Sunday, November 25, 2012

Bike Like An Entrepreneur

 Assuming you know how to bike, can you imagine learning to do so by reading some books, watching some movies, and listening to a bunch of lectures by some of the most prominent bikers of the time? Exactly! You cannot learn how to bike unless you jump on a bike with some training wheels and then over time start taking off those training wheels.

The same is true of entrepreneurship. Entrepreneurship is a skill, and skills are acquired through practice. There is simply no shortcut around it. Desiring a shortcut, in fact, would mean you are missing the whole point. It is like wanting to know how to ride a bike without having to ride a bike.

And for those of you who already know how to ride a bike, don't be overconfident about your skills. There is still a lot all of us can learn as the below psychology experiment which I just failed demonstrates (excerpt and photos are from May 9, 2012 YANSS Blog):

Take a look at those bicycles at the top of this post. Which one would you say is the most accurate portrayal of a real bike? Psychologist Rebecca Lawson once put together a study that revealed even though most people are very familiar with bicycles and know how to ride them, they can’t draw one to save their lives, and they can’t even pick a proper one out of a lineup. Despite this, most people rate their knowledge of how a bicycle works as being very good. Remember that when someone claims to understand something a bit more complicated, like a sub-prime mortgage. (This is a picture of a real bicycle.)

Sunday, November 11, 2012

Which is Better: Greed or Vision?

Is greed "good" when it comes to high tech startups? A protracted twitter exchange with fellow entrepreneur Jason Tryfon this morning made me realize that it is time to put in writing a more detailed defense of what I have been preaching in the Valley for some time:

It is my belief that startup founders who prioritize financial rewards over a specific vision/mission are less likely to succeed/survive compared with visionary founders.

I have seen many knee-jerk reactions to my above position. Here are some of my favorites:

(1) Accounting 101: A business cannot survive without money. Therefore, the quest to generate cash and ultimately profits should be the most important pursuit for a startup and everything else would be of less importance.

(2) HR 101: A startup needs talent to innovate and survive. Without promise of great financial rewards, a startup cannot recruit and retain requisite talent to really make it in a competitive labor market.

(3) Economics 101: As Adam Smith pointed out, all you need for a well-functioning free market is rational, profit maximizing individuals and firms. As long as people/firms engage in profit maximizing endeavors, the society benefits and progress is made. As a corollary, then, pursuing anything else is sub-optimal and is bad for society.

(4) Psychology 101: There is no better incentive than money to motivate behaviour, because money is quantifiable and can be used to obtain other things that individuals may idiosyncratically value. Therefore, the promise of great financial rewards is what makes a company innovate and succeed.

(5) Business Law 101: The founders/board/management of a company owe a fiduciary duty to their shareholders to maximize their return on investment. Therefore, prioritizing any other goal would be a violation of their fiduciary duty and grounds for shareholder lawsuits.

All of these arguments, however, either lack empirical, real-world support, or are actually compatible with my assertion about the vision-driven startups. So, let's take them one by one:

(1) My Reply to Business 101: A business cannot survive without many things. Cash is of course one such thing. So is motivated employees. But even if cash was the only thing without which a business could not survive, it does not logically follow that businesses ought to make profits their primary objective. Take for instance the statement that "A person cannot survive without air." Does it follow then a person ought to make pursuit of air their primary objective in life? Just because something is necessary for survival, it doesn't follow that its pursuit ought to be the objective of life. It is relatively easy to see that in case of human beings, higher goals and objectives are things that make life (and its necessary attributes such as breathing and eating) well worth it, but some of us lose that perspective when dealing with businesses for some reason. A business needs to make money to accomplish its goals, just as a person needs to stay healthy, eat, breathe air, etc. to accomplish its goals.

(2) My Reply to HR 101: I have been a witness to how non-financial rewards play a significant role in recruiting. I have recruited employees away from other startups because of differentiated vision or working conditions, and at many times, people have been willing to take a pay-cut. I have yet to see a single employee for whom the actual dollar value of results was the only factor in their career decisions. (Continued under Psychology 101 below)

(3) My Reply to Economics 101: News flash for Adam Smith followers: Turns out, based on a number of ongoing studies in econ and psych departments worldwide, people are not purely rational, selfish, profit-maximizing agents! People's sense of morality, fairness, empathy, altruism, and other cultural influences significantly inform and impact our decisions. There is even an emerging interdisciplinary field, called neuroeconomics, that is trying to make sense of all the irrational choices people make in their lives. Bottom line, there is too much unknown about human psyche and motivation to make any kind of normative judgment about how markets function. Furthermore, if the primary purpose of all firms in the market was to maximize profits, wouldn't the market ultimately converge on one firm that had figured out how to maximize profits? On the other hand, there are probably as many visions for the future as there are people in the world. Wouldn't the society benefit more if people focused on how to realize their vision?

(4) My Reply to Psychology 101: Although I don't dispute that money is a motivator, I do think its motivational influence is seriously hyped. Throughout history, tens of millions (at least) have been willing to put their lives in jeopardy or even willingly welcomed death in pursuit of their religious, philosophical or social beliefs. How many have done so for greed? In today's transparent labor market where compensations have pretty much converged amongst startups around the same stage, what startups compete on is their vision and sense of purpose. And in my opinion, when the going gets tough, those emplyees who are their for the vision are the ones who are willing to make "irrational" sacrifices (take pay cuts, work longer than legally or medically sanctioned hours) to see the dream come true.

(5) My Reply to Business Law 101: Maximizing shareholder value is not incompatible with giving priority to the vision of the company. This is assuming that the vision was articulated at the time of fundraising. The vision provides the boundary conditions within which the shareholder-value-maximizing activities are to take place. In fact, if the company decides to change course/vision/industry without approval from shareholders, that can land the Board/management team in as much legal trouble when things go south.

Bottom line, you gotta make money, but that doesn't mean you have to give up your dreams (or soul) to do so!