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Review – The First Tycoon (#review, #books, #capitalism, #history, #entrepreneurship)

Review – The First Tycoon (#review, #books, #capitalism, #history, #entrepreneurship)

The First Tycoon: The Epic Life of Cornelius Vanderbilt

by T.J. Stiles, published 2010

How and why did Cornelius Vanderbilt, steamship and railroad entrepreneur, become America’s “first tycoon” and in the process earn a fortune worth an estimated $100M in the 1870s? The simplest answer provided by this lengthy biography is that Vanderbilt was able to think about abstract entities such as corporations as representing competitive business opportunities in an age when most other people controlling them thought of them as profitable grants of privilege from the State (which they were). The result was that Vanderbilt thought strategically about his acquisitions in the sense of actively seeking to own things with identifiable competitive advantages (the best route, the lowest operating costs, network effects) which he would then exploit while slashing prices, while his competitors were stuck playing defense until they gave up and offered to buy him out in self-defense.

But the book really doesn’t offer enough specific and concrete evidence to validate this thesis, it’s really just a hunch and an attempt to read between the lines of what is offered. Like most biographers and historians, Stiles consistently fluctuates between the two extremes of failing to provide the necessary evidence to actually understand what was happening and why, and forcing a tortured narrative metaphor of “the capitalist as king/general” that ends up just confusing the issues. Vanderbilt is constantly in “rate wars”, is “battling” for control of companies and finds himself with an “empire” after yet another “conquest.” But we never hear this language in Vanderbilt’s own quotations (based upon written correspondence, newspaper interviews and courtroom testimony) which are numerous.

How Vanderbilt saw himself as a businessman and operator, and how Stiles chooses to depict him with his jarring anachronistic fadism are even more incongruous because Stiles himself spends much of the time arguing against his own descriptions! It is a puzzling choice. Perhaps books about old tyme capitalists don’t sell well without a not so subtle nod to the villainous Robber Baron laying in wait inside of all of them, but it’s a shame because the much more interesting story would’ve been the one told through Vanderbilt’s own eyes. Not to mention the fact that the Robber Baron myth is a lie perpetrated against Vanderbilt, not because he was a horrible monopolist but because he was such a pain in the ass to the horrible monopolists!

[The NYT] attacked him for, as he wrote elsewhere, “driving too sharp a competition” [… deriding] “competition for competition’s sake; competition which crowds out legitimate enterprises… or imposes tribute upon them” [… and called on] “our mercantile community to look the curse of competition fully in the face.”

Similarly, there are constant references to “the world Vanderbilt helped make” with reference to markets and businesses, the city of New York and the emergent nation of the United States of America. And while certainly the man’s actions and decisions were influential and impactful, Vanderbilt was not a statesman and never saw himself as anything more than an ambitious private citizen. There is not one example in the book of Vanderbilt plotting to remake the world in his own image. This is just another forced biographical trope that dopey readers, editors and authors seem to think makes a story ten times better to insist upon when the world just doesn’t have that many psychopaths in fact.

Other information missing from the story that seems essential to charting Vanderbilt’s rise: what he paid for various business assets and how he financed them, what he earned from them and what he paid in taxes, when he controlled an asset and when he was a minority partner, etc. Especially, we should like to know his leverage over time and how he was able to benefit from the various money panics that occurred repeatedly throughout his business career. One thing is for certain, he seemed to always be a buyer in such scenarios, never a seller, and he seemed comfortable being in control of his investments and making and enforcing operating policy, rather than being a mere financial speculator such as a partner like Daniel Drew might.

There are many charming bits of early American social and business vernacular we learn sprinkled throughout the book and its strength is in providing so many direct quotations from primary sources, especially the business media of the day, which really help to flavor the narrative and transport the reader to the place and time described. But this can also be a weakness, when the author ends up name-dropping a litany of capitalists involved in some deal or scheme and dribbling their worries and anxieties from private correspondence over several pages as the deal unfolds. I found it difficult to follow and mostly tuned out what I assume are supposed to be the action-packed moments of the story.

I first read this book shortly after it was published in 2010. I since decided to re-read it and while I wish I had had a bit more energy and focus when I did, I am glad of it. I took a new and different appreciation from some of the book’s events than I did on first pass, which suggests I’ve either improved my mental framework or at least changed it in meaningful ways over the last 7 years. Vanderbilt still comes across as a unique and heroic figure, a true titanic will. The narrative is as confused and cluttered as ever, and while I think there were the makings of a better, more concisely argued book here, and the author certainly has done his research, I am not convinced he did the right research or even fully understood what lessons he was taking away from it. The result is I’ve since downgraded the value of this particular work in my mind and think it belongs to a pretty standard class of historical biographies. Vanderbilt the man himself though is easily a five out of five as far as members of humanity are concerned!

I’ve got far more I’d be willing and able to discuss about this work and Vanderbilt as an example in private correspondence than I think I could fit into a short, coherent blog post, so really ruminating on this story will have to wait for another time and a different occasion.

3/5

Review – Innovation and Entrepreneurship (#innovation, #entrepreneurship, #books, #review, #business)

Review – Innovation and Entrepreneurship (#innovation, #entrepreneurship, #books, #review, #business)

Innovation and Entrepreneurship: Practice and Principles

by Peter F. Drucker, published 1985, 2006

This was a deep book with a ton of ideas and examples. It isn’t going to be easy for me to narrow it down to some concise takeaway, so I won’t try. This post will be more of an annotated outline of the contents of the book.

Where entrepreneurship comes from

Successful entrepreneurs are characterized by action, not inspiration. Innovations that seem big on paper may turn out to be minor businesses, while simple ideas can capture the imagination or appreciation of the marketplace in unexpected ways and scale beyond anyone’s dreams. Successful entrepreneurs are focused on creating value and making a contribution, not their potential financial returns.

There are four sources for innovation within an enterprise:

  1. The unexpected
  2. The incongruity
  3. Innovation based on process need
  4. Changes in industry structure or market structure

There are also three sources for innovation outside an enterprise:

  1. Demographics
  2. Changes in perception, mood or meaning
  3. New knowledge

The unexpected

Quotes:

The unexpected success is a challenge to management’s judgment… The unexpected success is simply not seen at all. Nobody pays any attention to it… No one even looks at the areas where the company has done better than expected… It forces us to ask, What basic changes are now appropriate for this organization in the way it defines its business? Its technology? Its markets? …It must be properly featured in the information management obtains and studies… Management needs to set aside specific time in which to discuss unexpected successes. Someone should always be designated to analyze an unexpected success and to think through how it could be exploited… The unexpected failure demands that you go out, look around, and listen. Failure should always be considered a symptom of an innovative opportunity, and taken seriously as such.

Questions to ask:

  • What would it mean to us if we exploited it?
  • Where could it lead us?
  • What would we have to do to convert it into an opportunity?
  • How do we go about it?

If something unexpected happens in one’s operations, it means there is a break in the knowledge between cause and effect and it likely represents an opportunity to innovate and improve.

Incongruities

Quotes:

If the demand for a product or a service is growing steadily, its economic performance should steadily improve, too. It should be easy to be profitable in an industry with steadily rising demand… The innovation that successfully exploits an incongruity between economic realities has to be simple rather than complicated, “obvious” rather than grandiose… Behind the incongruity between actual and perceived reality, there always lies an element of intellectual arrogance, of intellectual rigor and dogmatism… No customer ever perceives himself as buying what the producer or supplier delivers… [Businesses often complain of customers who are] “irrational” or “unwilling to pay for quality.” Whenever such a complaint is heard, there is reason to assume that the values and expectations the producer or supplier holds to be real are incongruous with the actual values and expectations of customers and clients… The incongruity within a process, its rhythm or its logic, is not a very subtle matter. Users are always aware of it.

The comment about the incongruity between what a customer perceives himself to be buying versus what the producer thinks they are delivering is an aspect of Jobs To Be Done theory. The main idea there is that customers are not purchasing a product or service, but a specific solution to a task that the product or service enables them to implement. An interesting entrepreneurial opportunity is to redefine one’s business and processes in terms of JTBD to look for closer alignment to customer needs and expectations.

Industry and market changes

Indicators of industry change:

  1. rapid growth of an industry
  2. perception and servicing of market inappropriate due to growth
  3. convergence of technologies that hitherto were seen as distinctly separate

Demographics

Quotes:

Demographics have major impact on what will be bought, by whom, and in what quantities.

The massive nineteenth-century migration from Europe to the Americas, both North and South, and to Australia and New Zealand, changed the economic and political geography of the world beyond recognition. It created an abundance of entrepreneurial opportunities. It made obsolete the geopolitical concepts on which European politics and military strategies had been based for several centuries. Yet it took place in a mere fifty years from the mid-1860s to 1914. Whoever disregarded it was likely to be left behind, and fast.

Static populations staying in one place for long periods of time have been the exception historically rather than the rule… It is sheer folly to disregard demographics… Demographic shifts in this century may be inherently unpredictable, yet they do have long lead times before impact, and lead times, moreover, which are predictable… What makes demographics such a rewarding opportunity for the entrepreneur is precisely its neglect by decisions makers, whether businessmen, public-service staffs, or governmental policymakers.

This unwillingness, or inability, of the experts to accept demographic realities which do not conform to what they take for granted gives the entrepreneur his opportunity. The lead times are known. The events themselves have already happened. But no one accepts them as reality, let alone as opportunity. Those who defy the conventional wisdom and accept the facts– indeed, those who go actively looking for them — can therefore expect to be left alone for quite a long time. The competitors will accept demographic reality, as a rule, only when it is already about to be replaced by a new demographic change and a new demographic reality.

For those genuinely willing to go out into the field, to look and to listen, changing demographics is both a highly productive and a highly dependable innovative opportunity.

The demographics section was one that surprised me most because demographics is something I don’t typically pay attention to, and I often find the attempt to categorize entire groups of people (“Millenials”) as behaving or valuing a certain way to be overwrought, but Drucker made sense of it for me in showing how predictable and inescapable various demographic realities are. In the broadest terms, demographics put floors and ceilings on certain aspects of market supply and demand, ie, there can only be so many people producing X, or so many people consuming Y. In more specific terms, it helps us to understand how cycles or patterns of generational growth (ie, this cohort of people is entering retirement, while this different sized one is entering adolescence) suggests where opportunities will congregate in the market space for products and services that are used by those cohorts. I think I want to try paying a lot more attention to this going forward and will investigate some demographic books I’ve heard about, such as Generations: The History of America’s Future.

The comment about demographics offering opportunity because it is neglected by others reminded me of Warren Buffett’s success. He possesses a deeply statistical mind and spent his childhood collecting what amounted to demographic data. He was obsessed with it. He also began investing at the cusp of the Baby Boom explosion which continued through most of his career. When he describes the reason he invested in a business like Coca-Cola, he explains it in demographic terms (X cokes a day, for Y people, with population growing at X% a year, translates to earnings of A).

This section also highlighted for me how important it is to may attention to the unique demographics of your market when hiring employees and designing customer processes. Ostensibly, if you knew a lot of your customers were of a certain age, gender, ethnic or educational background, you’d probably want to hire people like them to serve them, and design customer processes that compliment their world view. And you’d have an embedded advantage against competitors not thinking that deeply, who would look at what you’re doing and not understand why it was extra effective.

Changes in perception

Quotes:

When a change in perception takes place, the facts do not change. Their meaning does.

There is nothing more dangerous than to be premature in exploiting a change in perception. A good many of what look like changes in perception turn out to be short-lived fads.

New knowledge

Quotes:

The number of knowledge-based innovators that will survive when an industry matures and stabilizes is therefore no larger than it has traditionally been. But largely because of the emergence of a world market and of global communications, the number of entrants during the “window” period has greatly increased. When the shakeout comes, the casualty rate is therefore much higher than it used to be. And the shakeout always comes; it is inevitable.

Which ones will survive, which ones will die, and which ones will become permanently crippled– able neither to live nor to die — is unpredictable. In fact, it is futile to speculate.

This section made me think about the emergent “social media” industry, and the “blue chip” status of the FAANG stocks. These industries are too new for the shakeout to have taken place yet but it is startling indeed to think of a company with a $500B+ market cap ending up as roadkill from a future shakeup.

Principles of innovation – the do’s, the don’t, the conditions

Quotes:

All the sources of innovative opportunity should be systematically analyzed and systematically studied. The search must be done on a regular, systematic basis… [Ask] “What does this innovation have to reflect so that the people who have to use it will want to use it and see in it their opportunity?” …All effective innovations are breathtakingly simple. “This is obvious. Why didn’t I think of it?” …Effective innovations starts small. They try to do one specific thing. Otherwise, there is not enough time to make the adjustments and changes that are almost always needed for an innovation to succeed.

All strategies aimed at exploiting an innovation, must achieve leadership within a given environment. Otherwise they will simply create an opportunity for competition… Unless there is an immediate application in the present, an innovation is like the drawings in Leonardo da Vinci’s notebook– a “brilliant idea.” …When all is said and done, innovation becomes hard, focused and purposeful work making very great demands on diligence, on persistence, and on commitment.

[Ask] “Which of these opportunities fits me, fits this company, puts to work what we (or I) are good at and have shown capacity for in performance?” …[Successful entrepreneurs] are not ‘risk-takers.’ They try to define the risks they have to take and to minimize them as much as possible… Defending yesterday — that is, not innovating — is far more risky than making tomorrow… [They are] not “risk-focused” but “opportunity-focused.”

The entrepreneurial business

Quotes:

It is not size that is an impediment to entrepreneurship and innovation; it is the existing operation itself, and especially the existing successful operation… The new always looks so small, so puny, so unpromising next to the size and performance of maturity. Anything truly new that looks big is indeed to be distrusted… Entrepreneurial businesses treat entrepreneurship as a duty; if entrepreneurship and innovation do not well up in an organization, something must be stifling them. [They ask] “How can we make the organization receptive to innovation, want innovation, reach for it, work for it?” …Innovation must be part and parcel of the ordinary, the norm, if not routine.

[Ask yourself] would we now go into this product, this market, this distributive channel, this technology today? …[If you answer no, ask yourself] “What do we have to do to stop wasting resources on this product, this market, this distributive channel, this staff activity?” …Every organism needs to eliminate its waste products or else it poisons itself.

In companies that are managed for entrepreneurship, there are therefore two meetings on operating results: one to focus on the problems and one to focus on the opportunities. …”What did we do that turned out to be successful?” “How did we find the opportunity?” “What have we learned, and what entrepreneurial and innovative plans do we have in hand now?”

A member of the top management group sits down with the junior people from research, engineering, manufacturing, marketing and accounting and so on… This practice has one built-in requirement. Those who suggest anything new, or even a change in the way things are being done, whether in respect to product or process, to market or service, should be expected to go to work. They should be asked to submit, within a reasonable period, a working paper to the presiding senior and to their colleges in the sessions, in which they try to develop their idea. What would it look like if converted into reality? What in turn does the reality have to look like for the idea to make sense? What are the assumptions regarding customers and markets, and so on. How much work is needed… how much money and how many people… and how much time? And what results might be expected?

“What results do we expect from this project? When do we expect those results? When do we appraise the progress of the project so that we have control?” …For the existing business to be capable of innovation, it has to create a structure that allows people to be entrepreneurial.

In this section, Drucker argues that entrepreneurship is a culture and a practice, not a characteristic of being small, new or in a technological field. Any company can be entrepreneurial if it creates the right conditions for entrepreneurial thinking and acting, is open to entrepreneurial discoveries and treats entrepreneurship as an important, embedded business practice (much like it would treat having good accounting controls, or written customer processes).

One idea I had after reading this was to implement something like an  Innovation Circle/Council within the company, a rotating and inclusive membership of line managers and staff, asking questions like:

  • What do you need help with? Where do you seem to get stuck or overwhelmed?
  • What went well that you can teach to others?
  • What ideas have you had recently for improving the way we do business?

Entrepreneurship in the service institution

Quotes:

Failure to attain the objectives in the quest for a “good” only means that efforts need to be redoubled. The forces of evil must be far more powerful than expected and need to be fought even harder.

For thousands of years the preachers of all sorts of religions have held forth against the “sins of the flesh.” Their success has been limited to say the least. But this is no argument as far as the preachers are concerned. It does not persuade them to devote their considerable talents to pursuits in which results may be more easily attainable. On the contrary, it only proves that their efforts need to be redoubled. Avoiding the “sins of the flesh” is clearly a “moral good”, and thus an absolute, which does not admit of any cost/benefit calculation.

It needs something that is genuinely attainable and therefore a commitment to a realistic goal, so that it can say eventually, “Our job is finished.” …If an objective has not been attained after repeated tries, one has to assume that it is the wrong one. It is not rational to consider failure a good reason for trying again and again.

A central economic problem of developed societies during the next twenty or thirty years is surely going to be capital formation; only in Japan is it still adequate for the economy’s needs. We therefore can ill afford to have activities conducted as “non-profit,” that is, as activities that devour capital rather than form it, if they can be organized as activities that form capital, as activities that make a profit.

This will date this post, but I think there are a lot of parallels in this paragraph and the problems it touches upon to what is going in the US federal government and political system with accusations of improprieties with Donald Trump. So far, no one has come up with a credible claim and evidence that Trump has done something nefarious, yet the more failures that are revealed, the more emboldened the opposition becomes that they must resist Trump and stop him before it’s too late. It’s comical.

The larger point here is that because service organizations don’t have a simple Profit/Loss acid test like a commercial business, they need some other objective KPI connected to a limited duration/scope mission they can look to to see if they’re effective.

The philosophical point in the last paragraph is also interesting. Most modern commentators would argue we have too much capital, not too little, and too much for-profit businesses and entities. The rise of “social entrepreneurship” is part of this belief that young, energetic people should devote themselves to changing the world, for free. I think they’re wrong and Drucker was prescient. But then, he studied economics and they haven’t, so that is no surprise. In fact, one of the joys of reading this book is that Drucker is one of the last great German/Viennese intellectuals of the 20th Century, which means he is widely read and knowledgeable on the subjects he opines on. That is a rarity in the 21st Century.

The new venture

Requirements:

  • a focus on the market
  • planning for cash flow and capital needs ahead of time
  • building a top management team long before the new venture actually needs one and long before it can actually afford one
  • the founding entrepreneur to decide on his or her own role, area of work and relationships

Quotes:

One cannot do market research for something genuinely new.

The new venture needs to build in systematic practices to remind itself that a “product” or a “service” is defined by the customer, not by the producer.

Growth has to be fed. Growth in a new venture demands adding financial resources rather than taking them out. Growth needs more cash and more capital. If the growing new venture shows a “profit” it is a fiction; since taxes are payable on this fiction in most countries, it creates a liability and a cash drain rather than “surplus.” The healthier a new venture and the faster it grows, the more financial feeding it requires.

“What will the venture need objectively by way of management from here on out?”

The idea of growth needing feeding, and the tax implications of realizing profitability too soon, was a challenging thing for me to read. Of course, it brings to mind the growth models of companies like Uber and Amazon. I still don’t know what to make of this. Part of me thinks if you can’t grow profitably, you aren’t really growing at all, but consuming capital and putting it on an income statement. But what Drucker is saying also makes sense in that there could be a business model that can be profitable at a meaningful scale and between then and now, it requires great investment to get there.

Entrepreneurial strategies

Quotes:

“Hitting them where they ain’t” is a strategy that involves serving markets created by pioneers which are currently being serviced poorly.

“Creaming” is a violation of elementary managerial and economic precepts. It is always punished by loss of market… “Quality” in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. Customers pay only for what is of use to them and gives them value. Nothing else constitutes “quality.”  …A “premium” price is always an invitation to the competition… The only way to get a higher profit margin is through lower costs. Higher prices hold an umbrella over the competitor. “Premium” prices, instead of being an occasion for joy should always be considered a threat and dangerous vulnerability.

Don’t make the mistake of maximizing versus optimizing… A benevolent monopolist cuts his prices before a competitor can cut them. And he makes his product obsolete and introduces new product before a competitor can do so.

Successful practitioners of the ecological niche take the cash and let the credit go. They wallow in their anonymity.

Price is usually almost irrelevant in the strategy of creating utility. What is truly a “service,” truly a “utility” to the customer? …What Gillette did was to price what the customer buys, namely, the shave, rather than what the manufacturer sells… It charges for what represents “value” to the customer rather than what represents “cost” to the supplier… What does the customer really buy?

One question it seems like one would want to ask when reviewing one’s operations for entrepreneurial opportunities is, “Does this represent value to our customer?” One should eliminate if the answer is no, or try to find ways to do more of that if the answer is yes.

Optimizing versus maximizing is a really interesting conundrum. It’s connected to the idea of market segmentation. When one maximizes, one is trying to satisfy every single user through the same product or service. It leads to opportunities for disruption and more appropriate market segmentation, as well as the weakening and irrelevancy of the incumbent and often the loss of the advantage that gave it its initial market position. An extreme offender in this regard speaking contemporaneously is the behavior of “luxury” auto makers like Lexus, BMW and Mercedes, who are constantly moving down-market into silly, small, over-priced offerings in an effort to make luxury more accessible. They realize they are fighting over the same limited number of actually wealthy, luxury customers, and they still want to grow their production and so they create new markets of non-luxury buyers to serve.

You have to accept the limits of your market and create a new specialized product or service to meet the needs of those outside of it. Any other path is folly. But folly is the heritage of mankind.

Thinking about service and utility in terms of the customer’s perspective, I think you could explore the idea of when the customer chooses a competitor, what are they buying from them? It’s easy to think they have just made a decision to go with a different person or group providing the same thing, but it could be more likely that they have gone with a company offering a different thing entirely, as far as they evaluate utility.

4/5

Review – Grinding It Out (#books, #review, #business)

Review – Grinding It Out (#books, #review, #business)

Grinding It Out: The Making of McDonald’s

by Ray Kroc, with Robert Anderson, published 1992

Reading through the stories of great entrepreneurs, business people and politicians like Cornelius Vanderbilt or Warren Buffett, it is easy to find a sentiment much like this one from Ray Kroc:

Ethel [his wife] used to complain once in a while about about the amount of time I spent away from home working. Looking back on it now, I guess it was kind of unfair. But I was driven by ambition.

I find this sentiment remarkable for a few different reasons.

The first is how common it is. It seems to suggest that achieving “great things” in a particular field of enterprise is not possible without neglecting one’s family and other personal relationships in favor of the “productive” relationships and activities.

The second is how little awareness of this tradeoff many such people seem to possess, at least until they reach the end of their life and all their glory has already been gotten. Then, as they contemplate their state of affairs, either looking back on the empire they built or ruminating regretfully now that they are deposed (violently or voluntarily), they seem to re-evaluate how they spent their time and decide they came up short in considering family time less important than it should have been. They also seem to be either disconnected from the damage they do to their children and their psyches, or else try to evade such recognition– I think Ray Kroc mentioned his daughter all of two times in this 200 page telling, and while his daughter may not have been critical to the story of building McDonald’s, you’d think she would’ve provided enough value and motivation in Kroc’s life to merit more than a couple passing mentions!

The third is how excusable such high achievers seem to find their behavior to be in retrospect. “But…” is a permission word. It negates what comes before and offers cover. Yes, Ray Kroc was unfair, but… It suggests a different moral framework for studying life or a particular circumstance, one in which the rules don’t really apply and the ends justify the means.

The fourth is what a temptation these great projects must’ve provided to these people, to ignore their family, their health or any number of other values. If I was a successful paper cup salesman but stumbled upon the idea of McDonald’s myself, could I have resisted the temptation to build it and in the process knowingly give up my family, friends, physical well-being, etc.? It is perhaps easy to sit in judgment of another person’s efforts and decisions when the attraction of my own responsibilities is relatively less compelling. It’s easy to go home to my family at the end of the day as they typically offer me more interest and excitement. But would that be the case if millions of dollars and a global business organization hung in the balance? That I don’t know for sure, and perhaps you can’t know until you’re tempted with it.

But that leads to the fifth point, which is to consider whether a story like Kroc’s and McDonald’s could be told any other way. What if in the first 27 pages of the story of this business the quote above was not to be found, nor anywhere in the 173+ pages that followed? What if Kroc didn’t get divorced (twice), didn’t have a string of health issues along the way, came home and kissed his wife and daughter on the forehead five nights a week and spent most of each month at home and around town rather than around the country? What choices would’ve needed to be made differently to support that outcome, and how would the company look different either internally or competitively if that had been the case? How big would Berkshire Hathaway be if Buffett had raised his own children and loved his first wife more considerately instead of reading so many damn books and annual reports?

To ask may be to answer, but it’s frightening (hopeful?) to think otherwise.

Besides neglecting important obligations and personal considerations, what else do stories like these seem to tell us about those who achieve outsize success?

Incredible stamina seems to be part of it. They don’t just work hard, they work all the time. But again, it’s hard to know if this is part of the person, part of the responsibility and opportunity, or both. How would a person not work hard and often at something they didn’t love to the point they were mesmerized by it? Enthralled is a good way to describe the state of mind in relation to the idea of the thing being pursued here.

Also, simplicity. Maybe it’s the bad ghostwriting designed to break the story down for a lowbrow audience but the way these people talk about what it is they did, they rarely come across as great geniuses, though they’re often wits (Buffett is a notable exception here, and Vanderbilt was clearly “sharp”, a word for cunning back then, though it wasn’t clear he was necessarily “intelligent”, while it was clear he was no buffoon). The grand strategy and complexity is often seen in hindsight, knowing how the story ends and having years and years to tell it and thus accumulate various trappings which may or may not be integral to the success. In Kroc’s own words, it was all about Quality, Service, Cleanliness and Value and then spreading it across the land. Their financing was complicated, but it’s not clear it needed to be, especially if the company was less levered and less insistent on growing as fast as it did. Being focused seems obvious, yet important enough to mention it.

Where does that leave me? If there’s a way to build a legacy that doesn’t involve neglecting one’s family and health, perhaps by being more patient, moving more slowly or being less obsessed about the outcome, that is the kind of legacy I want to build. And I have to wonder what kind of personal insecurity or individual idiosyncrasy or whatever it is, that I seem not to have, that would not allow a person to make that choice given the alternative.

But if the only way to make things great is to trash some other part of your life and leave a smoking crater behind, a crater that’s especially painful in the vulnerability of old age, then I guess I better prepare myself mentally for more humble achievements. I’m just not interested in those kinds of tradeoffs and I don’t understand how such achievements could be satisfying without a family to enjoy them with and the sound mind and body necessary to experience it all.

3/5

Review – Zero to One (#startups, #review, #books)

Review – Zero to One (#startups, #review, #books)

Zero to One: Notes on Startups, Or How to Build the Future (buy on Amazon.com)

by Peter Thiel, published 2014

No wonder Peter Thiel is encouraging young people to avoid college and start companies– if the best lecture on startup entrepreneurship is Peter Thiel’s Stanford class-turned-book, it’s clear how vapid the value offering is in the average college course.

Thiel encourages the reader to build companies that make the world a better place on a principled basis, and he strongly advises to avoid competitive markets. And while he says that the book is not and can not be a how-to book for starting a company but rather a set of guidelines for how to think about what it takes to succeed as a startup, the book’s content doesn’t appear revelatory for any but the most amateur business mind. Maybe it would shock some people to learn they have to have a plan for selling their product, not just designing it, but if that’s the level you’re at (or that’s the “truth” you’re wedded to), is Peter Thiel’s book really going to be the bridge between your idea and massive success? Or any success?

It reads much more as a personal journal, reflecting on funny stories and anecdotes about Thiel’s own success with PayPal, than it seems to be a guide to entrepreneurship principles. Most of the “rules” are validated by some quirky thing that happened to Thiel and his mafia, for example, deciding not to invest in green energy companies because their CEOs were too well dressed and everyone knows real tech people wear tshirts and jeans. Huh?

It is also more useful as a descriptive work that explains entrepreneurship phenomena witnessed after the fact, rather than anything with a predictive quality to it. In other words, few entrepreneurship success stories will have failed to check the various boxes Thiel covers, but it’s also likely that many failures will have checked them, too. The book provides more insights into questions such as, “Why did Company X manage to grow so rapidly in Market Y?” rather than answering such questions as “How can Company X grow rapidly in Market Y?”

I was much more impressed by Thiel’s short speech pre-election to the National Press Club, outlining his reasons for supporting Donald Trump:

You can disagree with his reasons and his choice, but there is clearly a set of principles he believes in and an overall framework for understanding social issues that guided him to throw in his lot with Trump. That’s more educational than this book, unfortunately.

2/5

Notes – Stanford Graduate School of Business Search Fund Primer (#searchfund, #business, #investing)

Notes – Stanford Graduate School of Business Search Fund Primer (#searchfund, #business, #investing)

Notes on “A Primer On Search Funds” produced by the Stanford Graduate School of Business

“The Search Fund”

  • Greater than 20% of search funds have not acquired a company
  • Stages of the Search Fund model:
  • Raise initial capital (2-6mos)
  • Search for acquisition (1-30mos)
  • Raise acquisition capital and close transaction (6mos)
  • Operation and value creation (4-7+ years)
  • Exit (6mos)
  • SFs target industries not subject to rapid tech change, easy to understand, fragmented geographic or product markets, growing
  • Highest quality deals are found outside broker network/open market due to lack of auction dynamics
  • Research shows that partnerships are more likely to complete an acquisition and have a successful outcome than solo searchers (71% yielded positive return, 15 of top 20 performing funds were partnerships)
  • Principals budget a salary of $80,000-120,000 per year w/ median amount raised per principal $300,000~
  • Majority of the economic benefit of SF comes through principal’s earned equity; entrepreneur/partners receive 15-30% equity stake in acquired company in three tranches
  • Investors typically receive preference over the SFer, ensuring investment is repaid, with return attached, before SFer receives equity value
  • Individual IRR from 2003-2011 median was not meaningful, heavily skewed toward 75th percentile where median was 26% in 2011; 57% of individual IRRs were not meaningful in 2011; the median fund destroyed capital in 2009 (0.5x) and 2011 (0.8x); 58% in 2011 broke even or lost money
  • Half of the funds that represent a total or partial loss were funds that did not acquire a company; biggest risk is in not acquiring a company at all
  • Median acquisition multiples: 1.1x revenues; 5.1x EBITDA
  • Median deal size, $8.5M

“Raising a Fund”

  • Search fund capital should come from investors with the ability and willingness to participate in the acquisition round of capital raising

“Search Fund Economics”

  • Search fund investors often participate at a stepped up rate of 150% of original investment in acquired company securities

“Setting Criteria and Evaluating Industries”

  • Desirable characteristics for a target industry: fragmented, growing, sizable in terms of revenues and number of companies, straightforward operations, early in industry lifecycle, high number of companies in target size range
  • Desirable characteristics for a target company: healthy and sustainable profit margins (>15% EBIT), competitive advantage, recurring revenue model, history of cash flow generation, motivated seller for non-business reasons, fits financial criteria ($10-30M in revs, >$1.5M EBITDA), multiple avenues for growth, solid middle management, available financing, reasonable valuation, realistic liquidity options in 3-6 years
  • Key challenge is “know when to take the train” lest a SF never leaves the station waiting for the perfect opportunity
  • Ideally, seller is ready to transition out of the business for retirement or personal circumstances or has something else they’d like to do professionally
  • Experience shows it is better to pay full price for a good company than a “bargain” for a bad one
  • Idea generation: SIC and NAICS codes, Yahoo! Finance, Thomson Financial industry listings, Inc. 5000 companies, public stock OTC and NASDAQ lists and even the Yellow Pages; generate a list of 75 potential industries to start
  • Target industries buoyed by a mega-trend
  • Can also target an industry in which the SFer has worked and possesses an established knowledge base and network
  • Some focus on 2-3 “super priority” industry criteria (eg, recurring revenues, ability to scale, min # of potential targets, etc.)
  • Objective is to pare down the industry target list to 5-10 most promising
  • Basic industry analysis (Porter’s five forces, etc.) is then used to narrow from 10 to 3; SFers use public equity research and annual reports for market size, growth, margin benchmarks; also Capital IQ, Hoover’s, Dun & Bradstreet and One Source
  • Industry insiders (business owners, trade association members, sales or business development professionals) and industry trade associations or affiliated ibanks and advisory firms are primary methods of research and often have general industry research or white papers available
  • Next step is to create a thesis to codify accumulated knowledge and compare opportunities across common metric set in order to make go/no-go decision
  • In order to become an industry insider, SFers typically attend tradeshows, meet with business owners, interview customers and suppliers and develop “River Guides”

“The Search”

  • Median # of months spent searching, 19
  • 54% spend less than 20 months searching, 25% spend 21-30 months, 21% spend 30+ months
  • Track acquisition targets with CRM software such as Salesforce, Zoho, Sugar CRM
  • Bring up financial criteria and valuation ranges as early as possible when speaking to potential acquisition targets to save everyone time
  • A company that is too large or too small as an acquisition target may still be worth talking to for information
  • You must immediately sound useful, credible or relevant to the owner; deep industry analysis should already have been performed at this stage
  • Tradeshows can be a critical source of dealflow
  • If a particular owner is not willing to sell, ask if he knows others who are
  • “River Guides” are typically compensated with a deal success fee, usually .5-1% of total deal size
  • Boutique investment banks, accounting firms and legal practices specializing in the industry in question are also a good source of deals
  • The business broker community itself is extremely large and fragmented; could be a good rollup target?
  • Often, brokered deals are only shown if a private equity investor with committed capital has already passed on the deal, presenting an adverse selection problem
  • Involve your financing sources (such as lenders and investors) early in the deal process to ensure their commitment and familiarity

“Evaluating Target Businesses”

  • Principles of time management: clarify goals of each stage of evaluation and structure work to meet those goals; recognize that perfect information is an unrealistic goal; keep a list of prioritized items impacting the go/no-go decision
  • Stages: first pass, valuation/LOI, comprehensive due diligence
  • It is in the best interest of the SFer to tackle core business issues personally during due diligence as it is the best way to learn the details of the business being taken over
  • Adding back the expenses of a failed product launch rewards the seller for a bad business decision; adding back growth expenses gives the seller the double benefit of capturing the growth without reflecting its true cost
  • Due diligence may also uncover deductions to EBITDA or unrealized expenses that reduce the “normalized” level of earnings (undermarket rents, inadequate insurance coverage, costs to upgrade existing systems, etc.)

“Transitioning Ownership and Management”

  • Create a detailed “Transition Services Agreement” with the seller, a legal contract where specific roles, responsibilities, defined time commitments and compensation are agreed prior to the transaction close
  • The first 100 days should be dedicated to learning the business
  • Businesses consist of people, and people need communication; great leaders are always great communicators
  • “Don’t listen to complaints about your predecessor, this can lead to a swamp and you don’t want to be mired there.”
  • The goal is to learn, not to make immediate changes
  • Outwork everyone; be the first person in and the last to leave
  • Many SFers insert themselves into the cash management process during the transition period by reviewing daily sales, invoices and receipts and signing every check/payment made by the company
  • The company’s board should be a mix of deep operational experience, specific industry or business model experience and financial expertise
  • The seeds of destruction for new senior leaders are often sown in the first 100 days
Entrepreneurial Opportunity Cost (#socialism, #bureaucracy, #freemarket)

Entrepreneurial Opportunity Cost (#socialism, #bureaucracy, #freemarket)

I am wondering out loud here: when people attempt to do some kind of modeling of the various opportunity costs of having government provide X, versus having “the market” provide X, do they factor in the opportunity cost of lost entrepreneurial progress inherent in bureaucratic provisioning?

For example, if someone was arguing that the government should control automobile production, is there any calculus attempted that examines the present value of foregone future improvements in automobile production and design that will inherently be included in bureaucratic provisioning?

A further example– the roads and highways we drive on, which have been provisioned by government for decades, haven’t changed all that much. But cars have made huge technological leaps in terms of how they’re designed and built. Cars have entrepreneurs behind them, roads and highways have bureaucrats behind them.

I’m not sure I am articulating my inquiry as coherently as I might like to but there it is nonetheless!

Review – Losing My Virginity (@richardbranson, #entrepreneurship, #books, #review)

Review – Losing My Virginity (@richardbranson, #entrepreneurship, #books, #review)

Losing My Virginity: How I Survived, Had Fun and Made a Fortune Doing Business My Way

by Richard Branson, published 2011

 

Spoiler alert– this book is choppy and inconsistent in the pacing and entertainment factor of its narrative. You really need to read between the lines a bit to get the most value out of it. That being said, it’s surprisingly literary for a dyslexic former publisher of a student magazine and I found Branson’s repeated reference to his high-altitude balloon voyage trials to be an outstanding metaphor for his life as a businessman and entrepreneur.

You see, in Branson’s ballon journeys, the key factors of any consistency were that: a.) Branson was knowingly and openly taking what he perceived to be a potentially life-threatening risk b.) Branson was almost always underprepared for it, or decided to go ahead with his attempt despite early warnings that something was amiss and c.) nonetheless, he somehow managed to survive one disaster after another, only to try something bigger and bolder the next time around.

And this is quite similar to the way he comported himself as an entrepreneur on so many occasions. Again and again, he’d make a daring foray into a business, market or industry he didn’t quite understand, the company would stumble after an early success leaving them all on the brink of failure and yet, each time they’d double down and somehow win.

In that sense, Branson is a perfect example of survivorship bias. On the other hand, having so many narrow misses that turn into massive accelerators of a person’s fortune start to make you wonder if isn’t mostly luck but rather mostly skill.

As an entrepreneurial profile, “Losing My Viriginity” is full of all kinds of great successes and astounding failures. With regards to the failures, something I found of particular interest was the fact that Branson’s company were victims of some of the most common pitfalls of other businesses throughout its early history: taken for a ride by indomitable Japanese owners/partnerships in the 80s, repeated victim of the LBO-boom and the private/public buyout-cycle in the 80s and 90s. When you read these stories in the financial press it always seems to happen to the rubes of the business world, but Branson’s foibles help one to realize even rather sophisticated types can get taken in now and then.

The volatility in Branson’s fortunes do leave one with a major question though, namely, why did Branson’s company ultimately survive?

This isn’t a Harvard Business School case study so I don’t mean to pass this off as a qualified, intelligent answer to that question, but I will attempt a few observations and, in typical HBS fashion, some or all of them may be contradictory of one another and none will be provided with the precise proportional contribution they made to the end result:

  • the group had a cultural commitment to change and dynamism; they were not so much their businesses, but a culture and group of people who did business a particular way, a true brand-over-merchandise, which allowed them to reinvent themselves numerous times
  • the group strategically focused on being the low-cost provider in their industry, usually while simultaneously attempting to pursue the seemingly mutually exclusive goal as being seen as the highest quality offering as well
  • the group focused on serving customers but equally saw treating its employees with concern as an important value
  • the group consciously created a brand that could be applied to diverse businesses (see point #1)
  • the group pursued businesses that seemed “interesting” or sensually appealing to it, which ensured that everyone involved was motivated to do well because they liked the work they had chosen

Another thing I noticed about Branson and the development of his company was the attention he paid to the composition of management and owners and his dedication to weeding out those who were not good fits in a charitable way. Channeling the “best owner” principle, Branson made a conscious effort to buy out early partners whose vision and tastes did not match the current or future vision of the group. In this way, the company maintained top-level focus and concentration on a shared strategic vision at all times, sparing itself the expense and distraction of infighting and wrangling over where to go next and why.

Another aspect of the company’s resilience had to do with its operational structure. Branson built a decentralized company whose debts and obligations were kept separate. In an environment where new ventures were constantly subject to total failure, this arrangement ensured that no one business failure would bring the entire group down.

The final lessons of the Branson bio were most instructive and had to do with the nature and value of forecasting.

The first lesson in forecasting has to do with the forecasts others make of us, or the world around us. For example, Richard Branson had no formal business training, he grew up with learning disabilities (dyslexia) and he was told very early on in his life by teachers and other adult and authority figures in his life that he’d amount to nothing and his juvenile delinquency would land him in prison. Somehow this worthless person contributed a great deal to society, through business and charity, and by most reasonable measures could be considered a success, making this forecast a failure. If one had taken a snapshot of the great Warren Buffett at a particular time in his adolescence, when the young boy was known to often take a “five-finger discount” from local department stores, it might have been easy to come up with a similar forecast about him.

I’m not sure how to succinctly sum up the concept there other than to say, “Things change.” Most forecasts that involve extrapolating the current trend unendingly out into the future will probably fail for this reason.

The second lesson in forecasting has to do with how we might attempt to forecast and plan our own lives. When we have 50, 60, 70 or more years of a person’s life to reflect on, it is easy to employ the hindsight bias and see how all the facts of a person’s life were connected and led them inexorably to the success (or infamy) they ultimately achieved. And certainly there are some people, again using Buffett as an example, who from an early age were driven to become a certain something or someone and so their ability to “predict their future selves” seemed quite strong.

But the reality is that for the great many of us, the well-known and the common alike, we really don’t have much of a clue of who we are and what we’ll ultimately become. The future is uncertain and, after all, that’s the great puzzle of life that we all spend our lives trying to unravel. Richard Branson was no different. He was not born a billionaire, in a financial, intellectual, personal or other sense. He had to learn how to be a businessman and how to create a billion dollar organization from scratch. Most of the time, he didn’t even know he was doing it. In other words, HE DID NOT KNOW AHEAD OF TIME that he would become fabulously wealthy, and while he was hard-working and driven, it doesn’t even appear he purposefully intended to become so.

Maybe we should all take a page from Branson’s book and spend less time trying to figure out what’s going to happen and more time just… happening. We could sit around all day trying to figure life out, or we could follow the Branson philosophy where he says, “As for me, I just pick up the phone and get on with it.”

3/5

Why Do Former Presidents And Politicians Need “Jobs”? And How Do They Manage To Find Them In Silicon Valley? (#corruption)

Why Do Former Presidents And Politicians Need “Jobs”? And How Do They Manage To Find Them In Silicon Valley? (#corruption)

I got a good chuckle out of this today, “Obama hints at a future in VC“:

“had I not gone into politics, I’d probably be starting some kind of business,” said Obama. “The skill set of starting my presidential campaigns—and building the kinds of teams that we did and marketing ideas—I think would be the same kinds of skills that I would enjoy exercising in the private sector. … The conversations I have with Silicon Valley and with venture capital pull together my interests in science and organization in a way I find really satisfying.”

The rest of the article contains quotes from VCs good-humoredly sniffing Obama’s jock strap and suggesting candidly that he would make an excellent high risk capital allocator. I don’t even need to provide examples of why these disclosures are a bunch of bald-faced lies. You can make up your own punchlines.

Instead, I am pondering the following: does something like this represent a sign of how crony Silicon Valley is and how dependent upon government privilege it is for the profit it generates? Or does it represent how pragmatic this community of businessmen is in co-opting the enemy that is continually placing new obstacles on its road to riches?

I am not sure I am comfortable with either reality but the latter has merit in that one could at least argue one is acting in self-defense, and that’s more noble than getting behind the guns and pointing them at competitors and customers as in the case of the former.

 

Who Is YCombinator Trying To Fool With Their New Cities Research Project? (@ycombinator, @sama, #centralplanning, #economics)

Who Is YCombinator Trying To Fool With Their New Cities Research Project? (@ycombinator, @sama, #centralplanning, #economics)

Two friends independently linked me to YCombinator’s “New Cities” blog post and it interested me enough that I thought to write about it in brief. The idea of a new city started “from scratch” excites me as an advocate of the private property society. I have a hard time imagining how my preferred values and ideas for peaceful, voluntary social arrangements will come to be implemented incrementally within the existing coercive institutions we call “city governments”. Starting with a bare plot of land, wholly-owned by one or more sympathetic parties and going from there seems like the only viable option for realizing this ideal and building a working model.

I was excited, then, to see that some well-known and resourceful people in the Silicon Valley VC community seem to be on to the same idea. But then I started reading their short post and I ended up with a lot of questions, the primary one being “What are they really trying to accomplish with this?”

I’m having trouble trusting their motives as sincere because of this: if they’re trying to build new cities, and they think they need to conduct “research” to figure out things like…

  • How can we make and keep housing affordable? This is critical to us; the cost of housing affects everything else in a city.

  • How can we lay out the public and private spaces (and roads) to make a great place to live? Can we figure out better zoning laws?

  • What is the right role for vehicles in a city?  Should we have human-driven cars at all?

  • How can we have affordable high-speed transit to and from other cities?

  • How can we make rules and regulations that are comprehensive while also being easily understandable? Can we fit all rules for the city in 100 pages of text?

  • What effects will the new city have on the surrounding community?

…they could prop open a free copy of Rothbard’s Man, Economy and State, Scholar’s Edition (with Power and Market) and start reading the basic economic theory underlying these questions, with special emphasis on the sections about “The Economics of Violent Intervention in the Market” which specifically deal with the problems they mention which relate to artificial scarcity of housing, zoning laws, street use permitting, mass transit policies and legislative efficiency. All the brainwork has been done for them, there is no need to reinvent the wheel and “discover” these effects independently if only they will consider what Rothbard has to say on the matter.

In fact, anyone who has read such material would immediately look at the “high-level questions” the YC Research project hopes to think through and notice the flawed premises evident in asking them. For example, asking “What should a city optimize for?” implies a city has some kind of monolithic identity and singular purpose, rather than being an unplanned, spontaneous outcome of the individual plans and values of the multitude of people who compose it. In asking the wrong questions, this project is doomed to arrive at arbitrary answers that are worse than wrong– they will be unknowledge which will set people back in believing it to be true and acting on it.

I don’t expect anyone at YCombinator or the research project to take a concern like this seriously, because I don’t believe their stated motivation is authentic. If it was, I would expect them to study the conclusions of 350+ years of economic pondering on these very unoriginal curiosities before proceeding with their experiment, which will never happen.

So my question remains. What are they really trying to accomplish with this? (And their Basic Income research project, which almost seems like expertly engineered trolling for the same reason I question the motivation of this New Cities project.)

 

 

Ko School, An Incubator For Middle Schoolers? (#entrepreneurship, #education)

Ko School, An Incubator For Middle Schoolers? (#entrepreneurship, #education)

A friend in Dallas told me about an alternative educational institution he recently learned about, Ko School, located in Austin, TX. The school bills itself as “focused on ensuring that you have the skills, habits, knowledge, and attitudes to thrive in a rapidly changing world” and appears to provide students with both a standard STEM education as well as an entrepreneurship curriculum centered on “the three pillars of Authentic Leadership, Personal Development, and Autodidacticism”.

One of the founders has given a few TED Talks, here is a recent one:

I don’t know much more about it than this at present. I plan to do more research and I am making a note here for future reference.