What's So Wrong with Arrogance?

I have always had a negative gut reaction to arrogant/overconfident people. In popular culture, however, arrogance is played up as a cornerstone of success and downright entrepreneurial chutzpah, exemplified by icons such as Zuck in The Social Network, Gordon Gekko in Wall Street or Donald Trump in the avalanche of The Apprentice "reality" shows.

But I felt vindicated when in the last issue of Harvard Business Review I encountered a very interesting research entitled "Experts Are More Persuasive When They Are Less Certain" by Associate Professor Zakary Tormala of Stanford GSB. According to this research which tallied ratings of a fictitious restaurant based on a variety of professional and amateur reviews, my gut reaction to arrogance has been spot on with majority of folks:

[We] asked subjects what they’d pay for a meal at our fictitious restaurant, Bianco’s. People who’d read the tentative professional review were willing to pay 56% more than people who’d read the highly certain professional review. But uncertainty had almost the exact opposite effect with amateur opinions. People who’d read a confident amateur review were willing to pay 54% more for a meal than those who’d read an uncertain amateur review.

Professor Tormala attributes this phenomenon to "expectancy violations":

People expect experts to be confident. Violations of that expectation surprise them. We see that in our data. Subjects reported being more surprised by the uncertain experts and the confident amateurs. A surprise draws you in and makes you pay more attention. It gives the review more impact.

I also think there is another phenomenon at play, which for a lack of a better word I call "Car Salesman Phobia". On a deep philosophic level, we all suspect that there is really no certainty in life. So whenever someone starts to come across too strong about anything, our intuitive alarm bells go off that this person may either have an ulterior motive (like a car salesman) or be so amazed by themselves that they are not checking their own blind spots. Those alarm bells are somewhat muffled when the expert starts admitting that there is room for doubt and further research.

So, you may ask, why is it that when amateurs show confidence we tend to trust them more? This, I believe, is due to the fact we start at such a low trust level with amateurs that their admission of certitude (or anything else other than total ignorance) is a relative improvement.

In conclusion, next time you are pitching your company to an investor or new hire, think about whether or not the person you are talking to would consider you an "amateur" or "expert" and then act with respective dose of humility, 

What do you think?

Innovation Déjà Vu (or The Idea Clone Wars)

I think we are all too familiar with how every now and then several Hollywood movies come out with the same basic plot in relatively short succession. Here are some of my favorites (not in Oscar-worthiness, but in how much of a clone the movies are of each other):

Matrix, Dark City, & Thirteenth Floor;
Deep Impact & Armageddon;
Antz & A Bug's Life;
Finding Nemo & Shark Tale;
The Truman Show & Ed TV;
Volcano & Dante's Peak;
War of The Worlds (with Tom Cruise) & War of The Worlds (without Tom Cruise);
United 93 & World Trade Center;
etc.

This, of course, is not a coincidence as pointed out in a study published in this 2006 Whittier Law Review article by IP attorney Igor Dubinsky:

Movies arise from scripts, scripts arise from ideas, and while ideas, as Justice Brandeis noted, are “free as the air,” they must be nurtured by authors to present any real value. Once an author gives birth to an idea for a story or movie, he develops it and then attempts to sell it to a movie studio. If the author can secure a meeting with a studio executive, he presents his idea at an “idea-man” presentation. Alternatively, the movie script can be submitted to a studio via mail or a third person.

On the average, movie executives receive over 20,000 movie and TV show ideas per year, but only review 6,000 of these, many of them over meals with executives from other networks. Movie ideas come from various sources including Sunset Boulevard, network executives, the studios themselves, stars and their agents, independent producers, writers, word of mouth, trade papers, and magazines... Only about 200 sample scripts are commissioned per year, and seldom are more than twenty of those
ordered.

Sometimes the person who conceived the idea for a movie script will win a meeting with studio executives, only to have the idea rejected and then rewritten and developed by the executives without paying any copyright royalties to the original author. What happens even more often is that a script author will shop the same idea at numerous movie studios, or movie studio executives at different companies will discuss with each other ideas for movies they are thinking of putting into production. These same ideas will then be developed into movies by two or more competing studios. At the box office these similar movies will come out like déjà vu, within a few weeks or months of each other.   

Are the same nefarious forces at play when we see a sudden rush of group texting startups (hat tip to George Zachary for the apt tweet on this), location-based services, social commerce websites (aka Groupon clones), VoIP startups (ok, I participated in that Clone War by starting jaxtr, a "j" letter mobile VoIP company in 2005), etc?

As the parallels between Hollywood and Silicon Valley in the above excerpt are too obvious to point out, I would like to share with you a more generalized response, which is the following:

Innovation in Silicon Valley is as much a social process as is ideation in Hollywood. We need to talk to others to be able to refine and solidify all the various thoughts that swim around in our heads. The good thing about this social process is that we come up with better results because of it (a recent study points out that the best academic articles are those that are produced by teamwork rather than "solo geniuses"). The bad thing, however, is that as soon as we talk to one other person, we will have to accept the fact that there will undoubtedly be a multitude of others that will have the same idea planted in their heads and will want to do something with it. If you want to innovate, the clone wars are inevitable!

Are Big Ideas Dead?

It seems that Big Ideas are no longer around, at least in the high tech community. No one seems to really care about them. No one seems to want to take on any risk to pursue them in any serious entrepreneurial way. And the current emphasis seems to have shifted towards Small Ideas that require little or no funding and leverage existing set of public API's and the Social Graph (hat tip to Angel Bubble).

I say this after days of walking the hallways and chatting up numerous entrepreneurs and VCs at this year's SXSWi Conference (the interactive portion of South By Southwest, aka The-Closest-Thing-The-Tech-Community-Has-To-Woodstock) in search of someone pursuing, or at least believing in, a Big Idea. Instead, what I found was that it has somehow become more fashionable/lucrative/fundable to create incremental changes (even to clone Groupon or Foursquare), than to try to completely break the mold and change the dominant paradigm in any field. I was hoping to see something different, something truly original and breathtaking, but all that I could see was shades of the same.

And based on other reviews of the event, I am not alone in this disenchantment with the current state of our entrepreneurial culture.  Todd Wasserman has an interesting Op-Ed piece on Mashable, in which he proclaims:

"But we’re not just having an off year. We’re at a new, more boring stage in the [social media innovation] development cycle."

One very smart entrepreneur told me over drinks at SXSW that this year's Big Ideas are "The Internet and Social Networking", mocking the very premise of my inquiry, and thereby proving what I suspected all along: That we have all grown cynical of Big Ideas.

And there is some merit to this cynicism. Big Idea inventions like the Laser, Electricity, Automobile, Ultrasound, Steam Engine, Printing Press, and the Internet happen so rarely and require such a confluence of serendipity, good fortune and resources that in an environment where you can relatively easily launch and grow a company by making an incremental improvement over something already in existence (if not outright copying), then why should you bother? In fact, isn't all innovation an improvement on prior innovations anyway, and that progress is a series of baby steps? For instance, wasn't the can opener invented 50 years after the birth of the metal can itself?

True, but still I hope I am wrong about the death of Big Ideas and that there is still someone, somewhere out there pursuing something that would have quantum leap implications for humanity, even if it is a metal can waiting for a can opener. If you know of some projects along those lines, please do comment below!

Revolutionary Solidarity

Solidarity is not discovered by reflection, but created. It is created by increasing our sensitivity to the particular details of the pain and humiliation of other, unfamiliar sorts of people. Such increased sensitivity makes it more difficult to marginalize people different from ourselves by thinking, 'They do not feel as WE would'. -Richard Rorty

Like many, I have been obsessively following the rapid spread of revolutionary uprisings throughout MENA on Twitter and Facebook. It is impossible to summarize one's emotions in these times, which somehow simultaneously combines awe (at the countless acts of selfless heroism), anger (at the cruelty and brutality of a few), and hope (for a better future for humanity).

As an entrepreneur, when I take a step back and look at the general trends manifested by these uprisings, I can't help but be overcome by a deep sense of solidarity and commonality of purpose with the masses on the streets of MENA. That is not just because all entrepreneurs aspire to bring about revolutionary new changes to their field, but because we all seem to be marching at the forefront of a larger, emerging global consciousness whose core values are:

1) Belief in the Possibility of Change

People join a political revolution when they reach a point where they can no longer tolerate things-as-they-are and start realizing that there is a possibility that the socio-political status quo can change. "Acceptance" and "Status Quo" are no longer deemed to have an intrinsic value (which have been the core value in traditional societies), and are in fact blamed for being the instruments of oppression and as such, responsible for much of the suffering. The Frankfurt School Critical Theorists and Poststructuralists of 20th Century (e.g., Foucault) popularized these notions in the academia, but their mass application has only recently seen the light of the day.

Similarly, entrepreneurship is deeply rooted in one's conviction in the value of change. Sometimes the change may be about making a floppy disk smaller; or a new way of using a computer or a handheld device. But by definition, innovation and entrepreneurship is all about breaking with the past and bringing about a change, sometimes risking a lot in the process (though the entrepreneurial risks pale in comparison with the dangers faced by the revolutionaries on the streets).

2) Trust in Democratic Processes

Removal of an autocratic regime and replacing it with a democratic government is among the top demands of the masses in MENA. It stems from decades-long brewing of disdain for autocratic rule by an elite few who have used the citizenry as mere instruments towards furthering their own individual interests. Revolts, revolutions and uprisings are nothing new in the MENA as elsewhere in the world; what is remarkable during the recent string of uprisings, however, is the lack of a central opposition figure-head, a cult-of-personality that was central to prior upheavals (e.g., recall the central role of Khomeini in Iranian Revolution of 1979). Thus, there seems to be a common understanding and unspoken faith in people's capability to self-organize and govern themselves by putting their trust in a process that draws upon the collective wisdom rather than a person.

This "common understanding" seems to be the invisible hand that guides the entrepreneurial community as well. Startups are for the most part self-organizing, non-hierarchical entities, with a particular disdain for traditional corporate structures and detailed processes. Chaotic, agile, lean and spontaneous processes are respected as conducive to innovation and progress, whereas hierarchical, authority-based processes (characterized by lots of higher-level approval requirements) are frowned upon (if not, laughed at). Each startup is an exercise in democracy, and coincidentally enough, much of the products these startups create aim at further facilitating mass collaboration and contribution by drawing upon the potential of the crowds. Facebook, Twitter, YouTube and scores of other social networking tools demonstrate how each individual is not only a consumer of important content, but also a producer with the potential to move and mobilize masses. As a result, today less and less personalities dominate our consumption of news, entertainment, or educational material than any other time in history. Technology entrepreneurs have tapped into the intrinsic value of the contributory potential of an individual in a way few governments have ever ever been able to do.  

3) Disdain for Centralization

Autocratic regimes tend to be heavily centralized for obvious reasons: The dictatorial head of the state needs to maximize his control in order to minimize the risk of a coup or transparency into his personal gains. Thus, centralized government control over all societal institutions, including economy, media and communications are necessary to the survival of a dictatorship (e.g., there is no "freedom of speech" in any of the dictatorial regimes, and most uprisings are met with a shutdown of mass communications infrastructure as it was done in Algeria and Egypt recently). Because of this, centralized structures are all but synonymous with the threat of oppression and dictatorship. Not surprisingly, demands for a decentralized government has been high on the revolutionary agenda in the MENA.

Decentralization has also been a core value in the tech community. Entrepreneurial ventures are mostly decentralized organizations, where smaller teams work on projects with minimal central control as mentioned above. The Internet itself is based on a framework for decentralized distribution of packets of data (although the decentralization work is still far from over, as evidenced by the need for solutions such as the one advocated by OpenMesh Project), and many popular applications take advantage of the efficiency gains and network effects inherent in a distributed network (e.g., Skype, BitTorrent)). The general disdain for centralized approaches and normative preference for decentralized, distributed and unregulated processes is quite palpable across the entrepreneurial communities (see also, the debate over network neutrality).

Although thousands of miles apart, our entrepreneurial community shares its set of core values with the freedom fighters in MENA. This does not only explain why these events feel so instinctively important to us, but also serves as a reminder that we should do our share to further spread the word about their struggle as an act of solidarity.

Moral Evolution

Working on an article that better explains this evolution, and its connection with the uprisings in MENA. Please share your thoughts on the diagram!

Startup Lessons Learned While Running A Marathon

I recently started training for the marathon (alright, half marathon, but for someone as unathletic as I, it is practically the same thing anyway) in honor of my late father who had been fighting cancer for 18 months. This has been a life-changing experience for me on so many levels. Among many things, it has helped me understand the fundamentals of entrepreneurship a lot better.

So, without further ado, here are my

Top 5 Startup Lessons Learned While Running A Marathon:

1. Don't bother if you don't have a Cause (yes, with a capital "C").
What gets me up hitting the pavement and running mile after mile in rainy, cold winter morning weather is not the promise of a large payoff or some other material gain. I am doing this marathon in honor of my father and in an effort to raise funds to help find a cure for cancer. Remembering our family's struggle and hearing the stories of others during my training has been a supernatural motivating force.

2. It is all in the... PACE!
It is amazing how our instincts are not tuned for endurance sports... Somehow evolution didn't take into account tens of miles of running or founding a startup! So many people seriously injure themselves during their practice runs (or even at the goal event) because they simply run too fast, especially in the first half of the run. You need to start slow and build up gradually. You are in it for the long haul, so you need to save up as much energy as you can throughout the process. The end is typically farther than the eye can see and there are hills in between.

3. Ignore others.
This is really a continuation of #2 above. I have had to force myself to fight a lot of competitive urges in order to maintain a healthy pace. As soon as you get wrapped up in what others do, you lose sight of your own pace. 

4. Work through the pains.
I have yet to do a decently long run (6 miles or more) that did not involve some kind of pain/cramp/pinch somewhere in my body. And what has worked best for me in those situations is to slow down slightly, focus on my form, and breathe into the pain (a yoga-esque technique).

5. Focus on your form, not the distance.
To battle the toughest parts of the course, such as a steep hill, or the last mile, etc., what works best for me is to focus on my form (shoulder position, back, tummy, hips, foot placement) and keep looking slightly ahead. On the other hand, trying to look at mile markers or top of the hill is usually a recipe for disaster and great way to lose motivation.

Somehow I wish I had gone through a marathon before my first startup!

A Rare Find

 
The old adage that inspiration can be found anywhere is quite true. A bottle of wine, a gift from our good friends Fred & Mariam, provided a great reminder of that wisdom this week. Now, finding inspiration in wine dates back to Antiquity and is nothing new, but finding such inspiration literally on the bottle itself is a whole different story. This is what we found:

The wine was out-of-this-world good (a cuvee called "The Offering", 2008, produced by Sans Liege Wines from Santa Barbara, California -- and not surprisingly, Sold Out at this point). But what took our breath away was the philosophy of the wine maker, Curt Schalchlin, printed in unassuming font besides the label:

"I am free to make the wine of my choosing because I follow no one. Traveling light, all I need is carried inside: a pure heart, a clear mind, and an old soul. Though the sky is dark and the way is lost, with each footstep there is insight; with each breath, resolve." 

                                                                                        -Curt Schalchlin

We would have missed these wonderful insights and inspiring words if my wife had not taken the time to carefully examine the bottle. Inspiration is all around us, as long as we take the time to look.

Wishing Curt and all of you continued inspiration, insight, resolve, clarity of mind and purity of heart in the year to come.

Happy 2011!

Zen and the Art of the Start

Although I am at a loss when it comes to giving a prescription for how to become a successful entrepreneur, I can give it a description based on my observations of a few of my personal heroes: And it is that all successful entrepreneurs seem to be quite Zen!
The way I understand it, the mastery of Zen comes from an acceptance of the way things are, and embracing all contradictions inherent in our human condition, thereby becoming a catalyst of what has always meant to be. A Zen artist enables the manifestation of joy, happiness and beauty in the world. A Zen warrior fights the just cause in many instances without engaging in a single battle. And a Zen entrepreneur succeeds in changing the world without forcing any changes upon it. It is being a walking contradiction that makes sense: actively forcing your mind to be passive, so that life experiences are not tainted by the prejudices, fears and judgments of the mind. It is setting your ego aside, so that something much much bigger can inspire and drive your actions.

As an entrepreneur, you are constantly struggling with sanity and insanity, creation and destruction, calm and anger, fast and slow, among many other things. But unlike the acrobat or tightrope walker who tries to achieve a balancing act by using opposing forces to neutralize each other, great entrepreneurs embrace the extremes and create a union from these seemingly un-unitable forces that is a much stronger creative force than any extremist could achieve. Thus, the successful entrepreneurs seem to have a mastery of how the flow of life comes from a union of Yin and Yang, which is the essence of Zen.

How to Avoid VC Nightmares

Apropos for Halloween night, I like to dedicate this post to some of the investor horror stories that circulate around the entrepreneurial community in Silicon Valley in hushed whispers. Without naming names, I have been privy to the gory details of a few such stories (Oh, the Horror!), which typically fall into 3 categories:

(A) Our VC forced us to sell too early and we left all of the upside on the table
(B) Our VC stopped us from selling when we should have, and now I have nothing to show for it
(C) Our VC drove me out of my company/business at the worst possible time, leading to its eventual demise

Needless to say, this is not an exhaustive list and textbooks, in multiple volumes, can be dedicated to collecting all the various gripes entrepreneurs have against their investors. Typically, in my experience, the complaints are leveled against professional venture capitalists (VCs) rather than the angel investor individuals or groups, although the emergence of institutional Super Angels may change things in the future. And so, I will continue the rest of this post by focusing on VCs and how you may avoid becoming another cautionary tale in your dealings with them.

Is the "Horror" real?

In my last post, I described how bad investors can kill your company. That horror is definitely real. Anecdotally, the depth and magnitude of grievances against VCs can only compete with one other group of professionals: LAWYERS! With the exception that there aren't as many VC jokes out in circulation because many of us still hope to raise some money from the VCs and don't want those jokes to be digitally traced back to us. (Although, as a former lawyer and VC, I do find the negativity with both professions to be somewhat... hyped).

And then sometimes the entrepreneurs are so deeply hurt (physically, psychologically and/or financially) that they throw caution to the wind and decide to drop a nuclear bomb on their bridge to the VC riches by going after them in the court of law (see, e.g., Epinions founders suing Benchmark and August Capital) or in the court of public opinion (see, e.g., ArsDigita co-founders' revelations). There is even a growing Quora thread on this topic.


In summary, this is spooky stuff indeed!

Antidote: Investor due diligence

Although it is hard to have any real guarantees, should you find yourself in need of VC money, doing your homework on your investors can lessen your risk and improve your chances of picking the right investors.

First thing to remember is that not all VC's are created equal. There are worlds of difference between VC firms and even between partners in the same firm. So, start your preliminary diligence well before you even send out your Executive Summary. And make sure to really dig in before you go too far down the path of negotiating a term sheet, as it becomes exponentially harder (if not impossible due to cognitive dissonance) to switch investors once you have a signed term sheet in place.


Things to investigate during diligence

Although it seems like a daunting task that would necessitate hiring an elite PI agency with former CIA/IRS credentials, most of the important stuff you would be looking for is already out there for you to see.

Reference Checks. Talk to former founders/executives that the VC firm (and more importantly, the partner on your deal) has invested in. Make sure to talk to companies where things did not go super smoothly (names of which you will most likely have to dig out on your own). Try to get a feel for how it is to work with this firm/partner during good times and hard times. Their behavior during hard times is especially important as I had mentioned before.

Portoflio Size and Composition. You need know how many other portfolio companies does the VC firm/partner care about, and whether they actually have the bandwidth to do the things you expect them to do. Also, you need to get a feel whether you fall within the sweet spot of the kind of companies this firm does well with, or you are one of the outliers. Then check against your gut to see how you feel about that. Also, note that typically larger firms with larger porfolio sizes tend to push their investments towards higher exit multiples rather than allow for earlier liquidity.

Porfolio Integrity. This is something that is often ignored. Does this firm have a history of investing in competitive companies in the same field? Some VCs actually do that. You need to know the truth, because as a portfolio company, you cannot stop your VCs from investing in your competitor if they chose to do so.

Number/Amount of Investments. Find out, over the lifetime of the current fund, how many investments the firm/partner is expected to make, and how far they are currently from meeting that quota and deploying the cash invested in them. This matters, because it will determine the amount of attention and care your startup is likely to get over the next few years. Also, if the firm is towards the end of the lifetime on their fund they will be more likely to look for faster liquidity events and will be very distracted during their upcoming fundraising cycle.

Available Funds. You need to have a realistic picture as to how much more cash this investor is likely to deploy into your company, which is a function of how much on average they spend on each portfolio company and whether they have enough cash left in the fund to satisfy that obligation given existing and projected investments.

History of Lawsuits/Disputes. You need to know whether the firm/partner on your deal is or has been involved in lawsuits. Again, those lawsuits can tell you a lot about skeletons in the closet, as well as the distractions that will likely take the attention of the firm away from you.

Risk Profile. Another thing to get a sense for is whether this firm/partner has the wherewithal to take some serious risks and take a market position (the way such firms like Kleiner Perkins or Sequoia Capital do), or whether they like to play it safe and will abandon you/your vision after hitting a rough patch.

Most of the above information is readily obtainable. It does take some investment of time, but can you afford not to spend the time on them?

Happy Halloween!

Caution: Bad investors kill good companies

Around Silicon Valley, we all believe that having a good idea is not enough, and it is rather the execution that counts. And myths abound about how savvy investors like Sequoia or Kleiner Perkins can make a difference between a blockbuster success and a lackluster startup. I accept all of that. However, what has been left out of the conversation is an examination of the impact that bad investors have on promising startups. Sadly, few entrepreneurs pay much attention to this issue at the time of fundraising. It is time for some healthy debate on this topic, and here is my first stab at it:

What is a "bad investor"?

Some entrepreneurs assume that the worst that an investor could possibly do is not to add value. That is not true! As I will explain below, a bad investor (like a bad friend) can totally distract, demoralize, and completely ruin the future of your company. More specifically, a bad investor is one without whom your startup would have actually had a better chance of succeeding.

How to spot a "bad investor"?

Typically, bad investors are those that are disengaged from the startup and the Board when the times are good, but become quite concerned and agitated as soon as the company hits a rough spot (e.g., a key employee departure, a drop in key metrics, appearance of a lawsuit, etc).

What is so "bad" about a bad investor?

The main problem with the behavior described above is that it sabotages your success by putting stress on you when you can least afford it. Here is why:

Every startup goes through ups and downs; it is just a part of the creative process of innovation, as we all know. And "creative" is the operative word here. In a startup, you try things, some work, most fail, and you try to learn and repeat the process with better results next time using as much creativity as you can manage. These creative iterations are to a large part dependent on outside-of-the-box thinking. This is especially true when you need to do some major pivoting work around your business model / customer acquisition strategy / etc. That means you will need to take some major risks. However, whenever you focus on risks, fear enters the picture and your brain literally shuts down its creative parts and goes into defensive/survival mode, which means you become physiologically incapable of finding the creative solutions to your problems. Most of us have first-hand experience of this phenomenon, which is also supported by a growing body of psychology experiments (see, e.g., feeling good increases possibility of insights).

So, here you are, on the verge of losing everything (your reputation, the trust of friends and family who believed in you and perhaps even invested their savings into your company, your employee's livelihood, and the list goes on and on) while trying to keep calm and not panic. And as a savvy entrepreneur, you may be able to push back the internal fears and stress to come up with some creative solutions and insights. But it becomes an order of magnitude harder to do so when you have, at the same time, one or more investors breathing down your neck, distracting, harassing, and perhaps even threatening you and other investors, second-guessing every move and chewing up your remaining brain cycles. It becomes pretty much impossible to be creative under those circumstances, which unfortunately spells disaster for your company, as you will be unable to find a solution to your predicament, no matter how trivial the solution may seem post mortem.

Lots of great companies were second ideas that rose from the ashes of their predecessors. And more likely than not, the investors in those companies were understanding and supportive during the tough times, expressing something like "Hey, I know you guys have been working really hard and it is okay if the startup doesn't make it. We knew the risks when we invested and were honored to have been a part of this journey with you."  And that is the kind of investor you want to have!