Tuesday, March 19, 2013

Kickstarter and Long Shadows

I have mentioned in the past the "long shadow" that funding decisions cast into the future of a startup. These decisions often set an irrevocable path for startups, one that new founders often don't understand until they have lived through it once. It happens to many entrepreneurs, with perhaps Steve Jobs being the best know example of being dumped by the company he co-founded.  But it isn't just the risk of being fired that should concern the entrepreneur. They should also be concerned about the mission of the company. To reframe, it isn't about you, it is about the ability of the company to perpetuate its purpose. Good founders understand that it isn't the funding that matters, it's the funders. More specifically, their values, expectations and commitments.

These values, expectations and commitments will largely revolve around recouping the investment and a return. That is what investors do. If they put money in, at some point they will want to get it back, plus a return. While they may appreciate the purposes set by the founders and see these as fundamental to building value, those are not the primary purpose of the funders. In the end, it is about harvesting their share of the value. If it is a fund, they are required to do this, usually within 10 years of accepting money from their investors. Don't get me wrong, good investors work hard to increase the value of the firm- serving on boards, helping recruit talent, helping forge partnerships. But they are doing it so they get their money back. Even in impact investing, they are investors. If they don't want their money back, they are philanthropists, not impact investors. 

I was thinking about this as I read today's Fast Company article about Kickstarter,  and a great series of  recent blogs by Rafe Furst on "Why Crowdfunding Changes Everything." In the Fast Company article, one of the co-founders, Perry Chen, states "This is a founder-controlled company. Our investors understand that we want to stay independent forever. We have no intention of selling this company or doing an IPO." This is interesting, given that their venture round was led by Union Square Ventures, Fred Wilson's firm. Yep, the Fred Wilson who wrote a few years ago about the need for alternatives to acquisitions and IPOs to provide liquidity for founders and investors. His main concern was the tailing off of innovation in these firms after these events. But lurking between the lines of his post was the concern that, by investing (which requires liquidity at some point) he is part of the problem. His investment, in effect, will eventually lead his most successful portfolio companies to do something that will reduce their innovation, and by necessity, their value. 

The Fast Company article goes on to say that the investors accepted a requirement to "never sell their shares." Let's peel that back a bit. That means, as Chen said, that company sale and IPO are non-starters. It also seems to rule out Fred Wilson's idea of an alternative market where Union Square could sell their shares, but allow Kickstarter to remain private and independent. I'd have to speculate that the options for the investors are either that Kickstarter eventually pays a dividend (and that would need to be at a high rate to meet VC ROI requirements during the term of their fund), or that there is some repurchase formula, where the company could recapitalize and buy-out its outside investors. My guess is that it is the latter, and that will mean Kickstarter ends up with a lot of debt, or a private equity investor. Either will change Mr. Chen's life significantly, I'd wager. 

Another potential path besides the "never sell out" path is exemplified by Facebook. They did go public. But the founder, Mark Zuckerberg, maintained control by issuing two classes of stock. One class retains voting control with the founders. He borrowed this idea from Google, and LinkedIn, Zynga and others have also done it. As James Surowiecki wrote in the New Yorker, "whereas the CEOs of most public companies have to spend time kowtowing to investors, Zuckerberg and his peers are insisting on the right to say 'Thanks for your money. Now shut up.'" Perhaps these choices were made to avoid Steve Jobs's fate. Or perhaps they were made to see if the company can maintain an innovative, risk tolerant culture. To maintain the option to perpetuate the company's purpose. 

The road is littered with companies that lost their purpose (or at least shifted their mission away from social and environmental aspects) as they grew and needed to meet investor requirements. Ben & Jerry's, Tom's of Maine, Burt's Bees, Honest Tea. Too often, mission driven companies get bitten by their shadow. The naivete that makes one take on the world with a risky venture is often accompanied by the Achille's heel of lack of knowledge of the implications of early decisions. The entrepreneur raises money to grow and increase their impact and brand, but in the end, the cost of that capital is a loss of their core mission. Valuation trumped values. But not always, and not forever. Ben & Jerry's recently became a B Corporation. Zappo's culture continues to thrive. Stoneyfield Farms seems to have kept most of its mission intact. 

As I wrote several months ago, at New Belgium, we have tried a path of 100% employee ownership to perpetuate the company mission for the long term, and were able to provide the founders with liquidity over time. However, I don't think this would have been likely if the company had raised outside equity in the early days. 

If companies want to retain the ability to pursue their purpose, they will need to make intentional decisions on funding and funders. For some, it may be better to bootstrap, and grow more slowly than would be possible with outside capital. Others will use debt (carefully).  Others may choose a non-profit structure (although this isn't immune from mission shift), or investigate alternative structures like the ESOP or cooperatives where customers, employees or producers are the owners (REI, Namaste Solar, Organic Valley). Others may find, as Kickstarter has, funders willing to invest patient capital.  And others will invent a new way, based on the disruption that Kickstarter and their ilk have brought.

All in all, the funding process should become more democratic and transparent, and that means the shadows should get shorter and less mysterious for entrepreneurs.  

Sunday, March 10, 2013

Billions Saved (not "touched")

The field I work in is obsessed with impact. How will an organization make a measurable difference on a problem that matters? Unfortunately, this sometimes leads to silly math. Claims of "lives touched," whatever that means.

Sometimes, it is useful to step back and think about those that truly had an impact. Rather than lives touched, let's talk about lives saved. Here are a few examples.

Ignaz Semmelweis - first person to worry about germs in hospitals, when he noticed the number of women dying after childbirth. Turns out doctors weren't washing their hands. This was over a hundred years ago, so problem solved, right? Sadly, no. Hand washing and disinfection, (or lack thereof) is back in news with recent CDC "super bug" warnings. Semmelweis did not live to see the triumph of his ideas. He died after being beaten by guards in an asylum.

Norman Borlaug, who was central to the green revolution in agriculture. He won the Nobel Prize, and is credited with saving a billion lives.

Edward Jenner, often called the father of immunology. He was a pioneer in inoculation and vaccination, and is credited with proving effectiveness of early small pox vaccine. Historically, it had a 30% fatality rate, and millions were infected. Centuries later, smallpox was eradicated in the early 1970's by the WHO.

Alexander Fleming discovered penicillin, which led to broad use of antibiotics to treat disease. He also won the Nobel Prize. Not every dose saved a life, but many did. And we use a lot of antibiotics these days... estimates are 190 million per day. Which causes other problems. (This is an example of over-adoption of an innovation.)

What can we learn from these examples of impact? Bake your impact into your products and services. An ounce of prevention is worth at least a pound of cure. Measure real impact. Tie your metrics to your purpose. Income produced. Acres farmed with organic methods or reforested.  Cases treated. Births without HIV infection. Lives saved.

Direct causation (or correlation) is often hard to establish when you work on prevention, but work toward it, not away from it. Impact is too important to dilute with silly math and a meaningless competition on "lives touched."
If you like big numbers, you might be interested in these other blogs of mine: 3 Billion Served and Logistics, Legacy and Large Numbers
Of note, if you want to save billion of lives, you are living at the right time. For a few reasons. First, many people are living now versus the past (Banks estimates "about one person of fifteen who have ever lived is currently living").  And the pace of innovation and dissemination is much higher than in the past.

Thursday, March 07, 2013

What Will "College Town" Mean in 2025?

Fort Collins is proud of its recent ranking as a top "college town." Recently, I have been wondering what a "college town" will look like in 2025, so the article in our local paper provoked this short post.

I have blogged about this before- education (including higher education) is being disrupted. I don't know how this will evolve, but wonder if Fort Collins and other cities on this list are thinking about the second half of Schumpeter's creative destruction? What will a city need to do to attract creative, innovative people and organizations,  if students get their education through online courses, tapping into any class... any where... any time?

I have been trying to follow and study this trend. So far, it is the universities that are thinking most about this, and they are thinking about it mostly as a technology/marketing problem. I think they should also consider it as a business model problem. The universities (including those with faculty that teach about disruptive innovation) are acting like the incumbents they are, hoping that change happens slowly and gradually and that they can maintain their market position (and tenure). They don't seem to be thinking about what a university will look like when the students don't live here anymore. What about libraries, dorms, and yes, football stadiums (yes, my dear, that is correct plural)? Where should universities be investing? And what about faculty? Or selective admissions?

It seems that many beyond universities should be thinking about this too. What about the communities they serve? Or the businesses that serve student populations or hire university graduates? Are they thinking about what will change if the students don't live in college towns anymore? Not yet.

Friday, March 01, 2013

How to mentor someone

To mentor someone and help them achieve something worthy:
1) Understand who they are, and what makes them itch
2) Support them to unreasonable lengths
3) Challenge them to demonstrate what they really can be/do
4) Help them surprise themselves.

This is my opinion. No facts support this post.
By the way, this is also good advice for how to love someone.