Polygraph Media Blog

Are You Real?

As we progress with our business in 2010, I find myself more and more drawn to doing business with people who are genuine, sincere, and as honest as they can be.  Maybe I'm having a negative visceral reaction to all the examples of people acting "on behalf of their business," which we're told should excuse.  You know, because history is replete with cases of lying, cheating, and stealing to get ahead.  Some of the best business barons of the last several centuries have checkered pasts - so it's somehow OK to do whatever it takes to get ahead today, right?

I think our "outcome-oriented" culture is becoming extremely negative for our American society.  How many people do you regard as successful because of the outcomes of their businesses, not because he/she is intrinsically a good person?  Certainly, money is a very important scorecard in business and I'm not minimizing that.  But I think it's also important to do it "the right way."  It's not just important to succeed, it's important to succeed with class and dignity.  It's important to your legacy, your reputation, and the way people will treat you when you are inevitably down.  Because no matter who you are, it *will* happen.

Somewhere along the way in America, we adopted an extremist "do whatever it takes" and "me first" attitude about business.  I don't totally agree with that -- the how/when/why means more to me than the outcome.  I think it's ultimately good business to be genuine and true to your word insofar as you can be -- society *craves* it in a world of cleverly manipulated bailouts, mortgage bailouts, and "anything it takes."  Society is based on rules where we aren't out to screw each other or create a problem for someone else all for the sake of personal gain -- at least it used to be.  But those choices are up to you & me -- and we have to begin to do the right thing every now and then despite what the "rules" or the "structure" allows.  Otherwise, America will be pillaged until there is nothing more to take.

Quick Hits - February 10, 2010

It's been too long since I've made some random, unsubstantiated observations.  Lucky you.

• I have used Google Buzz for just a few hours, and I'm already convinced it's a game-changer.  Watch out Twitter... and Facebook, you'd better not get too comfortable.
• I really do think I could make a compelling argument for you that Twitter's best bet is for AOL or Yahoo or Microsoft to buy them.  Not that any of that would be inherently bad, but I just don't see Twitter surviving and thriving as an independent business over the next few years.
• Social media "fatigue" really seems to be an increasing trend among younger people who have used things like Facebook for awhile.  I spoke at an event at Texas A&M recently that really reinforced this point.  It will be interesting to see if this is a limited case or something that marketers will have to deal with in coming years.
• I have given up on working with my neighborhood association.  It involves the worst elements of  government, bureaucracy, volunteering, politics, incompetence, ego, and personal fiefdoms -- and very few benefits.
• Lots of people out there are willing to give advice to early-stage entrepreneurs... but if they haven't created an early-stage startup themselves, be careful how much you internalize.  There is nothing like starting a company from its earliest stages, and it's a very, very unique business experience.
• Writing a book while starting a company is hard.  At some point, I'll share the story of how I got this opportunity, how I made it work, and why I'll never do the two things at the same time again.  It's a rewarding life goal achieved, but everything has its costs.
• Facebook is a particularly tough topic for a book, since the platform and/or the rules change about every 3 weeks on average.
• The Austin Technology Incubator has significantly improved its portfolio in my opinion, and is rebuilding its brand around substantive member companies.  You heard it here first.
• I'm increasingly of the opinion that networking for the sake of networking is a really bad idea for early stage entrepreneurs.  I know this goes against conventional wisdom, but I have a good argument.  Later.
• Location-based services are in their v2 with foursquare, Gowalla, and MyTown.  No offense to the good folks in those companies, but I really think the act of "checking in" is too hard and lacks enough of a consumer value proposition for any of those services to "win".  You'll know you see a winner when 1) there is a real compelling reason for consumers to check in, 2) a lot of it is automated in some way, and 3) there are reasons to do so that will appeal to "Joe Public."  These are very much early-adopter technologies today.
• Speaking of location-based services, can Apple really get away with removing apps that surface location-based ads from the App Store?  I know they make their own rules, but that's unreal.
• I love the potential of Google Android.  My wife has one & it's a pretty neat device.  But it isn't quite there right now.  Let's see how it evolves before handing it the future. ;-)
• We're told that the economy picked up quite a bit in Q4 in the US... yet capital efficient startups are still in vogue.  I'm telling ya, this frugality thing is here to stay for a decade or more.
• Finally, I finally yesterday met the first woman I know who likes the iPad branding.  Ultimately, I think after the shock wears off it will be OK.  But gosh, how obvious is it that Apple's branding team is lacking???

Optimism

In my last blog post, I shared with you my 2010 resolution to point out more of the positive things that I see.  What better way to do that than to share some optimistic thoughts I have about the future.  Maybe the contrarian in me just can't accept conventional wisdom that everything is awful.  Everywhere I look, I see reasons to be optimistic about the future.  Here are a few places where I see some positives going into 2010:

• U.S. Economy -- Amidst the financial crisis and high unemployment is a relatively affluent and inventive nation -- we are a people who does not stay down for long. We embrace ideas and we're tolerant of each other for the most part. We fix problems and we make life better in the end. Sure, we have some trouble as a nation right now. And we're spending money like we have it for reasons that still escape me. But people get creative when they're pressed. We've faced a rough patch in the economy, and now people are dusting themselves off and reinventing themselves to be more competitive. We'll start to see the benefits of this in 2010.
• Austin -- Look around, Austinites. This city has not even remotely faced the same economic problems of other cities in the United States. There are a lot of reasons for this -- some economic, some political. So we've been pretty fortunate in this turn. What's the impact for entrepreneurs? More people than ever want to live here. As such, there has been a much needed influx of talent from the West Coast (California & the Pacific Northwest). Add that to the fact that Austin is flush with talented developers, and you have a city that is ripe for further technology entrepreneurship. It's all looking great for Austin in 2010.
• Entrepreneurship -- The revolution brought about by eal-time and social media technologies are creating a ton of opportunities for tech startups.  Advances in clean energy and bioscience are fueled today by big government investments and increased M&A activity respectively.  Other types of startups can rest assured that building a business today in lean times is great -- rising tides raise all boats, so if you can compete in 2010 you'll be even better positioned for beyond as the economy picks up again.
• Old Media -- Yes, the newspaper business is in serious trouble.  But it isn't over for big media companies who still have a significant local presence.  Many large local media companies have had a brutal 2009 -- cutting staff and getting more efficient as they figure out how to modernize their business in 2010.  But this is exactly what is needed.  It's a first step amongst many that will convert local newspapers that survive into tech-savvy 21st century publications that fully embrace the fact that distribution is now a digital, and not a physical problem.

Let's see how all of this plays out!

Reviewing my 2009 predictions

It's time for the self-assessment of my predictions for the previous year.  Here goes...

Government 2.0 -- if the Obama administration earned a mandate of any kind, it is in the area of government intervention in the free market.  There will be opportunities in not just the modernization of government data systems/infrastructure, but also in helping government operate more efficiently and helping government help business.  I expect to see billions of public dollars move into areas where Web entrepreneurs can benefit.  This may be the biggest story in our industry in 2009.

Grade -- C 

Yes, modernization of government has been a key agenda item for the Obama administration.  But a few things made this somewhat of a non-story in 2009:

• Bigger problems in the economy and in unemployment,
• Government inertia despite the mandate,
• Policies driven to inject money into the economy quickly which (sadly) is counter to doing it efficiently.

The cycle begins to refresh -- the prospects for early-stage startups should improve throughout 2009.  Why?  We'll collectively snap out of the panic of 2008 and time will pass.  We'll all look ahead more optimistically to the future.  Remember, a lot of this panic has been the destruction of capital -- but a lot of it also has to do with capital sitting on the sidelines.  It will be increasingly unleashed throughout 2009.

Grade -- A-

By and large, I think this has happened.  Advances in real-time, social gaming, and social networking technologies have continued.  Economic value has been created.  In fact, a second tier of startups is emerging from these new platforms.  I don't think things have gotten crazy, but I do think that startup people are a lot more positive today than a year ago.

Forks in the road -- I don't remember a time when the major players in our industry all had tough strategic choices for the future.  Google needs a second trick.  Microsoft needs a way to make progress in advertising.  Facebook needs a business model.  Twitter needs a business model.  Loopt needs an acquirer?  Yahoo needs an acquirer.  Apple needs diversification beyond hardware.  Some will find the answers and there will be some consolidation.  The choices these major players make will determine quite a bit about the future of the Web.

Grade -- B-

Facebook and Twitter have largely figured out their business model issues.  Reportedly, Twitter is now profitable on the basis of the search engine deals and Facebook is rumored to be in a position to do $1 billion in revenue in 2010.  If that's true, WOW.

But the major players haven't really impressed me with their responses.  Clearly, Google is out in the front of the pack with a few innovations in local search and advertising that could respond to actions by the emerging social media giants.  Microsoft, Yahoo, and Apple have all done some rather incremental things to take advantage of social media in a big way -- but none have made big, bold moves to compete.  I am similarly waiting for Amazon to jump into the pool as well -- we shall see.

The cloud computing platform & developer attention fight intensifies -- "Use my API and host it on our cloud platform"  OK, I don't think we'll get to that point in 2009.  But the proliferation of web services and cloud computing platforms will only continue this year.  Open data has won just about everywhere on the Web.  Amazon Web Services will be joined by competitive offerings from Google and Microsoft.  What is common across all of this?  The need to win over early stage startups.

Grade -- C+

This has happened to some extent, although the battleground has been over social/local/geo data from startups and relatively new market entrants.  I do expect the battle over web application hosting to intensify -- just later.

All told, if I'm calculating my performance like a semester in school, I come up with a 2.68 GPA for 2009.  Eh.  The biggest issue here is my timing -- I was optimistic yet again about things happening fast.  We'll see.  Have a great remainder of your holiday!

The Creative Disruption Distraction, Pricing Thoughts, and Blind Spots

How many times have you heard a story about a humble company that succeeds but on some level seems "unintelligent", not "with the times", backwards, not technologically advanced, etc.?

Odds are they serve an uninteresting, underserved market that has more cash than common sense.  They aren't focused on technology innovation as much as meeting customer needs, which are often far simpler than in mature tech markets.  They probably don't do a lot of PR.  They don't hang out at a lot of local networking functions.  They just humbly plug away and cash flow -- all under the radar of the local community.

Well, so-called "dumb" companies like this may just get the last laugh.

One of the dangerous things about hanging out with the tech-savvy community is that it's arguably where the smartest people are.  Just about everyone in this community is actively engaged in "creative disruption", trying to make a profit by redefining a business and in so doing, turning an existing dollar into a dime.

Certainly, a lot of businesses are being redefined today -- and odds are that it's a good thing long-term.  And I am not an opponent of creative disruption, don't get me wrong.

But amidst all the creative disruption are markets/industries/customers that are underrated for both their ability to pay for tech-based solutions to problems and their relative price inelasticity.  Even in late 2009, there are a lot of businesses in tech where price doesn't matter nearly as much as effectiveness.  Tech is a business enabler, and for that people will pay often times far more than you think.

The ability of entrepreneurs to do more with less is a great trait that sets us apart from everyone else.  But all too often, I find that the trait comes with an inherent bias that everyone else is as price-sensitive as we are.  It's often the WRONG thing to think, and it can result in leaving a lot of money on the table.  I've seen it happen more often than not -- entrepreneurs are "serial underpricers".  We assume that price is a big determining factor in whether or not a product/solution is chosen, often without truly empathizing with the customer to understand the correct answer to the question:

"What means more to the customer?  $XXX or the time necessary to become an expert to optimize for lowest cost?"

We don't think through this question because we've all found the free tool that does what we need to rip music off YouTube and put it on our iPhone... we've all found the right free tool for managing our Twitter accounts... and we run our entire back office with $100/month and a favor or two from a friend.  Yet we know that the world does not quite work this way.  We all know companies who blow money for reasons that seem unnecessary to us.  We just assume that everyone operates as we do, and often it ISN'T the case.

So, ask yourself if your biases lead you to overvalue creative disruption.  Are you inordinately drawn to companies that are based on great ideas, but lack a clear and viable business model?  Alternatively, are you too dismissive of businesses like these that may portend the future, but have no apparent way to cash flow?

We could all use balance in this business.  Without it, we're missing business opportunity.  Our biases drive us to immediately judge some ideas as brilliant, others "wishful".  It colors how we view fellow entrepreneurs and those we choose or don't choose to help/recommend to others.  Worst of all, it can create a giant blind spot in our thinking that makes us all -- entrepreneurs and investors alike -- less effective.

Wanted: Entrepreneurs to Fix Federal Government

As I scanned my RSS feeds this AM, I tripped across an interesting article on Alan Greenspan's concern about U.S. debt.  Summarizing -- he sees an impending fiscal crisis (duh!) that can only be fixed by finding ways to reduce federal spending.

One proposal that he supports is the creation of a bipartisan commission to tackle issues of deficit reduction.

Here's an idea for you, Mr. Greenspan.  Let's set up a commission of entrepreneurs to find such opportunities.  Limit participation by lawmakers, lobbyists, and attorneys (no offense, people) as much as possible.

Entrepreneurs are probably the most qualified people around who can find inventive ways to do more with less.  Why?

1. We're broke and cost-sensitive.
2. We have to be great at finding inefficiencies and fixing them, otherwise we fail.
3. We have a lower sense of entitlement than other groups.
4. At worst, we'll funnel more resources to ourselves, which has potential economic benefits of its own.
5. We have no problem making people angry.

The more I think of this, the more I think it's actually a pretty good idea!

Doing More with Less

I've talked before about Mish Shedlock's observation that we've entered the Age of Frugality, which has since been echoed by major publications such as Business Week.

Well now, we're seeing this phenomenon in the movie business.  Paramount has committed to a new program to create 20 "micro-budget" movies starting in 2010.  This is regarded as a revolutionary step in that business, driven by evidence that you just don't need huge dollars of investment to create a huge return.

I've argued for awhile that the best & most profitable startups in the current era will similarly do more with less -- the best opportunities for M&A and big returns over the next few years will be for those startups that purposefully *don't* take big investment.  These companies certainly won't be in favor of the service provider and "big VC" communities, but that may not be all that necessary moving forward.

It's interesting to see this now in the movie business... an industry that has been defined for so many years by "the blockbuster."

 

How Consulting Helps our Startup, and vice versa

Had we launched a startup and a consulting business at the same time in 2006 or 2007, we may have taken a lot more criticism than we did.  But even in the middle of 2008 -- before the stock market crashed and many people realized that the salad days were over -- I heard a lot of good things about the model.  The "capital efficient" startup model was just starting to take hold and most people thought that we could effectively balance the needs of both businesses.  I mean, it's better than starving right?

It has worked a little better than I originally expected.  Here are a few points about our experience that we've learned over the last 18 months or so:

• Focus is great and perfect for an ideal situation where you are adequately funded and you know exactly what you're building.  Kudos to folks who have that luxury.
• Focus, however, may work against you if your team members need a dynamic work environment.  Our team works best in bursts of 2-3 weeks at a time.  If we worked on one thing all the time, we would be less productive.  I have seen us work hard on something for say a month at a time, and we tend to slow down towards the end.  We get stuck on things that we can't quite solve.  Variety helps us.
• So we aim to have a few software projects and a few consulting arrangements both at the same time.  It turns our startup into a cross-disciplinary group that takes lessons from one project and applies them to the others.  It's helpful far more often than you'd think -- and as a result, we have both better products and we provide better services to clients on the consulting side.

At some point in the not terribly distant future, we will have to focus our energy more directly.  The two businesses will likely divorce one another as the stakes get higher with world-class customers and possibly investors.  But I don't think I'd start a company any other way if I had to do it all over again.  Focus is great if you can afford it, but the serenditpity you get from doing a few things well pays off tremendously.

An Alternative Startup Approach

A lot of people have commented on how the economy and lack of "exits" changes the game for entrepreneurs seeking funding for early stage idea.  You need one heck of a personal connection or paying customers to even think about getting funded at a decent valuation today.  The bar is higher than ever to justify an early-stage investment, and for the effort you'll get a modern (i.e. low) valuation to boot.

Rob Adams (former venture capitalist and now professor at the UT Business School) said at a recent Texchange event here in Austin that it is "easier for a startup to sell a major customer than it is to raise funding."  That's probably true, especially for companies that haven't gotten a lot of customer traction.

Then today at an Austin Technology Incubator "Lunch and Learn" event, we heard Jim Nolen and Matthew Lyons talk about term sheets and fundraising in 2009.  The news was similarly bleak for entrepreneurs seeking early stage investment to validate an idea.  Venture capital returns for the decade ending in 2009 look OK, but not nearly as good for the decade ending in 2010.  VCs are having a hard time raising new funds, and they're keeping dry powder for portfolio businesses that were hot years ago but may have actually missed their opportunity to shine.  Even angel investors are seeking safe investments -- investors everywhere are reluctant to part with any money without a reasonable assurance they're going to get it back at decent returns.  There isn't much appetite for risk today -- too many people have been burned in the past and there isn't obvious reward lurking around the corner.

So where does this leave us?

• Low M&A and IPO activity
• Stock market drop has eradicated some angel investor wealth, anxieties remain
• Venture capital undergoing transformation & reinvention

Yet, startups continue to innovate.  New technologies have dotted the landscape and have created new opportunities for entrepreneurs to create value.  Perhaps most importantly, costs of doing business have decreased dramatically between the recession and efficient Web 2.0 technologies that dramatically reduce some operating costs.  So it takes less money to create more value today, but investors are still skiddish.  It tells me that there is a market inefficiency in favor of the statup entrepreneurs right now -- as long as he/she can continue to build value and minimize investment.

From my vantage point, all of this indicates the emergence of a rarely discussed trend:  a temporary shift of power to the bootstrapping entrepreneur.  How does a startup executive pull this off?

• Commitment to a capital efficient model -- low burn rate with obsession over costs and as little outflow in salary as possible,
• Inclusive and fair distribution of equity -- options or other benefits for employees who contribute despite receiving lower than market salary,
• Extreme scrutiny of service providers -- reluctance to make large financial commitments or promises before the startup is ready,
• Surgical marketing/business development strategy --targeting of prospective customers or partners through personal engagement and 1:1 outreach,
• Little/no "buzz" before proving the business model --no significant PR, blogger, or press outreach announcing your great idea until it has been refined.

By going this route, an entrepreneur can build a business the old-fashioned way, by building value one customer at a time... and by translating feedback into product innovations that will drive success.  It's better to give yourself time to iterate a bit before going loud.  Once the company has achieved its first major success, it's time to set everything in motion -- marketing, PR, fundraising, etc.

As entrepreneurs, we are all driven a little by wanting to bring a new idea to the world.  We get excited and our reaction is to tell the world about it well before we've really figured it out.  If you aren't patient, you can look silly when your specific iteration isn't exactly right.  But if you can be patient, you'll give yourself precious time to figure out where you fit in and what specific value you provide.  Then you can tell the world what you've achieved knowing that you've helped to solve real problems in the marketplace.

Believers and Non-Believers

Since leaving Microsoft just under 18 months ago, I've worked with a number of incumbent organizations to help them modernize their businesses with Web 2.0 themes:  social media, real-time, self-serve, collaboration, etc. I've worked with government folks, people in local media companies, publishers, consulting firms, major technology companies, auto manufacturers, etc. on consulting projects, social media implementations, new workflows/company policy, new business opportunities, and initiatives to improve efficiency.  I've spoken at industry events as a presenter, a panelist, and a moderator.

All these experiences have led me to believe that in business today, there is a big and increasing gap between "believers" and "non-believers" in change/modernization.

I would be painting with a broad brush if I were to say it is a generational gap.  It isn't at all.  Nor is it just a social media or Web 2.0 thing.  It's bigger than that.  It's generally a gap between folks who see that now, more than ever, business moves too fast to not think critically and make quick adjustments to take advantage of trends that will ultimately impact both the top and bottom line.

Let's step back and look at what is happening broadly in the economy.  Despite the rosy predictions, the fact is consumers are revisiting their personal spending today.  If we are going to even remotely revert to mean levels of debt in society, it will be at least a 3-5 year trend -- not just a mere blip on the radar.  Mish Shedlock touches on this theme of the Age of Frugality repeatedly in his fantastic blog that I highly recommend.  Like it or not, America (and the World for that matter) is going on a diet.  Collectively, we mortgaged the future for the present... and the future is now.

With lower consumer spending, there are increasing pressures to do more with less inside the corporation and perhaps redefine business for the future.  In this sense, big institutions of all kinds really have a lot more in common than anyone really thinks.  I touched on this a few months ago when I said that Microsoft's problems and those faced by the newspaper industry are pretty much the same, but today I'd say that large incumbents in a variety of industries are all in the same situation.

I don't know what to make of it just yet, nor do I know exactly how to profit from it at this moment.  But I've never seen people so divided in large organizations as they seem to be today -- people who bring about change vs. people who want to maintain the status quo.  I see a new example of it almost every day.

We are indeed living in an unprecedented time when the business landscape will be shaken to its core... where businesses will be redefined... where new brands will thrive... where old ones will fizzle... and where a lot of companies that can't adapt intelligently with limited information will die.  Now if someone could just tell us all what "adapt intelligently" means, we'd all be OK. ;-)

But there are no answers and there is not enough data to tell you exactly what to do.  There won't be -- technology, innovation, and advancement are by definition impossible to project into the future.  You have to feel your way through the jungle.