Wednesday, September 26, 2012

Surviving Little Entrepreneurism


In the October 2012 issue of Vanity Fair, Randall Stross writes about Silicon Valley’s Y Combinator, describing events in the spring and summer of 2011 when 2,000 teams competed to become one of 64 “companies” receiving between $11,000 and $20,000 to launch their “business.”

One team highlighted by Stross was made up of three 24-year-olds, recent college grads who pitched an idea for a business that would send “past memories to your in-box.”  Encouraged to “pivot the idea”--the latest phrase for “that stinks, try again”—they then hit upon an idea to create a business that would “organize and rank your Facebook content, allowing you to easily create a printed photo book.”  Yep.  These three would-be entrepreneurs told the Y.C. partners that they “believe in the power of memory, nostalgia,” without, one presumes, having had time to accumulate much of either.  When asked how this idea will “expand” they said they’ll begin building memory books around personal calendars, Foursquare check-ins and tweets.

Now--hold onto your hats--this was one of the teams the Y.C. Partners really liked, so much so that they were willing to fund their “business” (however it came to rest on its pivot) by investing $20,000 in return for 7% of their newly formed “company.”

Welcome to the world of Little Entrepreneurism.





The win for these three “entrepreneurs” was the opportunity to under-earn McDonald’s hourly wage, probably accomplishing much less than they would have flipping burgers and learning something about quality, service, production, and how most of the world makes its living.

This kind of economic opportunity used to be called sharecropping.  This is what record promoters did to garage bands, signing lopsided contracts and hoping just one would make it onto the radio.  This is, in fact, what happens when we fall so in love with a concept--in this case, entrepreneurism & innovation--that we turn it into an assembly line.  


Schools are rushing to attract students who want to become entrepreneurs.  Events for fledgling entrepreneurs are everywhere.  Websites and consultants abound.  In the case above, Y Combinator is attracting smart kids who are so determined to "disrupt the world" that they are willing to work essentially for free on ideas with no discernible substance and donate 7% of any lottery winnings they happen to hit.  (The law of averages alone says there will be a Dropbox from time to time, the very point of the exercise, one assumes.)

Do I blame Y Combinator?  Not at all.  This is, in fact, a brilliant way to identify talent and stumble upon a big idea or two which will easily return all those $18,000 (average) investments.  Plus, YC is probably building one of the strongest farm teams in Venture and a network of entrepreneurs for the next half-century.  They are, a coach might say, drafting the best athletes available and figuring out later where to play 'em.  Bravo. 

I don't much blame the three graduates either: Who wouldn't rather sit in front of a computer and think deep thoughts about disrupting the world with clever source code instead of  having to work a real job?  It's not all that different from grad school, or maybe grad school with a practical shot of auto shop.

Still--doesn't the system somehow seem broken?  

Nicholas Carr wonders why “innovation ain’t what it used to be” and concludes “An entrepreneur has a greater prospect of fame and riches if he creates, say, a popular social-networking tool than if he creates a faster, more efficient system for mass transit. The arc of innovation, to put a dark spin on it, is toward decadence.”

I like this explanation, but have a slightly different take.


The Age of the Little Novel

Suppose we decided one day that the greatest, sexiest occupation in America was not Cool Serial Web Entrepreneur but Novelist.  Everyone got out of school and was expected to write his first novel.  Really precocious youngsters would write their first novel in high school, or quit college because they just couldn’t stand not having their stories circulating in the market.

What would be the result?  A world of awful, trivial, shallow novels.  Not because there weren’t some great potential novelists graduating each year, but because few of them would have had enough experiences to go beyond narratives about online bullying and scoring the winning touchdown.  That would account for the first 250,000 novels printed every year. The next 250,000 would be about boy wizards.  Only a few of them would actually be read, or make any money.

That’s exactly what’s happened to entrepreneurism, at least the pizza-and-disruptive-source-code variety.  College grads dying to start a company have as their raw material a set of experiences that, we now know, all look an awful lot like Facebook and Twitter.  And, thanks to the Web, the cost of launching a venture is now less than putting a new beauty salon on the corner lot.  (One of the leading lights of Little Entrepreneurism posted to his blog a few years ago that his goal was to start and build a business while sitting around his kitchen table and rarely changing out of his bathrobe.)

Another enabler of Little Entrepreneurism is affluence.  The fact that so many kids can take two or three years of their lives, forego a steady paycheck and treat the resulting failure as a badge of honor speaks to a cultural safety net of soft parental couches.  There has never been a generation quite so privileged.  (Read about American entrepreneurs prior to the start of Silly Web Ventures.  Start-up costs were substantial.  Failure was not an option.  They were working for their lives.  This is the real legacy of Silicon Valley, and entrepreneurial America more generally.)  Little Entrepreneurism exists, in part, because we live in an extraordinarily entitled society.


And then, of course, there's the infrastructure that's developed over the last 20 years, especially in places like SV.  We've built a cocoon of money, lawyers, office space, consultants, networking opportunities, leased services--anything a new entrepreneur could want or need.  (It is an engine, one of the most powerful innovations of our 21st century American economy.)  The advice Y Combinator gives about its most successful start-ups: "They just eat, sleep, exercise and program."  That's some distance from 
the entrepreneurial experience at start-ups like HP, Fairchild and Intel, which had to build a product and a company at the same time.

Surviving Little Entrepreneurism

Many of us older folk have survived some pretty bad ideas, like the Age of the Conglomerate, when guys like Hal Geneen were lauded on the cover of business magazines for building multinational messes that slammed hotels, insurance companies, real estate developers and telegraph equipment all under one roof.  Big was beautiful.  It all seemed so right at the time.

We survived the Japanese Miracle, weathering Kaizen classes and being chastised for thinking short-term, when the real secret to a long-term perspective turned out to be government protectionism and an abundance of no-interest capital that never had to be repaid.

We survived In Search of Excellence, the single greatest hoax perpetrated upon managers in the 20th century.

We've (mostly) survived the Age of the Celebrity CEO, featuring Lee Iacocca, Jack Welch and Carly Fiorina.  And, with luck, we will survive the beatification and sainthood of Steve Jobs.

But more than anything, I personally would like to be around when Little Entrepreneurism finally recedes, and the concept of innovation returns to earth and takes its rightful place next to all of the other important things that go into building long-term value and improving the lot of mankind.  Imagine a world where a start-up would have to have a good idea, one that generated real customers and relied on a real business model.  Imagine a start-up where its owners felt at risk.

There’s an acclaimed investor out on the West Coast paying college kids--this time the princely sum of $50K a year for two years--to leave school and go disrupt something.  It should be a bright red flag that this investor is a Stanford college and law school grad, kind of like the billionaire who says money is not really that important.

Are you truly unhappy in college?  Are you dying to innovate something?  How about innovating your college experience and turning it into what you want it to be?  There will be few times in your life when you can fill up your intellectual tank or make more connections from a wider range of people and choices, and do it all virtually risk-free.  If you think trading that kind of experience to build an app that lets people find used designer clothing is better, then go ahead.  But remember, sharecropping is no more lucrative today than it was in 1880, and your parents’ couch might be comfortable, but it’s still your parents’ couch.


Some Modest Advice: Fill Up the Tank

In 1960 a psychologist named Sarnoff Mednick defined creativity as associative memory that works exceptionally well.  I take that to mean, the more experiences you have--the richer your memory bank--the better chance you have of one day putting concepts together and bringing something novel to market.   In other words, any mental dexterity you fear losing by not disrupting the world between the ages of 22 and, say, 27, will be more than offset by the fact that you’ll actually have a clue.



It’s hard to believe that trivial innovation is better than no innovation, because the opportunity cost is so high.  In the 24 months it takes our three flailing entrepreneurs to launch a new social networking app, only to find that it has no economic value, they could all be working for a real company with a real product in a real industry, learning something useful.  How high-impact teams work.  How leaders lead.  How real products get to market.  How to move 50 or 5,000 people all in the same direction.  What the big problems that people face really are.  (Hint: It’s not turning their old tweets into a scrapbook.)

You can see the carnage of the last 15 years of Big Entrepreneurism on LinkedIn, which is full of episodic, often empty resumes.  Here's one with three different companies at C-level positions in six years.  Another with six companies founded in 12 years.  Low impact.  Possibly no impact.  The most abused title of the last decade: “Serial Entrepreneur.”

Look, I would never, ever sniff at $20,000.  To a student with debt, it must seem a fortune.  But it’s so much more fun to work for a while with smart, experienced leaders, see how the world runs, get a paycheck and contribute, and find something big and important and challenging that’s dying to be improved.  Then take your real idea, something with substance, and ask an investor for $1M or $5M or $10M.

When their response is, “We love the idea.  Do you see a way we could put $25M to work with you?”. . .you’ll be looking and feeling a lot less like a sharecropper and a lot more like an entrepreneur.


This is Little Entrepreneurism in 2012: Smart investors playing the long odds for short money.  Enthusiastic students dying to disrupt a world interpreted almost entirely through the lens of social networking.  Cheap entry costs.  Powerful infrastructure.  Affluent and forgiving parents.  Failure as honor.

Little Entrepreneurism is destined to score its occasional splashy outlier.  Charles Darwin predicted that 150 years ago.  But for most young entrepreneurs who are being asked to crawl out of the water and grow lungs, it's a game where they really don't have much of a chance, and the personal opportunity costs are staggering.