Economics for One » Entrepreneurship

High Tech Boiler Room

rick — Wed, 22 Apr 2009 03:21:38 +0000

The 2000 film Boiler Room depicts the seedy world of the “pump-and-dump” scam. In it, a broker purchases a large block of public stock in a shell (i.e. empty) company. The firm then calls potential clients to pitch them the same stock. This drives up (“pumps”) the price, making it appear to be a runaway stock, thus attracting more buyers and driving the price higher.

When the price is high enough, the broker “dumps” their own shares at a huge profit and walks away. The result is that the buyers are left holding stock in a worthless, basically non-existent company, which promptly falls back to zero, wiping out the investors.

Which brings us to Silicon Valley. Over the past decade or so, Silicon Valley has morphed from a region that was the builder of great companies (Apple, HP, Intuit, Cisco, Oracle, etc), into perhaps the greatest generator of “pump and dump” stocks.

Many people who live in Silicon Valley have complained about the changes that have taken place over the past decade. Venture Capitalists still like to claim that their primary interest is building great companies. Many of Silicon Valley’s founding VCs (Art Rock, Tom Perkins, etc) used to believe that if they built great companies, the money would follow. So they focused on building great companies.

But now it s

eems the VC community is more interested in pumping up their companies, getting “an exit” (i.e. dumping), and moving on. Today, if they happen to buil

d a great company along the way, that’s terrific. But it is far from the primary motivation.

Any entrepreneur can tell you about the emphasis VCs place on having a solid “exit strategy.” But while VCs will sometimes ask about a “business model” how many ask about the company’s “business strategy?” (Answer: None.) And no, a business model is not a business strategy, any more than an exit model is an exit strategy. The model is just the form it will take, such as “selling tickets”, while the strategy is how you are going to go about doing it successfully (e.g. “door-to-door with a fleet of hourly workers familiar with the people who live in the neighborhood, hired from local churches.”)

And the entrepreneurs aren’t much better. Although many entrepreneurs are still driven by a desire to see their products come to market, the reality is that, faced with a potential multi-million dollar lottery win, most entrepreneurs will abandon the dream in a heartbeat.

I have a little more sympathy for the entrepreneurs as they often don’t have much money, so the temptation has got to be big. By contrast, a successful VC typically has a much larger personal net worth, and has made a decision to pursue this business model. Of course, their decision must recognize the difficulty of raising follow-on funds if their prior fund shows sub-standard results. So the focus on financial results is understandable.

But the net result is an emphasis in Silicon Valley that has moved from building great companies, to pumping up new companies or technologies just long enough to gather a large user base, show a potential for greatness (but not actual greatness), then dumping the technology or company on the highest paying buyers they can find, regardless of long-term value.

And that’s a shame. Because it makes a few people very wealthy, but at the expense of the system that allowed them to get there. And in the end, is there any moral difference between them and the seedy brokers in Boiler Room?

WSJ Op Ed: Focus the Stimulus on Entrepreneurs

rick — Thu, 26 Feb 2009 21:45:31 +0000

Here’s a great Op Ed in the Wall Street Journal.

http://online.wsj.com/article/SB123544318435655825.html

They give a great argument for focusing the Stimulus on Entrepreneurs, rather than traditional, moribund behemoths.

A healthy, competitive economy is like an ecosystem. Unsuccessful businesses die young. Successful businesses are able to grow, accumulate resources, and age. But eventually they too give way to younger, more competitive companies.

By propping up the older firms, we are basically preventing the new, more competitive and more effective firms from taking their place. This stifles innovation and weakens the overall system. On the other hand, by encouraging the creation of new businesses, we find those more effective replacements sooner, and create a stronger, healthier economy.

You might be an Entrepreneur!

rick — Thu, 05 Jun 2008 00:41:45 +0000

I recently met a man who tried to impress me with his entrepreneurial credentials.

“I’ve always been an entrepreneur!” he proclaimed. ”When I graduated from school I immediately joined a little startup, named Yahoo!” He looked quite pleased with himself.

He was in his early 30′s. I thought about it a moment. ”So, how may employees were there?”

“Just 350 back then.” He answered smugly.

Pause. ”And when did they go public? Wasn’t it around then?”

“Well, yes. Just before I joined.” Now he looked uncomfortable. Or annoyed. Either way, he seemed to realize I was calling his bluff; I quickly changed the subject.

I was amazed. Here was a guy claiming he was an entrepreneur, because 10 years earlier he had joined a public company with 350 employees. He was as naive as the woman who thought she understood parenthood because she’d once owned a cat!

Plenty of people like to think of themselves as entrepreneurial. They like to think they are creative, resourceful, and able to get things done. And they may be; but that’s not an entrepreneur.

So what distinguishes an entrepreneur from other employees?

An entrepreneur creates businesses out of nothing. They develop a business the same way a real estate developer might develop a shopping center, or a residential community. Lots of people might help in the construction – but that doesn’t make them the developer.

Here are some simple tests to help determine entrepreneurs.

Did you work for the company before it was incorporated?
Did you work for the company before it had a bank account?
Did you write a personal check to open the company’s bank account?
Have you guaranteed the company’s payments with your personal assets?
Do you know what a Resident Agent does, and have you ever hired one?
Do you know where the Articles are? Did you help edit them?
Have you worked for a company before it had an office?
Have you faced personal bankruptcy if the company fails – or does not succeed quickly enough?
Does your career directly depend upon the success of the company?
Have you found yourself dreading payday, rather than looking forward to it?
Do you have stock options? (A trick question: no entrepreneur has stock options; they have stock.)

Very few entrepreneurs would ever answer “No” to more than one of these questions. And it gives them a maturity and understanding of where and how economic value is created that few other people ever really understand. It comes from within.

And they learn to understand the greatest challenges of entrepreneurship. Those challenges are personal and emotional – not related to any particular challenge of a business.

A true entrepreneur has experiences that employees just don’t get. And it changes them. They come to realize that the success traits of an entrepreneur are not about education, or the type of charisma that would make you the envy of your MBA class. In fact, many successful entrepreneurs barely know what an MBA is, let alone have one.

They realize that a successful entrepreneur has a vision in mind for a business, and are willing to bet that they can make it happen. An entrepreneur takes huge risks compared to anyone else, but often doesn’t perceive those risks as being risky. They bet their time, effort, and reputation on their own success. But most of all, they believe in themselves. They are betting on their own vision and their own ability to make it happen.

By contrast, most venture capitalists have little understanding of risk – and are not even betting their own money. And investors, employees and others are typically placing their bets on other people’s success and vision, rather than their own.

Ironically, it is people like the man above who are quickest to judge entrepreneurs. They think they know what makes a “good” entrepreneur, when in fact they don’t really know what an entrepreneur is. And that leads to fatal mistakes. (One of the most common is thinking the entrepreneur can be easily replaced. Despite overwhelming evidence that entrepreneurs drive the success of their businesses, they are often convinced – or forced – to leave, to make way for other management with no true entrepreneurial experience. A more successful strategy is to surround and support the entrepreneur with complementary skills.)

Entrepreneurs drive the economy. They create the jobs for employees; they produce the returns that investors rely upon. It is their vision, creativity, and ultimately their production that pays effectively all of a nation’s taxes.

But they are often derided by others – and particularly those with little or no entrepreneurial experience. While getting started, they are constantly being told they are not big enough, established enough, or mature enough. They are constantly being compared with other companies – either past companies that failed, proving this new venture is doomed as well, or large companies that succeeded, proving this new venture cannot succeed because someone else already has a lock on the market.

The challenges a true entrepreneur faces are often emotional in nature – the need to overcome the negativity of others. So they must have the courage of their convictions, a strong belief in themselves, and also the ability to identify when they must change course, and to do so without hesitation.

A young entrepreneur’s best cheerleaders are usually older entrepreneurs, who understand the challenges of starting a new business. They understand that most of what one learns in business school can be bought. They understand that an entrepreneur’s biggest challenges are not marketing strategies, or hiring, or getting financing. Rather they are staying positive, focused, and upbeat. And they understand the rewards for starting a new venture are both financial and emotional in nature. Yes, the business must be financially successful. But a true entrepreneur also understands the statement, “I would have traded a bit of financial success to see the product hit the market sooner.”