P.S. You Should Read This

Practically anyone can form a start up these days, whether they are innovative or not. This has resulted in an explosion of start ups, with there being tens of thousands of them around the world today. So how does a VC firm pick the right early-stage companies from the wrong ones? It can’t use historical performance to value the companies simply because there isn’t any. Until now, they’ve had to make a judgment call and use qualitative factors to determine whether the companies were worthwhile investments.

I recently came across an article which focused on a start up, YouNoodle, (why am I not surprised) that has come up with a way to come up with a numerical valuation of other start ups and early stage companies. It focuses on 4 areas to come up with the valuation: the team, the start up’s financial factors, its concept and its advisors. I think that the areas used to gauge the valuation are pretty comprehensive, as most people would only consider the concept and financial factors when deciding whether to invest in the start up or not. Although the idea of a numerical valuation for start ups sounds extremely appealing, I do have some reservations over the idea of using a survey to determine a valuation. I’ll probably have to do some more digging into its methodology to be convinced, as its 88 million dollar valuation of Google falls well short of Google’s actual value.

I guess the main point of the author is that while its estimates may not be extremely accurate, they give you a sense of whether the company will be profitable or not. This sure as hell beats taking a shot in the dark and choosing investments based off the impressions its concepts leave on you. I see a lot of potential for both YouNoodle, as well as other companies which may tweak YouNoodle’s model to provide more accurate estimates. I’m sure that investors would gladly pay a little extra to get a better picture of the start ups that they want to invest in.

I recently came across a rather innovative company, Grins 2 Go. While it is a franchise that focuses on events and photography, it has the unique twist of being completely mobile. It offers every company their own van, all the photography equipment they’d need, and also provides training to the company.

The mobility provides a number of potential advantages. Firstly, it prevents the need for clients to have to travel to studios to get portraits done, as the company comes to them. It has also gone after a very niche market, and has no major competitors making it extremely profitable to them.

It has become so successful in the U.S. that it is looking to take its operations abroad, especially in regions where mobility is essential. I guess only time will tell if Grins 2 Go has as effective an impact abroad, but the future definitely looks bright for this company.

The “swoosh” logo is unmistakable. It has permeated practically every possible region in the world, and you’d be hard-pressed to find anyone who couldn’t identify its association to Nike. So what has it built its brand image upon? Good, quality shoes. Sure they produce and sell all sorts of sportswear, but their core competency remains in footwear. As a result, any changes made to their offerings are likely to generate a lot of media attention and get scrutinized by the public.

One of their newest products did just that. With the Beijing Olympics right around the corner, Nike is actively unveiling new footwear for all the sports featured. While most of its new products were in line with its traditional image, Nike’s venture into a new sport, riding, raised more than a few eyebrows. Its equestrian boot (Ippeas) is apparently more comfortable than the regular leather boots thanks to its “air zoom” cushioning and a new type of spur, among other tweaks. There are many criticisms of the product, ranging from it “looking like a stripper’s boot” to fears that it is diluting the traditional, elite image of the sport. I’m sure that there are plenty who believe that this is yet another attempt by Nike to diversify its business, but I disagree. Nike has already been burned in the past by trying to go after niche markets, such as cycling shoes, and I highly doubt that it hasn’t learnt from those mistakes. I think that it isn’t using the Olympics as a stepping stone to get into the riding market, which is way too small, but rather, is using it as a marketing ploy. The boot has already gotten more than its fair share of press, and the Olympics haven’t even started yet. Nike’s competition, such as Adidas, have been unable to come up with such equestrian boots, further casting Nike in the limelight.

This is far more effective way for a company to market itself, rather than using traditional television ads and billboards. For starters, the uniqueness of the product means that more people will pay attention to the company and retain interest in it. Secondly, Nike doesn’t even have to pay for the coverage! Media companies, such as Business Week here, automatically end up covering the offering and spreading it among the public. There is one drawback from using unique goods to market a company: brand dilution. A possibility remains that developing products which are completely different from the company’s traditional focus could lead to a “watering down” of a brand, with customers becoming confused over what the company specializes in. Nike has taken this into account with the Ippeas. As I mentioned earlier, Nike is known for its footwear, and the Ippeas in all its uniqueness remains one.

Only time will tell whether Nike’s move actually pays off, and even then, it would be hard to quantify the increase in Nike’s brand equity. Either way, Nike has not taken on too much risk with the Ippeas, but could be faced with plenty of upside from it. That sounds like a good deal to me.

All this focus on innovation in the media (and my blog too, apparently) seems to suggest that we should all drop whatever we are doing and starting innovating immediately. So is innovating at all times effective? Scott Anthony at Forbes doesn’t think so, and I quite resoundingly agree.

In “Balancing Disruptive Innovation”, Anthony explores the importance of the timing of innovation, and looks at examples such as Getty Images and Seagate. A single sentence of his summed up the argument perfectly: “The paradox is that when companies need to act differently, they can’t, and when they can act differently, they don’t need to.” It is this argument which differentiates the successful innovators, which are few and far between, from all the others. Most companies try to innovate only when they are faced with major problems and once their business model no longer works. By the time the companies realize that they need to revamp their process, it is often far too late. Innovation isn’t a quick fix to a problem, but is often treated as one. Instead, it is a long term solution, one which requires both a great deal of foresight and time to implement. It is this nature of innovation which brings out the paradox proposed by Anthony. Most people live by the rule “If it ain’t broke, don’t fix it” Such a rule will have to go out of the window if innovation is to be implemented effectively. Only when the company is performing well will it have the resources as well as the time to undergo any drastic changes to their business model. This is a “risk” which few are willing to take as why would anybody in their right mind change something which is doing well? My answer: to negate problems and protect the firm’s interests further down the road, be it in five, ten or even twenty years. Many companies are also focused on short term results, with managers being compensated for performance. As innovation isn’t the ideal way to boost immediate numbers and show high margins, decision makers are not incentivized to make those tough calls.

While companies have started to compensate managers in the form of stock in order to ensure that the manager acts in the long term interest of the company, they still do not incentivize the adoption of innovation. The perception of innovation will have to change from being a temporary fix to being a necessity, and there should be no barriers to its implementation.

So how do you incentivize someone to adopt innovation at the right time? Companies tend to use quantitative measures to gauge performance of a manager. Unfortunately, the long-term nature of innovation, as well as its less-than-obvious effect on the company, means that it is hard to separate the role innovation plays from the other operations of the company. A company could, however, set up a management team that studies successful innovators and identifies the incentives these innovators used The company could then adopt a similar system within their own firm.

Picture courtesy of: http://www.whatagreatidea.com/art/antbroke.gif

Business Week recently featured an article on innovation and how companies which do innovate do well, especially in recessionary conditions. The article focuses on 4 companies: Best Buy, P&G, Apple and Starbucks. It notes that the first three have all used different techniques to innovate and modify their business practices. Best Buy has started to focus on providing customer service to its clients, and is doing so by increasing its staff. Adding people during a recession may not seem like a standard business practice, but it is a sign that the company isn’t focused on the short-term conditions, but it is innovating for the long-term. The article also looks at how Apple’s innovative products have been able to stimulate consumer spending in poor market conditions, as well as how P&G is changing its business operations to cope with rising energy costs. The author then contrasts this to Starbucks, who is closing stores to cope with its lack in profits. He also claims that by closing these stores and keeping its breakfast sandwiches, it is not being innovative.

I can only agree with some of the arguments proposed in this write up. I agree with the argument made for Best Buy in that by pursuing an innovative strategy such as increasing its labor force, it could be securing its long term future. The argument made for P&G is much less convincing. The author simply states that P&G has tried to change the fact that it uses 30,000 trucks and 145 manufacturing plants to cope with the rising energy costs. This is not particularly innovative, as every company I know is trying to scale back operations which consume a lot of fuel. So how is P&G any different? I also find the example of Starbucks as not being an appropriate example of a company with bad innovation. It isn’t cutting stores simply because of the bad economic conditions, but because some of its stores were cannibalizing its own other stores. This cannibalization would occur no matter what the conditions are, and hence I highly doubt it will open a huge number of stores up as soon as the economy gets better.

Do you know the difference between conventional logic and value innovation logic? I didn’t, at least until I read this article. The report proposes a very interesting framework to determine if your company focuses on value innovation or conventional logic, and notes how companies which focus on value innovation tend to perform better than ones which don’t.

The framework looks at 5 basic dimensions of strategy, and looks at what differentiates value innovators from conventional companies in these metrics. The dimensions are: industry assumptions, strategic focus, customers, assets & capabilities and product & service offerings. While you can read more about the differences in the article itself, the main difference highlighted is the fact that those who follow value innovation logic tend to focus less on their competitors, and more on themselves. They also do not allow themselves to be hindered by industry boundaries, but think out-of-the-box to maximize their growth.

While the framework seems to work in theory, I believe that it is a lot harder for it to be practically implemented. For starters, companies like to benchmark themselves by their competitors, especially as it gives them an idea of how well they are performing, or how they should be performing. Trying to completely ignore the competition would mean that the company would have no quantifiable measure to gauge their relative performance. Let’s take an example that a company has a growth rate of 10%, but its competition is growing at 12%. In absolute terms, it may be fine, especially if it is focusing on its own performance. The company might even consider this to be a “quantum leap in value” as proposed by the article. When compared to the competition, however, it is far less impressive. It should also be understood that competition matters in every industry, especially as all companies are going to be evaluated against their peers by clients and customers.

The study proposes that value innovators focus on the “mass” of buyers and willingly let some existing customers go. Apparently, it is bad to provide customization to serve different customer segments. I find such a strategy inherently flawed, as trying to serve a mass of customers will inevitably lead to a loss in focus. The company would be spreading its resources too thinly, and fall into the trap of the “Peanut Butter Manifesto”. While trying to meet all its potential customers’ needs, it just might end up meeting none of them. It would be far better for a company to focus and target a particular segment, and then work towards meeting all its needs.While the proposal is lacking in a few ways, it isn’t completely wrong. There are a few valid points which companies should keep in mind as they map out their strategy. Not being allowed to be bound by the industry conditions and thinking out-of-the-box are definitely goals that companies should strive for. Companies should try and source out markets and customer segments which haven’t been targeted, and become a leader in those areas. They should also keep thinking about new and innovative ways to capture a larger market segment, and unconventional means would be useful in doing so.

All in all, the concept of “value innovation logic” as proposed by the author has its pros and cons, and it definitely should be taken with a pinch of salt.

I recently read a very interesting write up on the link between entrepreneurs and criminals, and how criminals could be entrepreneurs if given the right type of opportunities.  This would seem like an alien concept to most, as how can entrepreneurs, who are lauded by our society, have any sort of a connection to criminals, who are vilified?

The arguments proposed are very valid and logical, but not something that is not intuitive.  Apparently, people who have shown characteristics such as a desire of independence and an aversion to rules can be criminals or entrepreneurs.  Just as criminals have an aversion to being bound by laws and social norms, entrepreneurs do not like being in a bureaucratic corporate environment that restricts their creativity and conflicts with their working style. The author even cites a statistical analysis that identifies a relationship between teenage crime and being self-employed once the other socioeconomic factors have been eliminated.

I concede that while both entrepreneurs and criminals might share similar character traits, it is quite a stretch to draw a link between them and conclude that criminals could become entrepreneurs under the right conditions.  There are plenty of differences between criminals and entrepreneurs as well, but these are not exposed in the article. To also propose a solution of using incentives to convert criminals to entrepreneurs is also a little too simplistic. Firstly, incentives could help any criminal become more productive, and not just the entrepreneurial ones. Secondly, criminals are not formed simply due to lack of incentives, but due to everything from upbringing to their environment. Society would have to change all these factors before criminals can be made more productive members of the community.

Even the best of intentions can be twisted. An article in the WSJ sheds light on how companies such as Rhodia have taken advantage of an UN rule, which was meant to curb pollution, and made money off it.

Rhodia is a chemical manufacturing company which destroys nitrous oxide, a greenhouse gas. Under the UN rule, it can therefore receive pollution “credits” which it can sell to polluters in countries for revenue. The original plan was for money to flow from the richer countries to the poorer countries, thus incentivizing the poor countries to develop green technology. Companies such as Rhodia, however, take advantage of it and make enough money to de-incentivize their own countries from being green.

Although Rhodia claims that it is “committed’ to protecting the environment, figure make it is clear that the pollution credit business is profitable, far more than even their primary product, adipic acid. The UN also defends the rule, by saying that greenhouse gas cutting obligations are being fulfilled, even to the developed countries. Yet the fact remains that the primary purpose of the program is being undermined by Rhodia.

I guess the main takeaway from this situation would be that the UN will probably have to place tighter controls on the companies that it issues “credits” too. It definitely did have the right idea by trying to automate the process and using the markets, as it would require far too much work to deal with each organization individually. Sanctioning who they give credits to, and putting a cap on the number of the credits awarded per company, would go a long way in fixing this problem.

The importance of a formal education in entrepreneurial success is something which generates much debate. There are some who believe that an education is not required, and that the ability to be an entrepreneur is something people are born with. Others, such as Matthew Bandyk with the U.S. News, believe that an education can be extremely valuable. I believe that an education has both merits and flaws, but is nonetheless crucial to any budding entrepreneur.

In addition to the benefits already proposed in the article, I feel that an education can have another major advantage: credibility. Entrepreneurs who start working on their idea immediately upon graduating from high school often find it hard to market it to potential venture capital firms and investors. Sure, there may be the occasional idea which could completely blow them out of the water, but often, it takes a lot more to convince these firms to invest in the idea. The credibility gained from a college education, especially one which is top tier, can instill confidence in the investors, and make them a lot more open to new ideas. An education would also help entrepreneurs in the event that their venture fails, and they decide to seek a more stable job.

Despite its many benefits, having an education has its costs as well. A four year course in a top university is a sizable amount, not considering the opportunity cost of lost income. Within college itself, there can be a lot of pigeon holing in form of majors and courses which could restrict the type of classes an entrepreneur could take. This in turn could affect and control his thought process, possibly hindering his ability to generate innovative ideas. Peers influences can also play a huge role in college, where the potential entrepreneur could be made more risk averse than he initially was. He might even end up dropping his ideas completely to go for a more mainstream job.  

By no means is college a free lunch, as there are costs to go with the benefits that it brings. Picking the college which adds the most value is therefore crucial for any entrepreneur’s success.

Corporate Social Responsibility is a much talked about subject these days. Every company seems to be adopting it, and generating press about their efforts at being a good citizen. Well according to one study in Business Week, philanthropic efforts by corporations have actually dropped in comparison to those 25 years ago.

The study used a much more quantitative measure to conduct this study, rather than basing it off the popular press. It notes that in contrast to 25 years ago, when corporations donated 2% of their pre-tax earnings for philanthropic causes, companies nowadays only allocate 0.7% of their earnings. I guess that companies have started finding it easier (and cheaper) to publicize good actions than to actually do them. After all, the only thing that matters to their business is what the public thinks of them, rather than how much good they are actually doing. However, I agree that just looking at a single figure is not reflective of all the efforts, but it is definitely better than a purely qualitative measure.

The study could be improved by looking at a number of factors, ranging from conducting surveys of employee happiness to having a detailed analysis of each of the company’s efforts (and “crimes”). It should also be noted that the simple action of donating a significant portion of a company’s revenue does not make it a socially responsible one, as it could be causing damage (like undercutting employees or pollution) or having poor practices in so many other ways. Similarly, a company does not need to donate to be responsible. It could just prevent pollution, increase expenses (by offering higher wages) or even generate awareness.

Despite the study being flawed, I still feel that it does hold truth. The only way to inculcate the concept of CSR is to bring out the truth about companies, both the good as well as the bad ones. Society in itself will need to make a more of an effort to ingrain these concepts, and prevent itself from being swayed by simple press releases and media articles.