'Opportunity' is a central concept in entrepreneurship research, and this Article explores the relationship between law and entrepreneurial opportunities. We adopt the widely held view that entrepreneurial opportunities are ideas created by entrepreneurs, rather than resources waiting to be discovered. Of course, as with all products of the imagination, entrepreneurial opportunities draw on existing resources for inspiration, and we contend that some legal systems are better than other legal systems at encouraging entrepreneurs to think about existing resources in new ways. We also contend that when entrepreneurial opportunities are exploited, the inventory of resources expands, thus laying the foundation for the creation of more entrepreneurial opportunities. This 'opportunity cycle' leads to plentiful and continuous opportunity creation.
Legal rules play an important role in each stage in the opportunity cycle, and two sets of stories told about law are foundational to innovation research. The first is that property rights (i.e., rights to exclude) are essential in the development of innovative resources because property rights assure market participants that they can retain many of the benefits of their success. The second is that various sets of legal rules – including laws limiting barriers to entry, bankruptcy laws, and corporate laws relating to limited liability and asset partitioning – reduce the costs of entrepreneurial action and failure, thus emboldening entrepreneurs to exploit opportunities. Our thesis is that all of these stories are part of a grander tale about the opportunity cycle, and the central theme of that tale is that the promotion of entrepreneurial action is a fundamental value of the U.S. legal system, the expression of which through positive law inspires entrepreneurs to create more opportunities.
I've been chatting with my co-blogger Gordon, who is now next door thanks to this great visiting gig at BYU, about laws and entrepreneurship in advance of next week's Cornell law review symposium on the topic. One of the memes in the literature is how law can facilitate entrepreneurship. However, one thing that has struck me in researching microfinance is that laws in the United States do more to hinder entrepreneurship than assist it. One group of laws intentionally tamp down on entrepreneurship and the other group unintentionally raises opportunity costs, which make the concept of microfinance a hard sell here.
1. Regulation. In the U.S., we have a lot of laws that are meant to protect citizens, promote health and sanitation, and generally promote safety in various industries. That's great. This is why I would much rather live here than in most counties. However, some of the laws are used mostly to keep folks out of "professions" such as taxi driver, hair stylist, shoe shiner, etc. The myriad occupations that require licensure strain logic. Farmer's markets are filled with regulations about what sorts of things can be sold there. So, in developing countries, if a microborrower gets a loan for $100, the microborrower can buy a goat and sell milk or baby goats, buy chickens and sell eggs, buy ingredients and sell pastries, or various other things that will support borrowing $100 even at a fairly high rate of interest. However, in the U.S., that $100 would quickly go to license applications and wouldn't even begin to cover the cost of a certified commercial kitchen or a taxicab license. So, in the U.S. "microloans" tend to be in the thousands of dollars through the Small Business Administration loan program or community development loan program to be used for small to medium enterprises, not microbusiness. We have regulated out microbusiness.
2. Opportunity Cost. Because entrepreneurship in the U.S. takes the form of small to medium enterprises with large start-up costs, the cost is often more than the opportunity cost of being an employee. In developing countries, there aren't many opportunities to be an employee, but in the U.S. there are. Of course, in tough economic times, these opportunities dwindle, but even the prospect of a minimum-wage job may outweigh the risks of borrowing money for a small business. This may be preferable -- many of the microborrowers I meet in developed countries would much prefer the stability of steady employment in a subsistence economy, but there are obviously deeper satsifactions that can be had by being a successful entrepreneur. I think it's interesting that many of the successful start ups that we are familiar with are started by young, single men in college. There opportunity costs are low. It would be an interesting study to see what the opportunity costs were of most successful enterpreneurs.
Longtime Glom readers know that I've been interested in the new private secondary markets for quite some time. Indeed, my summer writing focused on these new markets, where accredited (i.e., wealthy) investors can buy shares of pre-public companies from current shareholders. Security Law's Dirty Little Secret, forthcoming in the Fordham Law Review, was the result.
In the piece one of the concerns I voice is that these new markets risk disrupting the "nurturing" model of venture capital. The dominant VC narrative is that part of what makes Silicon Valley et al. so successful is that venture capitalists bring not only dollars, but also expertise and support, to the entrepreneur. VCs take seats on a start-up's board and actively advise it on the myriad challenges a fledgling company confronts. My worry was that the secondary market, by providing an easier exit for venture capitalists and substituting faceless investors for engaged, experienced VCs, risked upsetting the successful Silicon Valley start-up model.
Enter AngelList, a website backed by SecondMarket, one of the two big players in the new secondary market. According to today's WSJ, AngelList allows angel investors to invest directly in start-ups via the web. Using this website, accredited investors can buy shares straight from the company. Investors may never meet or even speak with the entrepreneurs at all.
Off the cuff, here are some thoughts:
- Angels aren't VCs. The loss-of-expertise point may matter less here. Angels generally are less active investors than VCs and take fewer control rights, so substituting unknown web investors for angels may not make much of a difference. Where you come out on this depends upon what kind of intangibles you think angels bring to the table.
- Small dollar amounts from investors--as low as $1,000, according to the article--may lower the incentives of the angels to monitor any one investment. The WSJ quotes one investor: "You say how much, hit 'go,' and you're committed," he said. "It's almost as easy as the Amazon one-click checkout." This ain't you grandmother's--or Peter Thiel's-- angel investment, boys and girls.
- This money, unlike with the secondary markets, goes straight to the start-ups, and gets there closer to when they need it. That seems like a huge plus.
- It's more egalitarian. One attraction of Angelist is that it brings the Internet's "cut-the-middleman" angle to angel investing, and makes it less dependant on who you know in the Valley.
- But it's only available to accredited investors, and thus ripe for criticism from two fronts. First, from the "$1 million ain't what it used to be" crowd, investors with that net worth and/or $200,000 in annual income aren't necessarily sophisticated enough to handle these kinds of risky investments.
- On the flipside, if you're intrigued by AngelList, you're out of luck unless you have the money to get in the door. With more and more Americans qualifying as accredited investors, AngelList is just one more reminder that, when it comes to investing in the U.S., some investors are more equal than others.
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."
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.
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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One of the things I love about the Crocker Fellows course is that we have faculty from five different departments in the room simultaneously (Business, Engineering, Computer Science, Life Sciences, and, of course, Law). Each of the disciplines represented in the room has its own canonical ideas, and listening to those ideas play out is educational for all of us.
For example, today a faculty member invoked the Five Whys (of Toyota fame) in trying to help one of the teams understand the root cause of a problem. Here is the idea, in a nutshell, as stated by Kenichi Ohmae: "If instead of accepting the first answer, one … persists in asking 'Why?' four or five times in succession, one will certainly get to the guts of the issue, where fundamental bottlenecks and problems lie."
A couple of years back, Eric Ries wrote a nice blog post on "The Five Whys for Start-Ups" at HBR, and Jeff Lipshaw noticed the affinity of the Five Whys with the Socratic method. Want a lean startup? Hire a law professor as a manager!
In the Crocker Fellows class today, we talked about teams. I have blogged about entrepreneurial teams and teams in the classroom, but the Crocker Fellows Program is built on a particular notion of teams, captured by the famous definition of teams in Katzenbach and Smith (1994): "a small number of people with complementary skills who are committed to a common purpose, performance goals, and approach for which they hold themselves mutually accountable." In our class, the teams of five people comprise a mix of majors, including engineering, computer science, business, life science, graphic design, etc.
Chris Mattson led the discussion, using the Nightline episode on IDEO as an illustration. Here it is:
Does anyone use the IDEO shopping cart? I haven't seen any in the US, but there are reports of similar carts in France. And Chris has seen similar carts in China ... so has this guy. If you are interested in more on IDEO, you might also check out Tom Kelly on Stanford's ecorner.
As for the Crocker Fellows, the teams are still in the "forming" stage (see Tuckman's stages of group development), but they are transitioning quickly into the "storming" phase. While I am eager to see what emerges from these teams, I was asking myself some questions today in my observer status:
- What is the role of law and lawyers, if any, at this stage in the innovation process?
- Lawyers work in teams to develop briefs or documents ... is the IDEO process essentially the same as writing an innovative brief or constructing a new deal structure?
- Could we use teams in this way to teach law? (My classroom teams have a more modest function than the teams we are using in the fellows program.)
No answers, yet, but maybe by the end of the semester I will have some more ideas.
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.
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.
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!
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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Our readers with an interest in entrepreneurship might be interested in a symposium being hosted by The Ohio State Entrepreneurial Business Law Journal on March 10, 2011 that will focus on the damage that the financial crisis has inflicted on the ability of small businesses to raise capital. Details are here.
Legendary VC Don Valentine tries to explain his success. Why the obsession with the market?
"Because our objective always was to build big companies. If you don't attack a big market, it's highly unlikely you're ever going to build a big company."
An elegant explanation of how to change the world.
P.S. Valentine tells a story (start around 50:00) about Sandy Lerner's termination from Cisco. You might be interested if you know Urban Decay. He describes her as "tough beyond all comparison." Hmm.