It can be difficult to see the forest for the trees when it comes to defining what it is we in the so-called “tech community” are trying to achieve.

The confusion begins with names: some call it the “startup community,” the “tech business community,” or #BmoreTech. Whatever. I’ve been splitting these hairs for several years now, and with the help of many others and after many personal experiences with organizing groups, events, venues, and businesses have developed a simple but powerful vision for the community.

We’re all trying to build an ecosystem that looks something like this (click to enlarge):

Before we get into the specifics of this vision, here are a few basic values that underly it:

• People are the lifeblood of the community. The ecosystem requires educated, creative people. We should strive to enrich and build compelling opportunities for the people in our community.
• Businesses generate the wealth that powers our community. Strong businesses make a strong community. We should aim to make our businesses stronger and more valuable.
• There is a role for everyone. Diversity of expertise and background is essential to a strong business community. We should aspire to have a healthy mix of product companies, service companies, business service providers, and many types of venues and events for relationship building.
• We should celebrate our successes. Celebrating successes, whether they are successful exits or just milestones, is essential to creating a community that values growth, curiosity, and experimentation.
• We should connect people together.  Trust and strong relationships are a precursor to new business formation. With strong trust relationships, we’ll have more new businesses and they will be more successful.

With this in mind, here’s how this model works, step by step. It’s a cycle, and for simplicity, we’ll start at the bottom.

1. Getting into the mix. (6 o’clock) New participants, exited entrepreneurs, investors, hackers, new entrepreneurs come together via a mix of venues and events. By “venues” I am talking about spaces that offer opportunities for daily, ongoing interaction between individuals. They’re “high touch” while being “low risk.” Think coworking, hackerspaces, regular café coworking, incubators and accelerators, and educational institutions. By “events” I’m talking about one-off or periodic events that afford people an opportunity to get together, get to know one another, and try new things. (Think Bmore On Rails, Startup Weekend, EduHackDay, CreateBaltimore, etc.) New investors can participate in angel groups and pitch events.
2. New business formation, access to capital. (9 o’clock) With trust, exposure, and experience, new businesses can form. With the prolonged exposure made possible by the “mix” phase, entrepreneurs can make more informed decisions about who to go into business with and have likely had more time to refine their ideas before ever beginning. This means a lower failure rate for new startups than in a less-developed ecosystem. As for investment capital, some will come from exited entrepreneurs, some from venture capitalists, seed funds, and governmental initiatives like TEDCO and InvestMaryland. We should aim to connect investors with nascent businesses. This will happen naturally to some extent in the “mix” phase, but we should consciously encourage it; bootstrapping should also be an option.
3. Business growth. (12 o’clock) Some companies will grow to become strong product companies, others will become service companies. Some people want to grow their businesses to sell them, while others just want to build and run a great business. These approaches are all valid. We should celebrate the formation and growth of all of the companies in our ecosystem.
4. Entrepreneur exits. (3 o’clock) Some entrepreneurs will seek the opportunity to exit their businesses and capitalize on their growth. This is most lucrative with product companies. When these exits occur, we should celebrate them as successes of the community as a whole.
5. Entrepreneur returns to the mix. (6 o’clock) Exited entrepreneurs should be encouraged to re-engage with the community, either as investors or as active entrepreneurs to form new relationships and new businesses. The cycle starts anew.

That’s really it. If we can make this cycle work, we’ll have a thriving entrepreneurial ecosystem in Baltimore. (This is the exact same cycle that made Silicon Valley great, and is now working in places like Boston, Austin, and New York.)

That’s Great, But Where Do We Stand Now?

We have much of what we need in place: venues, events, investors, and businesses. But the two things we have most lacked are a cohesive vision for how this cycle is supposed to work, and also the last link in the cycle – systematically re-engaging entrepreneurs into the ecosystem.

However, just today came the news that Greg Cangialosi and Sean Lane are forming a startup accelerator in Federal Hill. That’s an example of two successful entrepreneurs getting back into the mix and re-engaging. We need more of that. But we need to make it easier and more attractive for entrepreneurs – there need to be obvious on-ramps and channels. We’re starting to get that in place.

My hope is that this vision, which I have shared in one-on-one conversations with many friends and leaders to much enthusiastic agreement, can now take root as the underlying force that animates our community.

Role of the Greater Baltimore Technology Council

There’s been much discussion about what the role of the Greater Baltimore Technology Council should be, and I submit that this vision, as I’ve articulated it here, is what the group has been moving toward for the last three years – and with Jason Hardebeck (who is himself an exited entrepreneur) at the helm, I believe we can move towards it more quickly now.

The GBTC’s job is to:

1. Help build and protect the ecosystem. GBTC should be a watchdog that ensures the ecosystem has the right pieces in place and that they have what they need to function properly. This means working with government, educational institutions, and others to ensure that the conditions required for the ecosystem to thrive are present.
2. Accelerate the cycle. The faster this ecosystem operates, the more successful we will be. Specifically, GBTC should connect people together, and celebrate our collective achievements, and help pull our educational institutions into the ecosystem. Ultimately this will pull in more smart, creative people, accelerating the cycle further.
3. Make our businesses stronger. By connecting our community together better and providing venues, events, connections, and celebrating our success stories, GBTC can help to make each of our businesses stronger and more robust. This also means connecting businesses to service providers (HR, insurance, accounting, legal) and mentors who can provide value.

For all the drama and hand-wringing, it really is this simple!

Some have wondered whether they “belong” in the GBTC. That’s something every person and entrepreneur has to decide for themselves; there are obviously many valid and valuable ways to participate in this overall vision that are outside of the scope of the GBTC. However, if you care about growing and protecting this ecosystem, and if the group can help your business grow and succeed, I’d encourage you to lend GBTC your support; it just makes good business sense, as GBTC is the only group that has been tasked with this important work.

I know that others in positions of leadership in Baltimore’s tech business community (and at GBTC) share this vision. I encourage your comments and feedback, but before reacting, you might take some time to really think this over. This is something I’ve been looking at for several years, and based on everything I know, this is the right way forward.

The Rest of the Story

Oh, and there’s one more thing.

We all want to prime this pump and get this vision more fully underway, but I also think it’s reasonable to ask how Baltimore’s tech ecosystem fits into the bigger scheme of things. What relationship should we have with other ecosystems, in our region and around the world? Is the point to win or are we trying to thrive? I’ll be touching on this topic in an upcoming post, and it should help to clarify how this vision makes even more sense for Baltimore.

50% Off Loaves and Fishes…

Every few years a company emerges that grows so swiftly that it manages to define the zeitgeist and often helps to inflate a bubble that defies any rational explanation. Often these businesses are driven by new, disruptive ideas that take the market by storm and create a real shift in how people do things. Amazon (and online shopping), Google (and the search business), and Apple (music, smartphones, and touch computing) fall into this category. They created real, thick value.

For every one of these, there are others that grow, get tremendous buzz, and then seem to dissipate as quickly as they emerged. Or they settle into a kind of staid middle-age, their torrid teen years long forgotten. Think about 90′s darlings like IOmega, Boston Chicken, eBay, and Home Depot. It can be difficult to predict which businesses will stick around and which will fall away (or become low-growth, boring enterprises).

Groupon has emerged as the “Jesus Startup” of 2010-2011. The industry always needs one, and they tend to conform to an archetype and have a mythical story: the visionary CEO (Marc Andreesen, Evan Williams, Mark Zuckerberg) who experiences a remarkable rise to greatness. For this story and for these 15 minutes, we have Andrew Mason, the humorous and self-deprecating everyman who declares of the fledgling Groupon, “We could still fuck this up.”

The implication is that they’ve done something to “ace” it so far. But the truth is that they are just regular guys that started out doing something else (some kind of social mission charity stuff – blech – don’t talk about that, it’s not compatible with the visionary myth). And after executing on their original idea and experimenting a bit, they found themselves in the middle of a new exploding business model. Kudos for that. But as is the case with most “Jesus Startups,” there’s been a notable lack of critical thinking about what happens next.

Here’s where I think Groupon is weak.

1. Over-reliance on hypergrowth.

Groupon has posted some crazy huge numbers as they push through massive expansion into new markets. When you are turning up a new major metropolitan area every few days, gross revenue numbers are going to grow very quickly as businesses rush to be part of something that’s got so much buzz. As their geographic footprint stabilizes, top-line revenue will start to level out. When that happens, the business becomes much less interesting and has a lower upside (see Home Depot, Gap, Boston Chicken, Microsoft). This is why a push to IPO while this hypergrowth is happening seems to be a priority for the company.

2. Customer fatigue.

If you have been using Groupon, Living Social, GILT, HauteLook, or any of the countless other sites that rely on daily emails to get their message out, I’ll bet your experience has been something like this: at first you reviewed the emails every day; you bought a few things; you are now buying almost nothing; now, you may not look at the emails at all; you still have unused Groupons. Time is money, and people have too much crap. Eventually, people are not going to take the time with this. And when Groupon has exhausted all the “easy hits” that drive people to buy, then what? Besides, I thought email was “dead” and for “old people.” Right? Or did I miss something? (Sure, the deals spread through Facebook or whatever social channels, but email is a huge part of the business model.) As younger folks steer away from email, it’s an open question whether the current “daily deal” model can be sustained.

3. Business fatigue.

Businesses are tripping over themselves to be part of the latest new thing and expose themselves to thousands of customers at a shot. And sure, a Groupon deal can be a great opportunity for some businesses. But many businesses (some say up to 40%) have found that doing a Groupon deal can be a costly mistake that actually damages their business. The economics of the deals deliver a fraction (typically 25%) of the face value, which often does not cover their costs. While there is some breakage (unused deal revenue that can offset losses), this still may not cover the cost and hassle the promotion entails. Additionally, businesses that undertake in smart advertising can promote themselves all year round. A business can do a Groupon deal at most once every few months – otherwise the deal just doesn’t seem “special” enough. Groupon is a great novelty that can help some businesses become better established, but I really wonder if many businesses would participate more than once or twice, when compared to ongoing targeted marketing initiatives.

4. Scale as the only barrier to competition.

There are now thousands of competitors to Groupon (Living Social is the largest). There will be thousands more. The reason why both companies have received such massive investments to date is that they need to get big to create a local sales force in every market in the world, which is obviously an expensive proposition. If they can get sufficiently big, they can build a sustainable business that will dissuade new market entrants simply because any competitor would have to build a worldwide localized sales force. And if you’ve ever had to run a local sales force, you know that it’s a very expensive, messy, people-driven business. The business that Groupon will eventually most resemble structurally is the Yellow Pages. With sales teams in every city, the major directory publishers were able to exert a near monopoly control over the interface between local businesses and consumers, and Groupon is going after the same market. The difference is in Groupon’s use of technology and use of social. Otherwise, the two businesses are nearly indistinguishable. The assumption is that Groupon’s scale will prevent competitors from gaining a foothold, but I don’t see any real reason a focused local competitor couldn’t develop a sustainable business.

5. Tone-deaf on China.

Groupon has undertaken a massive push to expand into China. That sounds great, and any US investor would likely salivate over such an aggressive, prescient-sounding move. Ah, that Mason guy, he really knows his stuff. But my friend, China-expert Christine Lu tells me that Groupon’s Berlin office has recruited 1,000 new hires for China in the last three months – many recent college graduates. But here’s the thing. I’m currently getting a daily deal from a site in Shanghai called Wufantuan that’s indistinguishable from Groupon. (50% off Mexican food in Shanghai was one recent deal.) If you know anything about the Chinese market, you know it favors locals and cloning is part of the culture. To expect Groupon to be able to achieve anything meaningful in China is wishful thinking. Google got run out of the country on a rail. You expect the powers that be there to allow a US firm to “split” revenues with Chinese businesses to provide its budding bourgeoisie with deals on burgers, skydiving, and cupcakes? Um, yeah. OK. If there’s a business there, it will be Chinese. The entire Groupon strategy with China is theater, designed to show investors that they’re “paying attention to that market” while they ready the IPO.

So, the real deal of the day is for Groupon itself. The question is whether there’s enough upside in the model – and enough “bigger suckers” out there for the average Joe to make any money on the offering before the business model settles out and becomes the next eBay, Home Depot, or Gap. These are fine, sustainable businesses, to be sure, but all are way less sexy than they once seemed. (Yes, for about 6 months in 1995, Gap was incredibly sexy.)

Before you decide that Groupon’s the next hot young thing, it’s worth asking whether you want to jump on this model right now. I believe there’s a really nice, long term, but ultimately very boring business in there that should pay a nice dividend. Meantime, the visions of hypergrowth are likely much exaggerated.

I certainly can’t criticize the trajectory that Andrew Mason and company have managed to carve out for themselves. It’s an incredible story and it’ll be fascinating to see how it unfolds. The expectations are so high, they really can’t be met.

My bet is that they will need to move on to more sustainable forms of year-round marketing for businesses and away from the aggressive 50% discount model. That’s a much less sexy place to be and it will require some real creativity to carve out a niche there. But I just don’t buy the idea that they can continue to build a business based solely on deals of the day at such aggressive discounts.

The Groupon model right now is based primarily on creating new relationships between businesses and customers. They’ll be on to something really interesting when they can help to nurture and sustain those same relationships profitably.

From my friend Christine Lu (@christinelu):
Thanks for the mention Dave. I think they’re hiring 1K in the next few months. As in currently in the process of. Things over there have just sounded a bit weird to be a sustainable market entry strategy so I think it’s all a nice way to have a China story to prop up the IPO. The elusive vision of 1.3 billion people using Groupon. Nevermind that clones are already saturating the market and they’ll have Alibaba’s Taobao to deal with. Anyways, we discussed it a bit on Quora.

From my friend Vivian Wang (@vivwang):
The JV is a positive differentiator for both companies and will accelerate market consolidation. There are 1686 other group shopping sites as of December, yet only 29 sites have CIECC licenses to legally operate. Some believe there are only 10 serious contenders that can attractively compete. The real threat is Alibaba and Taobao, so a more international footprint into China seems warranted. One of the smarter things Groupon did was buy Mob.ly back in May, which has been developing on all mobile platforms. For a sector that’s already doing about $79B in transactions, I think the risk seems worth taking.
…
Hope something truly uniquely innovative comes out of this that the world has yet to see. I’d personally love to see Tencent migrate from selling a $1B of games & virtual goods to some seriously tangible merchandise. The foolish side of me actually thinks they’ll have a fair shot at it. Should be fascinating.

And from my friend Francine Hardaway (@hardaway):
I believe all this bargain stuff, especially in the US, is part of the recession and will go away when it is over and we all relax. I agree with you 100% on Groupon’s model; I am done buying stuff I don’t need, even at half price. All the people I know who love coupons (I never have) are armed with sheaves of them, and all that happens is the merchants are in price wars with one another in a race to the bottom. Sites like Groupon and Haute Look might be marketing front ends, but they are also margin-shavers for the people in the businesses they market. This HAS to be unsustainable at the end of the day, whether China is successful or not (and I bet it won’t be, because of all the people who, when we were in China, got up and said they would clone our products in half an hour).

What do you think about Groupon?

Occasionally we here in the burgeoning tech community in Baltimore have paused to take stock about how far we’ve come, and what would be good to do next. About a year ago, Mike Subelsky made some suggestions on the BaltTech blog, and he’s recently identified some awesome emerging leaders who have made a real difference in the last year. Many of the ideas he identified are ones that people have taken up and run with.

In my travels in the last year, I’ve come across several ideas that are working in other places that we should consider pursuing here – in no particular order.

• Startup Weekend – Bring together a bunch of startup-minded people on a Friday, form groups, and build something entirely new from scratch by Sunday. Demo it on Sunday afternoon. I had the chance to attend StartupWeekend Seoul this summer and it was a great experience. Lots of relationships were formed and some truly great ideas were unearthed. We need a big-ish place where folks can hang out for 3 days straight and someone to take the lead.
• Girls In Tech – This organization is a global group of women who are making a real difference in the tech community. Some have griped about the name, and I agree it’s somewhat problematic – however to their credit they are trying to do their best to attract young women involved in tech and create a culture that is at least somewhat fun and edgy. Behind the scenes, its founders and main movers and shakers are some of the most intelligent and connected emerging women leaders in the tech world; with strong leaders in China, New York, and San Francisco. I promise you that a Girls In Tech Baltimore chapter would find good connections worldwide.
• Founder Dating / Find-a-Cofounder – These events have been popping up in San Francisco, Seattle, and New York in various forms. The idea here is that if you can bring together a ton of people who all have a clear intent to want to form a startup – if they can find good partners to work with – maybe something will come of it. This seems like a great way to unearth “startup-curious” folks in boring jobs and pair them up with ambitious entrepreneurs who just need a strong partner. And every other combination. Worth doing. (And it looks like a meeting may be happening next week to start the conversation!)
• Hacks and Hackers – Baltimore has the critical mass to support a chapter of this group that aims to connect journalists and tech/developer people. And entrepreneurs. News here is horribly broken and it’s going to take an entrepreneurial mindset to fix it. The sooner we can get journalists and smart startup people to get to know each other better, the sooner a new model will be discovered. Get on it.
• TEDxBaltimore – I helped pull together TEDxMidAtlantic in 2009 and 2010, and TEDxOilSpill this summer. TEDxMidAtlantic aims to throw a spotlight on a wide range of creative thinkers in and around our entire region. Mel Brennan from YMCA of Central Maryland and Open Society Institute have been discussing a potential collaboration to help produce TEDxBaltimore, which would have the opportunity to focus on Baltimore and its future potential. I strongly support this and anyone who would like to step up will find support from YMCA, OSI, and TEDxMidAtlantic. Contrary to some recent tweets, no date has been set.
• Entrepreneurs Unplugged – This event in Philadelphia features an entrepreneur on stage to discuss their story, successes, and failures. As long as they can keep from lying on stage I think this could be an extraordinarily powerful format. GBTC has had a Face2Face program for several years, which avoids the tendency that entrepreneurs have to whitewash over failings and details by pulling together a very small group over dinner. Both are awesome.
• Reverse VC Pitch Party – My friends Larry Chiang and Dave McClure have been dreaming this one up, so VC’s can do “outreach and education and stimulate deal flow.” I think it’s a great idea and I’d love to see groups like my own Baltimore Angels as well as some of the VC firms in the region get up on stage and talk about the deals they like to see, the reasons startups should seek them out, etc. A great way to turn the tables and share perspectives that are all too often misunderstood.
• CityCamp – In the spirit of BarCamp and SocialDevCamp (both of which could use folks to take the charge for updated events – we’ll all help!), CityCamp is a catalyst and a forum for talking about what’s working and what still needs to be done from an Open Government / Gov 2.0 standpoint. It’s what Baltimore City’s well-intentioned “Data Day” this summer perhaps should have been. There’s a lot of potential for involving folks from the design, architecture, and foundation community here too.
• Junto & Salons – Ben Franklin convened a regular gathering of smart folks in Philadelphia, many much older than himself, to discuss ideas of the day and to trade notes about what businesses had gone bankrupt and the like; he called it a Junto. Lately I’ve noticed an increasing number of evening salon conversations about politics, startups, tech and the like. Our friends in Philadelphia revived the Junto tradition a couple of years ago, with awesome results. We’ve discussed doing it here but it hasn’t happened yet. Are you the charismatic leader?
• Bootstrap Baltimore / Mosh Pit 2.0 – For the last two years Jared Goralnick has put together Bootstrap Maryland at University of Maryland’s College Park campus. This is a great event, and we could use something here in Baltimore that is aimed at drawing out the amazing quantity of entrepreneurial talent here in Baltimore’s many universities. A few years ago, GBTC hosted an event called MoshPit – a business plan competition for college students. We need to revive this program and meld it with something like Bootstrap. And we especially need to reach out to students in engineering, science, and the arts – not just business students.

Go ahead and steal these ideas. There are plenty more where these came from. Borrowing working ideas from other places means they have a much higher chance of success than trying to design a totally new event format from scratch. Plus, it gives the potential for direct exchange with organizers elsewhere.

If you are interested in pursuing any of these ideas, ping me – I can put you in touch with the originators of these events. And thanks again to everyone who has stepped up to make a real difference here. We are changing this city one mind at a time.

Are entrepreneurs born risk-takers? Is there something about their personalities that predisposes them to take risks that others can’t stomach? Can entrepreneurship be taught?

According to entrepreneurship researcher Saras Sarasvathy, entrepreneurs aren’t different from anyone else; they simply adopt a different approach to problem solving.

Dr. Sarasvathy suggests that entrepreneurs actually create their own odds of success by taking incremental steps that move them closer to their goals. After being an entrepreneur for over 25 years and studying the behavior of many others, I think she’s right. She calls this incremental approach “effectuation” because it takes advantage of the compounding effects that the entrepreneur causes by their own actions.

Here are 6 key points to understand about Dr. Sarasvathy’s theory of effectuation:

1. Entrepreneurs start with what they have and who they are. What do you know a lot about? What early or deeply personal experiences have affected you? What connections do you have? Leverage these assets to do something and then see what comes of it. This first step leads to additional opportunity, and sometimes these opportunities are very big and unpredictable. Action attracts others, and those others enhance opportunity and the odds of success.




2. Entrepreneurs limit risk by understanding what they can afford to lose at each step. True entrepreneurs never take very much risk at once. Typically the calculation goes something like this, “I think it would be worth investing $50,000 in exploring this opportunity. If I lose it, I can survive. What’s the worst that can happen?” There are two likely outcomes of that reasoning: either the experiment is successful, in which case the investment is rewarded and leads to other follow-on opportunities, or the experiment is not successful, which most likely also will lead to other follow-on opportunities. Either way, new opportunities typically emerge because action attracts others.




3. Entrepreneurs create their own market opportunity. When Burt Rutan set out to build Spaceship One, it was not because he perceived that there was a  big market for expensive one-off spacecraft that was going unmet. He started with what he knew how to do and an affordable risk. When Pierre Omidyar started Ebay, he didn’t anticipate it would become a multibillion dollar company. Google’s founders Sergey Brin and Larry Page tried to sell Google for $1M, but were instead forced to see it through and become multibillionaires. The market for a company is often not clear at the moment of founding. Entrepreneurs find their way to the market by the creative, iterative leverage of what and who they know.




4. Entrepreneurs trust people. The best entrepreneurs internalize the African proverb, “If you want to go fast, go alone; if you want to go far, go together.” To uncover large opportunities, it’s often necessary to coordinate the interests of many. The best entrepreneurs involve more people in the effectuation process, because more people means more assets, which often has a non-linear impact on the eventual outcome. In fact, Sarasvathy argues that a degree of calculated “over-trust” and “intelligent altruism” is a rational strategy for uncovering large multiplayer opportunities that would otherwise be hidden or impossible to achieve.




5. Effectual thinking can be taught. Because entrepreneurship is just an application of effectual logic and not the result of innate personality traits, it can be taught. We do not accept the notion that “scientists are born, not made,” and even while we might believe that some people are more disposed to scientific work than others, we do not accept the notion that people cannot be taught to think scientifically. It is similarly possible to teach people effectual thinking. Tellingly, in communities where effectual thinking is common (Silicon Valley, for one), people who had not previously displayed effectual tendencies are often motivated to adopt the pattern once they see it can be effective at problem solving or in generating wealth. Effectual thinking may not only be teachable; it may be contagious in the right circumstances.




6. Failure increases the odds of individual success. While the success rate of a typical individual venture might be quite low, an entrepreneur that sustains a failure is more likely to succeed in later rounds. Failure teaches the entrepreneur about affordable risk, suggests boundaries for over-trust behaviors, and offers hints about how to maximize opportunity. We should never stigmatize failure, but instead understand that it is part of the effectual process.

Pop Business Books

It is fashionable to tell people stories about Purple Cows, Tipping Points, Outliers, Whuffie, Crushing It, and practicing a Four Hour Workweek. However, these books all have their roots in effectual thinking. Do something. Utilize what you really know to stand out and be different. Work with others to uncover the opportunity you want to find. If books like this can motivate people to act, they’re probably a good thing. But I find they can be crazy-making because they don’t offer the intellectual underpinnings to explain why (or how) these approaches might actually work. They’re most often shaming you into action, and in the end they’re giving you a fish, instead of teaching you how.

Effectuation and Social Networks

The internet (in general) and social networks (like Twitter and Facebook, in particular) are platforms for effectuation. They allow entrepreneurs to find the people who will, at each successive stage, help to contribute to the success of their enterprise. These could be customers, partners, or investors. Any platform that allows like-minded individuals to find each other is an accelerant to the effectuation process. In fact, the like-mindedness of these stakeholders is more important than the roles that they play. What is the difference between a company and a customer when both are stakeholders in the product? Who is paying whom for what and when is a detail that needs tended to, but without finding the people who will participate in the conversation that maximizes the utility of the product, maximizing revenue will never be a consideration.

The Myth of the Visionary Entrepreneur

We give a lot of credit to successful entrepreneurs. Warren Buffett, Bill Gates, Steve Jobs, and Richard Branson are some of the most admired people in the world. In some ways that credit is deserved (though one could argue that civil servants and humanitarians are worthy of even more praise). However, we assign them too much credit, or at the very least we assign them credit for the wrong insights.

These people did not anticipate the circumstances of their success, and did not set out to attain the particular achievements for which they are most well known. Rather, these people are all master effectuators. They took action early. They involved others. They took many successive steps that moved them closer to their passions. They suffered failures. And perhaps most importantly, they are alive to tell about it.

There are many unsung heroes and master effectuators who have had great success but whose stories have ended less well. And we don’t hear as much about them. The final outcome should not diminish their achievement.

You do not need to be the next Bill Gates or Steve Jobs, or even have an idea right now, to be an effectual entrepreneur. Start now and take the journey. You will be glad you did.

References

• Saras Sarasvathy [video] on entrepreneurship at BigThink.com
• Effectuation [book] by Saras Sarasvathy at Google Books
• Effectuation and Over-Trust [article] by Sarasvathy & Dew at Entrepreneur.com

“Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world.” – Walt Disney

Thinking about Eric Ries‘ lean startup methodologies, it occurred to me that Walt Disney pioneered the form in 1955 with the creation of Disneyland. Let’s take a look.

Private Beta: July 17, 1955

Disneyland was officially launched in a private beta in July 1955 to 6,000 guests by invitation only. Unfortunately, those folks shared their invitation links and 22,000 extra guests showed up with forged tickets! Special guests Ronald Reagan and Art Linkletter helped Walt Disney put on a good show that was live-streamed on television.

But the park was anything but a success that first day. Ladies’ heels sunk into the asphalt slurry sidewalks in the hot July sun. A plumbers’ strike meant that only a few water fountains were operational. A gas leak closed several sections of the park.

These setbacks led Disney’s team to refer to this fateful day as Black Sunday. The opening day generated such negative publicity that Disney and his team took special care to invite the press back the next day and in the coming days to see “the real Disneyland” and see things as they had been intended.

But even if things had gone as planned, only 18 attractions were operational those first few days. Tomorrowland had just four attractions and was admittedly incomplete. Several other attractions would open later in 1955 and 1956.

When Disneyland opened in July 1955, it was literally the minimum viable product. With just $5 Million in financing, there was a lot that Walt wanted to put into the park, but there was only so much money and time.

They launched with what they had ready and took the hit for the stuff that was broken. Why? So they could learn from their customers.

Customer Development

Disney listened to his customers. This change log on the site Yesterland.com shows how much stuff opened in 1955 was eliminated or modified over the years.

New rides were added, old ones modified; others became simply obsolete or required updates. The awkward and failure-prone Flying Saucers ride was replaced in 1967 with the Tomorrowland Stage, which was in turn replaced in 1986 with the Magic Eye Theater. The “Rocket to the Moon” became the “Rocket to Mars.” The iconic Matterhorn Bobsleds ride didn’t open until June 1959, nearly four years after the park’s debut!

Disney’s guest relations department has had the benefit of hearing a huge volume of customer feedback – about which attractions people enjoy, which ones they hate, and which ones literally make them sick. With such a powerful mechanism for continually collecting feedback from millions of customers (who take pride in interacting with one of the world’s most prestigious brands), the Disney organization has benefited from a feedback cycle of continuous improvement.

If Disney and his team had gone into “stealth mode” for 55 years, could they ever have produced the park that we see today?

Build On One Success

After Disneyland was successful, and could benefit from a methodology of continuous improvement, they were able to obtain the financing necessary to build Disney World, Epcot, Euro Disneyland, Animal Kingdom, Disney’s California Adventure, and several other projects. You might think of each of these as several products in a portfolio, but they all flowed from the fundamental success of the original and the conviction that it was okay to launch with a halfway-there product in July 1955. They knew that customers would help them find the way forward.

Disneyland has always been the result of the interaction of management and customers to produce an experience that is valuable for its customers and profitable to operate.

Your software business should take the same approach. You don’t know what your customers are going to want. Launch with something workable, even if flawed. Then iterate with continuous improvements after that. Then, you and your customers will be building something valuable together.

Your product should never be completed, as long as there is imagination left in the world!

Entrepreneurs sometimes think that they are the ones “doing the work,” and that investors are but a necessary evil: parasites looking for a free ride on the back of the hardworking startup.

This false dichotomy blinds entrepreneurs to the reality that they, too, are investors and must always think like one. It deeply affects your decision-making process.

The Business Case

Why is your entrepreneurial endeavor a good idea? In a capitalist system, all entrepreneurial activity has just one purpose: to make money. Presumably, your business idea will require the investment of some of both your time and your money. Your time has opportunity cost associated with it (what you could be earning doing something else); and your money could be in the markets earning 5-7%. Over time, your business idea should return a value greater than 7-10% compounded in order to make it worth doing at all. Many businesses can yield several hundred percent returns, either in the form of free cash flow or an exit (selling that cash flow) later on.

You might argue 1) there are other reasons besides making money to start a business, 2) capitalism has flaws, 3) we don’t actually live in a capitalist system. These are fascinating, valid arguments, but let’s put them aside for now.

If you accept the idea that making money is the only reason to start a business, then why would you spend your time and invest your money in a business concept that you would not ask someone else to invest in as well?

Bad answer: Because you don’t think an investor will “get it” and you don’t want to waste your time figuring out how to convince people you don’t know that your idea and team are worthy of their cash.

Good answer: Because you don’t need additional cash and don’t want to give up equity right now. You might consider taking investment after your prototype is complete to make a couple of key hires.

This “bad answer” is a kind of exceptionalism: you think that you are special, that you have all the answers you need, that this time it will be different, and that you won’t ever need investors. But like most exceptionalist attitudes, this mindset is a self-deception.

Always Be Transactable

In economics, transactability is the degree to which something can be traded, usually for money. If you don’t think like an investor yourself, you are adopting a mindset of non-transactability early on. You’re essentially saying, “I don’t even want to think about trading equity for money because I am exceptional and I don’t care about what anyone else thinks of my business.”

The problem with adopting a non-transactable mindset is that it tends to persist and self perpetuate. When do you go from being non-transactable to transactable? When do you decide it’s okay to give up equity to key hires or partners? When do you decide it’s okay to accept a small amount of investment? What will I do when it’s time to sell the business?

Many early-stage entrepreneurs dismiss these questions, assuming that they will “figure them out when they get to them,” or they say that they’ll “never sell their business.” These are both flawed arguments: if you don’t think about how you would trade equity for cash (and vice-versa) from the start, you are likely to handle any situation that requires it poorly.

Your Business Has a Valuation From Day One

This morning, Apple has a market cap valuation of $184.64 Billion (more than Google, less than Walmart). Your business is probably worth less, but it still has a value!

The “valuation” of your business is, quite simply, what someone else would be willing to pay to own it. That is usually a combination of the depreciated value of your assets, less your liabilities, plus a multiple of whatever free cash the business might be available after operating expenses. Some businesses get really high exit multiples (product companies, 8-10X net) and others get lower exit multiples (service companies, 3-4X net). There are no “rules” for business valuation; it’s a lot like home prices. You can look at comparables and take some guesses, but it boils down to what a buyer is willing to pay. It’s nice to have a lot of buyers, too.

You should always be thinking about maximizing the value of your business. What would somebody else pay to be in your shoes? In the early stages, the answer is almost “not much” or even negative. That’s to be expected, but over time, if you succeed the answer will start to be $100K, or $1M, or $10M. You need to be thinking about that trade all the time, and at least have some sense of what your business valuation is and how you might maximize it.

Everybody Is an Investor

You may not think so at first, but you are always asking for investment. If you are hiring someone, they are evaluating your business plan, your chances of success and whether your company represents something they want to invest their time in.

Your trading partners are also evaluating you and determining if they want to enter a relationship with you. Your customers also evaluate whether they should bet on doing business with you.

By keeping transactability always in mind and caring what others think of your business, you will be more likely to appear viable to these constituencies. And being transactable helps you make better deals with partners and customers: you learn what can be traded and what can’t.

I’ll Never Sell!

Some people have no intention of ever selling their business, and instead just want to be their own boss and make some money. This is fine, and most people call this approach running a “lifestyle business.” It’s well suited for sole-proprietors and can offer great personal freedom.

But this can be a treadmill: most often, you’re trading money for your time. Even at a high hourly rate, your income is tied to how many hours you can bill. Take a month off and you lose a month’s pay.

Or, you may have built up a clientele that pays recurring subscription fees or other residual income. While this can free up your time somewhat, if those recurring revenues are not high enough to sell to an acquirer, you can still be stuck.

At some point, you will want to get off this treadmill. What then? Do you just shut down the business and throw it away? That’s a very bad idea. Ask again, what would someone else pay to be in your shoes? The answer might be $50K, or $200K, or $1M depending on your business. You can and should capture this and shop it around in the market.

Or, you might have a service company that you want to pass on to your family. What then? What’s that worth? How do you manage your estate planning effectively?

Any business where “you” are the face of the business can be tough to sell in the market. But even these kinds of businesses can be sold. I’ve seen this happen, and it’s usually for meagre amounts of money. (Think computer sales + repair, HR services, accounting.)

Precisely because of their low market valuations, I’m not big on lifestyle companies. But my point is that they too have valuations that someday need to be reckoned, and to start any company – even a lifestyle company – without thinking about business valuation, investors, and transactability is foolish.

Always Have a Pitch

The simple way to keep your head on straight is to always have a pitch. You should always think about how you would explain your business to an investor. It may well be that the only investor you are concerned about pitching early on is yourself, your partner, your friends and family, or even your spouse. But you should also be thinking about what other kinds of investors (angels and yes, even VCs, where and if applicable) might think too. Because you just might need them later.

You are your own lead investor. If you cannot articulate why you’re doing what you’re doing and why it might generate good returns in the long run, then why do it?

The First Church of American Business teaches that virtue accrues from execution, and that the ability to manage big, complex to-do lists either personally or via delegation is the key to getting ahead in business.

From there it also holds that competition is all about having and managing longer and more complex to-do lists, and beating out the other guy who’s presumably doing the same thing. Books with titles like “Execution,” “Getting Things Done,” and the “7 Habits of Highly Effective People” depict the business world as a crazy-making self-perpetuating scheme of testosterone-fueled competition, which ultimately aims to canonize its Saints the way the sports world does its highest trophy winners.

Business book writers have it particularly easy; they go back and look for the “winners” of this apparent competition (Jack Welch, Bill Gates, Eric Schmidt) and assign them all manner of superhuman qualities. Occasionally they come across somebody who somehow managed to get on top without shaming (and presumably out-executing) all of his or her peers, and they shrug in disbelief and assume that they must have “the vision thing” and canonize the schmuck anyway; the last thing the high priests of productivity would want to admit was that they didn’t see someone coming.

My deepest wish is to go back to 1960 or 1985 (maybe both) and gouge out the eyes of these practitioners with their own tassel loafers. We’ve seen how this all worked out; this approach to business has led us to the only place it could: a testosterone-fueled sham of an economy.

Certainly execution is important. But in the rush to assign virtue to execution itself, we’ve lost sight of what it is we’re executing – that “vision thing.”

Design is the most important force for good in the world today. Overstated? I don’t think so. Design indicates intent. I believe humanity has good intentions for the world; therefore I believe that design is the way in which we will manifest those good intentions.

Many people are confused about what design is. They confuse it with industrial design (iPod, Beetle, Aeron Chairs) or graphic design (packaging, advertising, marketing, websites), or simply assume it’s one of those “art things” that they don’t have to worry about because they didn’t study it in business school.

But in fact, people design things every day. We are all designers of our lives. In the simplest choices, we are signaling our intentions about how we want to interact with the world and sending subtle cues about the kinds of interactions we desire.

Getting good at design is a little bit like becoming a Jedi master – it comes from a place inside where less is more and where silence is more powerful than sound.  It’s about looking for the reasons why something will work rather than the ways it might fail. It’s about finding the line, the melody, the art, the poetry in mundane transactional details and teasing it out to make it serve you. It’s tough to explain, but over the next few days, I’ll be reviewing some recent, unconventional examples of design in my own experience.

Design is all about executing a small number of the right tasks.

Yesterday at my parents’ house I stumbled across a small black 3″ x 4″ leather-covered notepad with the word “THINK” on it in gold, and my grandfather’s initials (V. G. TROY) embossed in gold in the lower right corner.

This was an original IBM Think Pad.

Thomas Watson, founder of IBM, famously instructed his employees to “THINK” and had emblazoned the word all over the company’s offices; each employee carried a “THINK” notepad. And it seems they gave out various similarly-themed promotional material: my grandfather was a prospective customer to IBM, as he managed the automation of the New York State Insurance Fund in the early 1960′s. My wife recalls that her great-grandfather, an accountant, had a large “THINK” sign over his desk, presumably encouraging his supplicants to refine their queries.

I got to considering what it says about a company (arguably a society’s largest and most successful company) that is so fanatical about a single word like THINK. And what does it say about a company (and a society) that abandons that slogan?

THINK, in all caps and repeated like a mantra, says a lot. It implies that as individuals we are capable of logical contemplation that will result in conclusions that are universally true; that there is in fact one truth that all of us can visualize if we simply utilize our intellect and the tools of logic. What a view of the world (and of business) this is: there is only truth, there is only competitive advantage, there is only logic. If you want to succeed, all you have to do is find the truth.

Somewhere in the last 40 years, American business became unglued from truth.

Success in business became a kind of alternate-reality game, with a billion realities competing against one another, and perception trumping reality. No wonder a word like THINK seems obsolete and quaint now: it ignores the reality of Wall Street and all the complexity that comes when you’re painting a different picture for customers, employees, and shareholders.

If we were to choose a word that sums up the current business ethos, it might be something like “POSTURE” or “PROFIT”. But it’s surely not THINK; thinking has been out of fashion for some time, and it may just be that as we dismantle this fake, Bernie Madoff economy, we discover that if we want to achieve real economic success again we could do worse than to adopt Mr. Watson’s old mantra.

THINK.

As many of you know, I live along the shores of the Severn River, a river along the Chesapeake Bay, near Annapolis, Maryland.

This infuriating (but unsurprising) article in the Washington Post suggests that the metrics of its supposed cleanup that have been taking place the last 25 years have been inflated to reflect more progress than has in fact been made.

Just as the advice to an alcoholic on how to lose weight and get back to a normal lifestyle can be nothing other than “stop drinking,” the remedy for the bay is equally stark, though more complex. And the brainless consumer squads inhabiting the Chesapeake Bay watershed want to try every imaginable remedy other than the ones that will work.

If you want to fix the Chesapeake Bay, here’s how:

1. Offer massive tax credits for allowing industrial farmland to revert to forestland
2. Tax fertilizer sales
3. Offer tax credits for replacing industrial farms with grass farms
4. Discontinue commercial Blue Crab and fish harvest in the bay; yes, screw the watermen and end the industry
5. Tax all impermeable surfaces; tax large impermeable parking lots at a 4x rate
6. Use the impermeable surface tax to fund a tax credit for those installing permeable surfaces
7. Invest funds in stormwater and sewage handling plants
8. Price water at 5x its current price
9. Offer tax credits for commuting via bike and public transportation
10. Tax credits for people who place land under conservation easement

Got the theme here? It’s all about taxes. While I am not in favor of taxing people, I’m also not especially in favor of large scale programs to modify human behavior. This, however, is exactly what the people say they want, and there’s no surer way to change human behavior than with incentives and disincentives. Taxes and tax credits are arguably the only direct tool that government has to create such incentives for behavior change.

If at least a good portion of these measures are not undertaken (or ones which very much resemble them), I can only assume that — like the drunk who will try every other remedy other than to stop drinking — we are not serious about saving the Bay at all.

Which makes me wish people would shut up and get about their hurried destruction of it; it is the only intent we can infer from the behavior we see. Pave the Bay never sounded so realistic. It really seems as though no one — no one with the will to make a difference — really cares to solve the problem. And I blame us citizenry first and foremost, because we won’t give our elected officials the political cover to do any of the things that it would take to actually solve the problem.