08, 2006
Joe Francis has found his niche in porn, and Claire Hoffman of the LA Times has a fascinating, albeit disturbing, expose on Francis and his company. The story begins with Francis assaulting Hoffman and screaming, "You don't care about the 1st Amendment. I care about the 1st Amendment, but you are the kind of reporter who doesn't care."
Hoffman also describes the tactics Francis uses to recruit the women in his videos:
Tonight we had spent almost five hours in a sweaty nightclub, crowded with 2,500 very young and very drunk people. Clubs like this are fertile fields for Francis. He's made a fortune selling videos of women who agree to flash their breasts and French-kiss their friends for the cameras. In exchange, a girl who goes wild will receive a T-shirt, a pair of panties, maybe a trucker hat. It had been a typical night for him. He'd scoured the club, recruiting young and, for the most part, intoxicated women.
As you would expect, this strategy comes with some built-in legal hazards:
It seems like Francis spends a lot of money on lawyers. I guess that comes with the territory of filming strangers who take off their clothes. More than a dozen women have sued him, alleging that his company used images of them exposing their bodies on "Girls Gone Wild" videos, box covers and infomercials without their permission. Only a few have convinced the courts that they were unwitting victims. For the most part, judges and juries have sided with Francis' 1st Amendment argument that the plaintiffs' images were captured in public places and that the company was free to use them as it pleased, particularly in light of the fact that the women had signed waivers.
The story is long and describes the day's activities in great detail, including an incident in which one of Francis' recruits claims that Francis forced himself on her. The woman stated, "I told him it hurt, and he kept doing it. And I keep telling him it hurts. I said, 'No' twice in the beginning, and during I started saying, 'Oh, my god, it hurts.' I kept telling him it hurt, but he kept going, and he said he was sorry but kissed me so I wouldn't keep talking."
Much of my life is spent studying entrepreneurs, and I admire many of them. I find nothing admirable about Joe Francis.
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August 06, 2006
This cover and its accompanying story have been getting a lot of play on the blogs ...
Check out Jason at 37signals, Scott at Wordyard, Mike at 9rules, and Paul at Infectious Greed ... in decreasing order of outrage.
The problem is that Kevin Rose has not made $60 million from Digg. Not even close.
Where did BW get that number? The article contains these sentences: "So far, Digg is
breaking even on an estimated $3 million annually in revenues.
Nonetheless, people in the know say Digg is easily worth $200 million." Add this sentence: "Rose ... owns 30% to 40% of the company (he won't specify)." And voila! You get $60 million! (Or $80 million! Why not $80 million on the cover? Were they really trying to be conservative?)
Well, if the point was to get me to read the article, it worked.
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July 24, 2006
In her presentation at SEALs, Joan Heminway spoke about the differences in how men and women trust as well as the extent to which both groups are viewed as trustworthy, and then pinpointed some implications for these differences in the corporate context. In doing so, she spoke about a study conducted by Professors Lyda Bigelow and Judi McLean Parks of Olin School of Business, Washington University in St. Louis, which found that investors overwhelmingly favored companies run by men over those run by women. The professors created two different prospectuses for a company they claimed was going public and distributed them, along with the bio of the company’s CEO, to people with a business and finance background to assess their willingness to invest in the company. The two prospectuses were identical except that half of the investors received prospectuses indicating that the company’s CEO was a woman and the other half received prospectuses indicating that the CEO was a man. The bios of both CEOs were virtually the same. However, the professors found that the CEO’s gender had a huge impact on how both men and women investors viewed the company and its potential for success.
Thus, investors were not only willing to invest more money in men-led firms, but also were willing to pay the male CEO more money than the female CEO—saying they would pay the woman only 86% of the salary they would pay the man. In addition, investors had a less favorable view of the female CEO’s ability to manage the company, despite the fact that the resumes of both CEOs were identical. For example, investors indicated that the female CEO would be less able to handle a crisis and resolve conflicts on the board. They also suggested that the female CEO was less competent and had less leadership experience. Ultimately, investors—both male and female—agreed that the female-led company represented a riskier investment. In the professors’ opinion, the study revealed the difficulties women CEOs face raising money in the IPO market. The professors expressed surprise with the bias they found particularly given that 40% of companies in the US are run by women. However, the 2006 Fortune survey revealed that only 10 Fortune 500 companies are run by women, while only 20 Fortune 1000 companies are run by women. Certainly there are many reasons for this phenomenon, but the study suggests that gender bias among all investors continues to play a role in how we perceive the strength of a company.
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June 25, 2006
Brad Feld discusses a "Compelled Sale Right," which he found in a term sheet that recently crossed his desk.
Corporate lawyers are familiar with the doctrine of "minority oppression," which aspires to protect minority shareholders against "squeezeouts" and other abusive tactics by majority shareholders. The "Compelled Sale Right" turns the tables, allowing a minority shareholder (in this case, as low as 10%) to sell the company over the objections of the majority shareholders.
The minority investor has to wait seven years before the provision is active, but still ... I have never seen a provision quite like this one.
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May 16, 2006
My colleague Anne Miner made an interesting observation at the end of her presentation. She has studied university technology startups around the world, and she observed that policy makers and tech transfer officers worldwide have embraced an enormous vision of the power of technology startups to solve many of society's ills. Not just problems like unemployment or economic growth, but racial tensions caused by immigration (France) or the lingering problems caused by colonialism (Thailand). This is the world of technology startups as social movement.
Are they right? Probably not. But this is about hope, not experience.
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May 03, 2006
Rajiv Vinnakota spoke at the UW Business School today as part of the policy lecture series of the Initiative for Studies in Technology Entrepreneurship. Rajiv is co-founder, with Eric Adler, of the SEED Foundation, which established a much publicized "urban boarding school" for grades 7-12 in Washington, D.C. in 1998.
The students who attended the session seemed enthralled with Rajiv, who is energetic, idealistic, and likeable, but I was having trouble getting my mind around the costs of a SEED School education. The SEED school started with $25 million in capital, and it spends about $25,000/student in public education funds annually. The D.C. school usually enrolls 40 students -- chosen by lottery -- in each seventh grade class, and expulsion rates are high (18 students were expelled in 2004-2005).
Since opening in 1998, the SEED school has graduated only 41 students. According to this recent newspaper article, Rajiv "said 24 of the original 40 students enrolled ultimately graduated in 2004 and that 17 of the 30 original students enrolled in the Class of 2005 received their diplomas. Twenty-six seniors are expected to graduate this spring." Those who graduate appear to be on their way: 100% of the SEED graduates attend college, including some of the top colleges in the country.
At several points in the presentation, Rajiv noted that the SEED Foundation is a "learning institution," meaning that they are making lots of mistakes along the way. And given the public nature of their work, their mistakes are chronicled in the local press. They have plans to construct two new schools -- one in D.C. and one in Maryland -- in the near future, and other locations are being scouted. My sense is that they have a tough row to hoe, and if they don't cut costs dramatically and start increasing their yield, this experiment in urban boarding education will be short-lived.
December 14, 2005
Last week INSITE sponsored a talk by Mary Zellmer-Bruhn, who is an Assistant Professor in the Strategic Management and Organization Department of the Carlson School of Management at the University of Minnesota. She is working with colleagues there on issues relating to the formation of entrepreneurial teams. For example, they have written a paper entitled "Entrepreneurial Team Formation: An Exploration of New Member Addition" that examines various theories about new member addition. They ask: why do entrepreneurial teams choose particular new members? Perhaps because they seek to assemble certain resources (e.g., human or social capital) that will increase the likelihood of team success. Perhaps because of interpersonal attraction or the desire to make a social connection. Or perhaps some combination of motivations. Zellmer-Bruhn and her colleagues have been interviewing entrepreneurs in search of answers, but retrospective accounts are pretty muddled. Their current work attempts to identify entrepreneurs at an earlier stage, thus enabling prospective work.
Understanding teams is a burgeoning area of entrepreneurship research, inspired by the recognition that the "heroic entrepreneur" is largely mythical. Practically speaking, all successful entrepreneurs work in teams. It seems to me that this fact holds some potential interest for legal scholars. The structure of an entrepreneurial team must be influenced by available legal forms. Consider this:
Henry Ford has an idea for a car. The Dodge brothers have a machine shop. They want to form a relationship. What are the options?
Notice that your answer to that question likely involves a list of legal relationships: partners; employer-employee; principal-independent contractor; shareholders; joint venturers; etc. We could abolish all of these forms and allow people to create relationships from scratch, but it wouldn't take long before patterns started to emerge. At some point, we would give names to the patterns, and voila! We would have legal forms again. As a result, I assume that law must have something interesting to say about the composition and structure of entrepreneurial teams. (Or not. Maybe law just reduces the transaction costs of contracting and doesn't affect the shape of teams at all.)
I wonder: does the menu of legal forms vary enough from one country to the next that we might think of some countries as being superior to others in their ability to encourage entrepreneurial team formation?
UPDATE: Extra credit for the person who can identify all three people in the photo above. Click the photo for a bigger view. (By the way, are they a team?)
November 30, 2005
I like this line from Mark Suchman et al,"The legal environment of entrepreneurship" in TheEntrepreneurship Dynamic, Schoonhoven, C.B. & Romanelli, E. (eds): "For the typical entrepreneur, novelty, like a trace mineral, can be deadly both in absence and in surfeit."
October 27, 2005
Women have had a difficult time breaking into the startup game, and news stories about women and their frustrations with fundraising are common. Today, I stumbled across such a story at the Wisconsin Technology Network with the following title:
The article focuses on male networks as the main obstacle, but the title reminds me that female entrepreneurs have an image problem. Simply stated, many men do not believe that women are willing to make the sacrifices necessary to entrepreneurial success. And, of course, most venture capitalists are men.
Venture capitalists have lots of incentives to overcome inaccurate biases. There's money to be made! Nevertheless, venture capitalists invest in an environment of extreme uncertainty. Business models, technologies, government regulations, competitive environments, and, perhaps most importantly, entrepreneurial teams are all sources of uncertainty. In the end, the decision to invest is made only partly based on reasoned analysis. The courage to invest often comes from the gut, and that's where biases like this one live.
September 28, 2005
One life is plenty for me, but if you want a second life, you might be interested in this site. If you go there, you might meet Kasi Nafus, but she will be called Nepheline Protagonist. She owns a boutique there called Pixel Dolls, and she is making both virtual and real money. Check out her story on today's Rocketboom.
September 06, 2005
Historically, Texas has been a place for all kinds of people to start over and build a new life. Debtors would scrawl "GTT" or "Gone to Texas" on their doors and head out for the frontier. The NYT today has an article describing how after Katrina, many individuals and businesses from Louisiana are starting over in Houston. Of course Houston has a strange legacy of prospering in a rising tide; Houston owes much of its prominence today to the 1900 Galveston Hurricane, which shifted the commercial center from Galveston to Houston.
April 15, 2005
I am sitting in a classroom at Grainger Hall listening to University of Wisconsin students present their business plans to a group of five judges as part of the G. Steven Burrill Technology Business Plan Competition. The students are well prepared and serious. As the name of the competition suggests, the students are pitching technology based companies. For example, the group that just finished was involved in a company called "Clean Well," which relies on patented filter technology to address contamination risks in private water wells. And here comes another company worred about bacteria. Microfend is promoting antimicrobial textiles to ensure cleaner sheets in hotel rooms and other special markets. If you want to see the last couple companies, just hope on to the site linked above and simulcast it!
December 08, 2004
As I was filling out a deposit slip at the bank this afternoon, I heard two unoccupied tellers discussing Martha Stewart's newly announced show. The tellers were disgusted that a prisoner could be set up with such a deal while in prison, though technically, the deal had to be worked out before she started to serve. (wink, wink) The show will begin after she completes five months of house arrest next August.
The format of the show remains vague, but I think they should call it "Lunch with Martha." Based on this story from some of her fellow inmates, Martha is a great lunch companion. They could set the show in a prison cafeteria and have her interviewing all sorts of people, like the nun who was convicted of "obstructing the national defense and damaging government property for her role in an anti-war protest at a missile silo in 2002." That would be television worth watching.
November 19, 2004
The University of Wisconsin's Office of Corporate Relations recently announced a New Business Start-up Initiative. It's a nice step toward encouraging more university startups. Among the developments is the Guide for New Ventures, which was published last spring, but I am most looking forward to the Venture Capital Roundtables. And interacting with the Entrepreneur-in-Residence. Good stuff.
October 13, 2004
Today the Small Business & Entrepreneurship Council released the Small Business Survival Index 2004, which purports to rank the policy environment for entrepreneurship "across the nation."
The friendliest state is South Dakota.
The least friendly state is California.
So the lesson is that there an inverse correlation between policy friendliness and actual levels of entrepreneurship?
By the way, Wisconsin ranks 27th. What can it mean?
Hat tip to Dane.
September 18, 2004
"The difference between an idea and an entrepreneur is money." Hmm.
September 14, 2004
If you believe this, most entrepreneurs do not have a business role model. Actually, that fits my idealized image of the entrepreneur, who is more interested in blazing new trails than walking those blazed by others.
Scott Allen has assembled a list of quotations from famous entrepreneurs on entrepreneurship. (Two from Bill Rancic?) This must be the least inspirational collection of inspirational quotations I have ever read. It includes such gems as:
"We were young, but we had good advice and good ideas and lots of enthusiasm." (Bill Gates)"Business opportunities are like buses, there's always another one coming." (Richard Branson)
"When you reach an obstacle, turn it into an opportunity." (Mary Kay Ash)
Is there a less introspective group in the world than entrepreneurs? They are the epitome of the doer, not the thinker.
July 15, 2004
Robbie Vorhaus of Vorhaus Communications, Inc. offers a personal account about the use of credit cards to build a business. A few tidbits:
* "Plastic debt isn’t just about money, though; it’s about entrepreneurial thinking and philosophy. When you’re young, as I was in the early 1990s, and absolutely convinced that you have something unique to offer, perhaps it pays to borrow on credit cards. That is because what you need at that age is blind faith."
* "These days, I consider plastic a tactical tool for laying the groundwork for business that I am reasonably certain I will secure. In other words, if I have a good reputation, a good management team, if my calls are getting returned, and I can see revenue five months hence, but I need that computer server today, I would be inclined to put the purchase on a credit card. If, on the other hand, I am using the card merely to cover expenses, I don’t see credit card debt as a good idea. If you’re floundering and using the card, you’ll find yourself floundering and in debt."
* "Entrepreneurs get caught on a treadmill with plastic. They keep hoping to get through just another month until the business turns. This line of thinking is inextricably linked to another myth: that the debt belongs to a credit card company and you can just take it and not repay. Nothing could be more wrong. When borrowing on plastic, you must always make at least the minimum payment and contact the credit card company if you cannot. That is because if you create a bad credit record for yourself, you won’t ever be able to lease equipment or be granted other forms of credit."
Nod to Dane for the link.
June 24, 2004
This afternoon, my last in Germany for this trip, my two children and I were invited to attend an indoor fun park with a German family. Our host -- who has lived in the United States -- explained that such businesses were quite unusual in Germany, and that those who operated them did not understand how to attract customers. He had some very specific ideas about how to improve the business we were then visiting. So I suggested that he consider starting his own business.
His response: "Why would I do that? My job with the government pays well enough, and I have plenty of free time."
It would perhaps be unfair to suggest that this response is representative of an entire nation, but my experience here suggests that my host's attitude is commonly held. Admittedly, I am associating with a selective group, mostly lawyers, who do not seem an overly entrepreneurial lot in Germany. Nevertheless, Germany has not distinguished itself as an entrepreneurial hotbed.
June 23, 2004
The big entrepreneurship story over the past couple of days has been the space flight by Michael Melvill. Lots of people are uttering cautious words about how far this industry has to go before regular folks will be hurtling into orbit (or sub-orbit), but I am bullish on private space flight. Melvill's flight seems like an important step in making the possibility of private space flight concrete, even if it is outrageously expensive at present. People have long been enamored with the idea, but now the prospect of widespread private flights actually seems possible in my lifetime. I look for big things from this industry in the next decade.
June 13, 2004
In many ways, my world view has permanently changed after my visits to India and China this year. One way in which it has changed has been in my willingness to bargain. Having grown up in a world of fixed prices, I have tended to approach consumption as a search for the right value-price combination. The bargaining over everything that happens in India and China can be exhausting, but it has the potential for deal creation that is missing in a fixed price setting.
This occurred to me this weekend while I was shopping for a hotel room in Weggis, Switzerland on the Vierwaldstättersee. We must have stopped at five or six hotels, looking for the right combination of size and price. Every hotel had open rooms that were acceptable and the prices varied in a range of about 30 percent. All of the rooms were too expensive, in my view, so from the very beginning, I began suggesting lower prices. Only at the last hotel (of course ... it would not have been the last otherwise) did the manager agree to lower the price. And he got our money.
Hotels practice discriminatory pricing. This is the whole basis for Hotels.com's advertising campaign, which shows some people feeling stupid when they learn that they have paid too much for a room. Why the hotel managers I encountered in Switzerland were so reluctant to bargain is a bit puzzling to me. Were other prospective customers likely to appear and to pay the fixed price? Not likely, since I was shopping fairly late in the day. Were they concerned that other potential customers would become aware of the discount and demand one for themselves? Also unlikely, since such detailed price information does not circulate very effeciently among hotel customers. Of course, consumers may simply learn to always ask for a discount. If only one hotel is involved, it seems unlikely that sufficient numbers of past and prospective customers would actually get together and make an impact.
Here is an interesting paper exploring fixed prices versus auctions on eBay. According to the authors, a big factor in favor of fixed prices is the consumers' "hassle cost," which I observed first-hand in both India and China. While this suggests a rationale for offering a "Buy It Now" price, it does not explain why a vendor would refuse to hold an auction. Perhaps the manager's hassle cost? Do the managers have an incentive to get that marginal rental?
May 26, 2004
Nicholas Berg's name will forever be associated with the gruesome manner of his death, a low point in a very low time. Today, The New York Times published a story describing Berg: "An adventurous entrepreneur and religious Jew, Mr. Berg had a passionate belief in capitalism's power to transform poor nations. He really believed, friends and relatives said, that he could help rebuild that war-shattered country one radio tower at a time. It was a vision that almost immediately aroused suspicions." The story then details the many mysteries that surround Berg's presence in Iraq. To some Berg looks like a spy. They cannot understand the forces that would impel someone to act the way he did. To his family and friends, Berg was simply idealistic, and he clearly found himself in the wrong place at the wrong time. Consider this:
He attended Cornell University, distinguishing himself in engineering courses, a faculty adviser said. But his defining semester came in a small Ugandan village, where he spent the spring of 1998 in an exchange program. There he was exposed to poverty he had never imagined, friends said. He turned his inventiveness to good use, fashioning a brick-making machine to help villagers stabilize mud huts. In letters, he described schemes to help the Ugandans market mushrooms and make bricks from indigenous materials. "He was shaken by his experience," a friend, James Wakefield, 52, said. "He had nothing but a pair of pants, a shirt and boots when he came home. He gave away his clothing."
If you cannot imagine people like Nicholas Berg, people who want to change the world one idea or one good work at a time, I am sorry for you.
May 03, 2004
Yesterday's New York Times ran a story about Jessica Simpson's new line of beauty products. The story was appropriately titled "Jessica's Dirty Clean-Up Act":
"Jessica Simpson, the 23-year-old singer and reality television star, has always emphasized her innocence — a minister's daughter, she swore off sex until marriage — to distinguish herself from provocative peers like Britney Spears and Christina Aguilera. Which is why some fans of her music or of "Newlyweds," her MTV series, may be surprised to find Ms. Simpson hawking a new line of beauty products with distinctly erotic overtones. Her "Dessert" collection offers a menu of 13 "deliciously kissable" items like Belly Button Love Potion, Hot Body Topping a