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Entries Tagged 'economics' ↓

Don’t Change the World, Select a Better One

Much has been said about entrepreneurs and their oft-stated ambition to “change the world.” Making money is nice, they say, but they really want to “put a dent in the universe,” as Steve Jobs once said.

Some see this as high-minded conceit: Change the world? Through tweets and hashtags? Photo oversharing? A world where everyone is constantly staring at their phones? Is this change actually for the better? All valid questions, to be sure.

I’ve given this a lot of thought over the years, and while “changing the world” might be a bit of an overreach, one thing is true: Entrepreneurs are the people who get to decide which universe everyone else lives in.

And this has some other deeper implications.

Quantum Effects

The degree to which quantum physics has any impact on our everyday world is hotly debated by philosophers and physicists. But there are some ways we can interpret quantum effects as entrepreneurs that are interesting.

One theory is that there is an infinite number of parallel universes, and the world we live in is just one of many possible worlds. So who decides which universe the rest of us will live in? To be sure, political and military leaders do, but so do writers, musicians, scientists, inventors — and entrepreneurs.

When you think about it, we all have the power to propose something new. These proposals may be modest, or they may be starkly different from what has come before. Our ability to nurture these new proposals and steer our world into the universe where these new ideas take root is really the fundamental act of entrepreneurship.

So in some sense, entrepreneurs are quantum time travelers — able to steer the world into a new dimension that might not otherwise have existed.

Can you imagine the world we’d be living in if Steve Jobs hadn’t willed the iPhone and iPad into our universe before he passed on? It would be substantially different (and Microsoft’s stock price would certainly be higher).

Entrepreneurs aren’t the only people who have this power to shift us into a new universe: anyone can do it. Whether you’re a nonprofit worker, a lab scientist, a musician or just a rank-and-file employee in a company, there is almost always a way to start with what you have, what you know and who you know, and transform it into something that’s fundamentally new.

It is the collective output of those who dare to make these proposals that defines the shape, rhythm, texture and nature of the world we live in. That puts each of us in a position of incredible responsibility and power; for if each of us is capable of steering the planet in a new direction, then why aren’t we doing it?

Effectual Reasoning

Entrepreneurship researcher Dr. Saras Sarasvathy coined the idea of “effectuation,” a theory that states that entrepreneurs use a particular kind of logic in advancing their proposals.

Essentially, they gather up everything they are, have and know, and then they place a bet on a next step. That bet will typically have a higher upside than downside, and they can afford to continue if they lose the bet.

Following this continuously almost always means you can advance an agenda and make it grow. And Sarasvathy discovered that this is exactly how expert entrepreneurs operate. They don’t typically have a big master plan. They just execute a series of modest bets, and they’re aided by the people and experience they gather along the way. That’s it.

I find all this incredibly empowering; we have a simple recipe that enables us to continuously and collectively select a better universe than the one we are currently living in. And anyone can do it, just by thinking the way entrepreneurs think.

The money that comes from creating a positive change is a nice side benefit, but it’s hardly the point. Money’s just a tool to enable us to keep selecting a better world.

So can we change the world? Perhaps not. But we can each help to choose a better one. And that’s true power.

This piece originally appeared in the December 2013 issue of SmartCEO Magazine (Baltimore).

Stop Talking and Build Your Business

While I’m deeply involved in entrepreneurship, breathing it day in and day out, and actively follow many discussions around it, I tend to shy away from writing about it most of the time. Why? Because I’m generally too busy doing the entrepreneurship to talk about it. In the end, it’s the facts of our accomplishments that will speak far louder than some hollow words.

But every once in a while it can be helpful to take note of where one stands and what one has learned. This is one of those moments, and I’d like to take a moment to share a few thoughts on what it takes to start a product company. (Most recently, I’ve been hard at work building and launching Mailstrom through my company 410 Labs.)

  • Building a sustainable business is the only thing that matters. Entrepreneurs get caught up worrying about all kinds of shiny objects: tech trends, investors, hot markets, compensation schemes, founder personalities, community — you name it. Those things are interesting, but there’s only one thing that matters: building a sustainable business. That means recurring revenue and controllable costs. Watch those two items and then maybe you’ll have something to talk about.
  • Know your CAC/CPA and LTV. If you’re building a recurring revenue business, you need to know your customer acquisition cost and lifetime value of the customer. You need to understand this really, really well. To understand customer acquisition cost, you need to know all of the costs that go into acquiring a new, paying customer. To understand lifetime value, you need to understand your customer retention rates really well. If this makes your eyes glaze over, you’re not an entrepreneur.
  • The hard part comes after the funding. It may seem like securing funding is a great milestone, and you’ll be tempted to pat yourself on the back. Do that for a minute, but get the hell back to work. You have real work to do now. If you don’t understand how to deploy that funding, and more importantly have a plan for what happens when (not if ) you run out, you’ll be out of options. Be humble. This stuff is hard.
  • The Series A crunch is real. The funding environment today is quite brutal and you can expect to spend several months of your time working just on securing a “Series A” size funding round (for the sake of simplicity let’s define that as a post-seed round of $1M or more). Investors are looking for not only traction, but real revenues, social proof, and growth. They want to know why you are the entrepreneurial team that’s going to survive and thrive. There are thousands of other teams out there who won’t, so the odds are against you.
  • My dog can raise a seed round in this climate. With the myriad startup funds, accelerators, and crowdfunding available today, it’s easier than ever to raise a seed round. While raising a seed or small angel round is definitely a validation that you may not be insane, it’s no validation that you’re sane either. Startups are hot and these days, everyone’s an “angel investor” (even me.) But just because you raise that seed round doesn’t mean you will have a clear path forward.
  • You are responsible for your success — not your investors or advisors. It’s tempting to think that having a rockstar list of investors and advisors is going to catapult you to success. In fact, that’s just not the case. While having “name brand” people on your team can accelerate the growth and create additional options for your successful business, the onus is on you to deliver that successful business. They are not going to make it happen for you. It’s ALL on you.
  • Building products is hard and requires tireless analysis and iteration. Building products is ridiculously hard work. Every day you need to devise new experiments and analyze the results. You need to continuously iterate and improve every aspect of your product. You have to make clear headed choices about what is important and what’s not, frequently leaving even good ideas unfinished. In short, if you’re not comfortable with scientific method, numeric and statistical analysis, and ambiguity (yes, ambiguity ALL THE TIME) then you have no business being a founder.

I hear new entrepreneurs talk all the time about how everything is going so great — they had a great pitch meeting or secured a funding commitment, just hired a new person, or setup some shiny new piece of technology. And those things are all great. But remember, until you have a product that is generating real recurring revenue and you fully understand the dynamics, you don’t have a business, you have a conjecture.

And don’t get me wrong, as a fellow entrepreneur, I love a good conjecture. But what is really impressive is when you can start to make make it sing and scale. That requires tons of hard work — hard work that’s not flashy, doesn’t let you write upbeat self-congratulatory status updates, or put out self-serving press releases.

All that matters is your customers, the value you’re creating for them, and the dollars and goodwill that value generates. Let’s talk about that, because the rest is noise.

We Need an Honest, Open, and Transparent Baltimore

For Baltimore City to grow and prosper once again, several problems must be solved: jobs, crime, and education are chief among them. But these are mere symptoms of the decades of systematic disinvestment which has characterized much of urban America since 1960.

A return to prosperity is possible, and we’ve seen it happen in other American cities like Washington, DC and New York City. But this didn’t happen by accident. It happened through a combination of strong political leadership and outside and local investment.

It happened by creating a level playing field, and creating a fair, open, and equitable business climate that attracted outside investment. It happened by creating city governments that were open and accountable and in which citizens have some confidence.

In cities like Boston and San Francisco, it happened thanks to the lowering of property tax rates across the board, spurring not just Big Developer projects but investment by individual homeowners.

But in Baltimore, we have two distinct problems. One is qualitative: we can’t be trusted. The other is quantitative: we need to fix property taxes.

Baltimore is just not trustworthy. No one trusts Baltimore City government. Outside investors see the city as a parochial, pay-to-play backwater where insiders call the shots. Commercial developers correctly believe that you need to make significant investment in laying groundwork with specific politicians, developers, and contractors to get a project started here.

Prospective residential buyers perceive Baltimore City government as bloated, inefficient, outdated, resistant to change, and focused more on working out deals with insider developers than on creating a solid residential base. And they have good reason to harbor this perception. While there are many good and dedicated people in city government who care deeply about residents and residential issues, the inefficiency and waste are undeniable. And they are everyday reality for city residents — many of whom share their horror stories with their friends and neighbors.

Many Baltimore City agencies have not been audited in decades. The audit of the Department of Recreation and Parks is now almost one year overdue — primarily because of lack of sufficient financial records. Baltimore City is preparing to return $7M to the federal government because it was unable to account for how Baltimore’s Homeless Services department spent any of those funds.

This is inexcusable. In any other setting, if money goes missing, heads roll. But the machine grinds on here with no firings, no outrage, just talking around the facts and playing down the mistakes. It’s no wonder no one trusts Baltimore City government, for it has proven itself not only untrustworthy but systemically incapable of correcting the problem.

Yes, we need to restructure property taxes. Boston and San Francisco both flourished after making changes to their property taxes. Every city is unique, and their fortunes were rising in many ways regardless. Our star is rising too. We are an incredibly well-located city in the richest state in the union. The future is bright — and we can accelerate our fortune dramatically.

Before we worry over fixing property taxes (a quantitative problem), let’s first prove that we’re capable of earning and actually worthy of people’s trust once again (a qualitative problem).

Let’s show that we care about financial accountability by rooting out waste, fraud, abuse, and inefficiency in every corner of Baltimore government. Let’s show we’re serious by pledging to:

  • Perform annual audits of every city agency
  • Discipline and fire people who oversee waste and abuse
  • Prosecute cases of fraud, graft, and malfeasance
  • Level the playing field for outside investors (both commercial and residential)
  • Get serious about eliminating inefficiency and waste
  • Open as much of the city’s records and data as possible
  • Cultivate the perception that Baltimore government is fair, honest, open, and efficient

Mayor Stephanie Rawlings Blake is a smart, capable, and honest leader who has become entrenched in the culture of business-as-usual here in Baltimore — which simply must change. We need to call on the Mayor to lead this charge and demand accountability from all of the departments she oversees.

This isn’t going away. The next step in Baltimore’s return to prominence is to become — and be perceived as — a  trusted and honest partner. Sweeping problems under the rug won’t get us there.

Instead, it’s time to start throwing some people — the people who allow waste, fraud, and abuse — under the bus. Comprehensive financial and performance audits of city government are the best way to begin.

The Real Republican Adversary? Population Density

The 2012 election demonstrated what many people could have guessed: rural states voted for Romney while densely populated states voted for Obama.

Many have offered explanations — everything from the presence of top universities in cities, to the prevalence of immigrant and African American populations. Perhaps the Republicans should consider running a Hispanic or African American candidate in 2016; but will that really help? Is identity the issue, or is it more about values?

Or is something more basic at work? Studying election results county by county, a stunning pattern emerges.

Population Density: the Key to Voting Behavior?

Curious about the correlation between population density and voting behavior, I began with analyzing the election results from the least and most dense counties and county equivalents. 98% of the 50 most dense counties voted Obama. 98% of the 50 least dense counties voted for Romney.

This could not be a coincidence. Furthermore, if the most dense places voted overwhelmingly for Obama, and the least dense places voted overwhelmingly for Romney, then there must be a crossover point: a population density above which Americans would switch from voting Republican to voting Democratic.

So I normalized and graphed the data, and there is a clear crossover point.

At about 800 people per square mile, people switch from voting primarily Republican to voting primarily Democratic. Put another way, below 800 people per square mile, there is a 66% chance that you voted Republican. Above 800 people per square mile, there is a 66% chance that you voted Democrat. A 66% preference is a clear, dominant majority.

So are progressive political attitudes a function of population density? And does the trend hold true in both red and blue states?

Red States and Blue States

Separating the results from red states and blue states, we can see that while each has a slight preference for their ultimate candidate of choice, on a local level voting behavior is still directly correlated to population density.

Studying this graph, two important facts are revealed. First, there are very few cities in red states. Second, the few dense cities that do exist in red states voted overwhelmingly democratic.

Atlanta, New Orleans, St. Louis, Dallas, and Indianapolis are all in red states — and they all voted blue. And there are no true “cities” in red states that voted red. The only cities in red states that didn’t vote blue were Salt Lake City and Oklahoma City. And by global standards, they are not really cities — each has population density (about 1,000/sq. mi.) less than suburban Maryland (about 1,500/sq. mi.).

Historically, one can argue that red states have disproportionately affected election results by delivering a material number of electoral votes.

Red states simply run out of population at about 2,000 people per square mile. St. Louis is the only city that exceeds that density in a red state. It voted overwhelmingly Democratic (82.7%). In contrast, blue states contain all of the country’s biggest and densest cities: Washington DC, New York City, San Francisco, Baltimore, Milwaukee, Philadelphia, Boston, etc.

Red States Are Just Underdeveloped Blue States

As cities continue to grow in red states, those cities will become more blue, and ultimately, those states will become more purple, and then blue. The Republican party says it’s about growth and prosperity; the best way to achieve that in red states is through the growth of cities.

If you follow the red state trend lines, you can clearly see that any dense, fast-growing cities that might emerge in red states will be very likely to vote blue. The few that do already exist already vote blue. How would these new cities be different and cause them to vote red?

Red state voters generally prefer low-density housing, prefer to drive cars, and are sensitive to gas prices. Once population density gets to a certain level, behaviors switch: high-density housing is the norm, public transit becomes more common, and gas use (and price sensitivity) drops.

Red state values are simply incompatible with density.

Cities Are the Future

Globally, cities are growing rapidly as people move from rural to urban areas in search of opportunity. By 2030 it’s estimated that cities will grow by 590,000 square miles and add an additional 1.47 billion people.

Only subsidized suburban housing and fuel prices are insulating the United States from this global trend, and even with these artificial bulwarks, there is no good reason to think that America’s future lies in low-density development.

Density is efficient. Density produces maximum economic output. An America that is not built fundamentally on density and efficiency is not competitive or sustainable. And a Republican party that requires America to grow inefficiently will become extinct.

While the Republican party is retooling in the desert, it should carefully consider whether its primary issue is identity politics or whether its platform is simply not compatible with the global urban future. If that’s the case, an Hispanic candidate running on the same old Republican platform will simply not resonate. The Republican party must develop a city-friendly platform to survive.

Cities are the future and we need candidates from both parties that understand that reality.


The next question: why does population density produce these voting behaviors? Is the relationship causal or correlated? Probably both. I’ll explore this in my next post.

 
Data Source: US Census 2010 (population density by counties); Politico.com election 2012 results by County.