Earl Smith & “The Money Chase”…

Earl R. Smith II has some words of warning for those seeking funding.

Most money chases fail because the founders do not have an investment quality company. […] others fail because they either mismanaged the process or misunderstood how a successful money hunt should be managed. Yet others fail because they are simply not credible as entrepreneurs. This article is about that last group. Experienced angel investors and venture capitalist are always on the lookout for them and seldom take them seriously.

Might – shudder – you fall into one of Earl Smith’s eight entrepreneur antipatterns, his “Crazy Eights”? Let’s see..

1. “Man Have Got a Great Idea”, i.e. I’ve got a great idea but I need loads of other people to do all of it, and loads of money to fund it. Put another way, “I may be useless but my idea’s fantastic, ok?”
2. “Down the Rabbit Hole“, i.e. delusionary visionaries who very rarely talk with anything so down-to-earth as customers. People who fervently believe in their own hype but rarely (if ever) reality-check it.
3. “It Is Just Me and the Mice“, i.e. Lone Rangers who simply cannot draw any high-calibre people into their team. It almost always takes several people to build a profitable company, so where’s your team?
4. “I Had Some Spare Time“, i.e. part-time entrepreneur, not really interested in the competition, lax on details, not really committed in any significant way.
5. “A Gambler with Your Money“, i.e. a proper entrepreneur is neither an accountant (too dry) nor a gambler (it’s not about hoping for long shots), but someone who does his/her pragmatic best to minimize risk every day.
6. “Implementation is for the Proletariat“, i.e. monetization (and indeed often implementation) is beneath me.
7. “Do Not Know, Do Not Care“, i.e. when the investor knows more about the startup’s competition than the entrepreneur does. Has done no due diligence on his/her own company!
8. “I am Learning All the Time“. With rather less than a nod to Eric Ries’ Lean Startup movement, Earl Smith says that (sure) learning is nice, but that startups are actually about converting what you’ve learned into money.

Are you one of Earl’s Crazy Eights? Though #6’s seem fairly thin on the ground round my way, I must admit that I’ve met a fair few entrepreneurs who plainly fall into one or (often) more of all the other categories.

More to the point, do I fall into any one of them? Certainly, it would be easy to place every entrepreneur pitching a pre-revenue startup (as I am with Nanodome) into crazy pigeonhole #8: but it feels like a bit of an investor cop-out, a bit of a lame, catch-all alibi for not investing. As I recall, roughly 50% of all startups that receive angel investment are pre-revenue, so this is perhaps the only really unfair category of Smith’s crazy eight.

Of course, I would say that, seeing as it’s the only one I think I fall into. But you’ll have to make up your own mind! 😉

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“The Startup Manifesto”

Welcome to the future.

But my future is not the same as yours.

Your weight is now your weakness: times have changed.

My army of one laughs disdainfully at your decadent empire.

You speak to your disbelieving customers with a megaphone.

I listen to them with a microphone, grasping a different world.

You fight each other in meetings to keep your dead jobs intact.

All the while, I continue to dream, design, execute, and ship.

You wonder why your salesmen have stopped closing.

I wonder why there are so many market gaps open.

You idly muse about what the future might hold.

I’m too busy inventing it to care.

You are the roadkill.

I am the car.

Vrrroooom!

Failure to dream, failure to launch…

Just read a very interesting article on Steve Blank’s blog (link tweeted by @ericries) called “When It’s Darkest Men See The Stars“, but which left me with a curiously bittersweet aftertaste.

The title of his post is taken from Ralph Waldo Emerson (though to be precise, Emerson wrote “When it is darkest, …”), because Blank wonders – at length – whether this coming decade might be both the darkest hour for the American economy and the moment that startups & entrepreneurs lead it out of recession / financial stagnation into a bright new future.

So, not only do startups have to (somehow) get funding, (somehow) grow rapidly, and (somehow) be hugely successful, they now have to (somehow)  fix the global economy too. It’s a pretty tall order for a tiny bunch of spirited renegades working outside the system, however bright and connected in to their target market they happen to be. 😦

All the same, even though I take his overall point, I then left a comment to the effect…

Great, great post. If only it were true…

Outside the writhingly empty froth of social media and the short-term buzz of ‘hot’ sectors (geolocation, etc), now is actually a lousy time to be an entrepreneur. The vast majority of plays I see being pitched are simply value chain optimization rather than innovation – sure, people are daring to dream, but most of their dreams are stultifyingly mediocre.

Surely the right question to be asking is how best to channel entrepreneurial spirit and angel finance into things that actually produce new wealth rather than just optimize old wealth? Otherwise the distinctive feature of the decade will turn out to be a glut of sub-par entrepreneurs and fallen (broke) angels.

Really, what I’m saying is that I think we should politely pre-disqualify (if not actually kill) startups that don’t dare to dream that they can produce dramatically new wealth in the world economy. Such companies don’t (usually) serve society particularly well, and leave themselves wide open to being cut out of the loop by other (typically more cut-throat) value-chain optimizing companies slightly further down the line. Dress up their core marginality in Web 2.0 clothes all you like, but you can’t really hide the fact that raw optimization is very rarely a dramatically new form of good. I’d say that the biggest millstone being carried around right now by entrepreneurs is a failure to dream – and arguably the much-talked-about business ‘bootstrapping’ culture merely helps minimize the scope of those few dreams that do still get dreamed.

And what is worse is that the finance problem here is that extraordinarily few angels now seem to have a grasp of the difference between money extraction (i.e. reslicing an existing pie in a financially creative way) and wealth creation (i.e. creating something genuinely new that can then be sold). Perhaps this is simply a hangover from the curse of financial services – that, having spawned a generation of angels who have got rich off (what are essentially narrow variations on) marginal financial service plays, it is only natural that they seek to replicate their successes by investing in yet more marginal financial service plays. Really, why should people unskilled at investing in the physical ever be expected to invest in physical startups?

Interestingly, one particularly thing Blank points out (which has exercised my mind for the last four years, but which very few people seem to have fully worked through) is that Chinese manufacturers have created a two-year replacement cycle for consumer (and even semi-pro) electronics, based around the triple play of volume production, narrow margins and limited life-span components. It’s simultaneously a market position and a self-reinforcing mindset, which (together with all the MBA apologists for universal outsourcing) has served to define the world economy for the last 10-20 years (depending on which sector you’re looking at).

Bucking that whole flawed global system (as Nanodome valiantly attempts to do) comes down to a sustained exercise in engineering for reliability (which only a handful of German manufacturers seem able to do) and local manufacture (or, at least, late local assembly). However… having now pitched ‘reliability-by-design’ to a long succession of angels, I can  tell you that regardless of how much this is good for the National Debt and rebalancing the global economy, it is almost impossible to make it sound like a ‘sexy’ or ‘hot’ play to anyone. Oh, I do my best, but… sorry, Steve,  it’ll need both switched-on startups and switched-on angels to make a macroeconomic difference to that imbalance, and right now we’ve only got a tiny handful of the former in play.

(In many ways, all of this means that arguably my startup’s spiritual home is in Germany: perhaps I should properly learn German and go pitch there? Something to consider…)

Dragons or dinosaurs…?

Should startups be afraid of industry incumbents? Are they dragons or dinosaurs? How defensive should you be?

A quick story: when I started Nanodome, everyone I asked – and I do mean everyone – told me:-

• Security buyers buy on brand, so however funky my technology I’d need to have a brand attached to it to sell any at all.
• Licensing (and specifically to one or more major players) was the only possible business model that would work for a small hardware startup
• I should be terrified of incumbents such as Pelco (who had then only just been acquired by Schneider Electric), Bosch, Siemens, Panasonic, Samsung, etc

However, what quickly became apparent to me was that none of this was particularly true. In Nanodome’s corner of the industry, buyers have long bought high-end branded product in the hope that these would have been (over)engineered for reliability – yet even in 2007 it was clear from talking to customers that this ‘brandness’ was breaking down. Licensing, too, doesn’t work how most people think – basically, ‘good ideas’ only tend to get licensed after they’ve started to eat into potential licensees’ market shares.

Yet the generic supply-side problems incumbents tend to have are (a) that they’ve got top-heavy divisional management mouths to feed based on a cash cow that’s rapidly going dog-like, and (b) that their products have already been incrementally optimized to within a few thou of their production sweet spot. Corporates tend to be reasonably good at optimization – that’s basically why they hire MBAs. 🙂

The security industry is perhaps a bit of an extreme example of all this, in that most of its manufacturers grew large and fat on the long security boom – margins were wide, quantities were decent, & there was room for pretty much everyone to make money. But since 2006/2007, competition from multiple fixed camera setups has heightened, market prices have dropped, and everyone can tell that there’s inevitably a commoditization phase for PTZs coming up (even if nobody can quite see how this is going to work).

What you need to think through as a startup manager is how incumbents are able to react when (as has clearly happened over the last few years) all the certainties of their business context change. Imagining the view from their managerial chair, to avoid having to close down an entire division, how do you think they should go about forming a new plan? Honestly, could they really reinvent their business?

This is the stage where academic business theorists like to talk about how you should ignore all your sunk costs when making decisions – basically, how decision-makers should strip any proposition down to the CapEx, overheads, margins and volumes going forward. However, the perhaps surprising thing is that most corporates aren’t nearly as cold-blooded as their detractors like to claim – in fact, many (if not most) have real problems “Reengineering the Corporation” (whatever Hammer and Champy claim), because this often involves awkward and unpopular activities – closing factories, laying people off, offshoring in unexpected and hard-to-manage ways, etc. No matter how bad the situation and how necessary the upheaval, senior managers will also have to invest a lot of political effort and board-level lobbying to put those changes into action – and this will almost always distract attention from the rest of their thousand daily tasks.

So this points to the real reason why startups exist – it is because corporates are often unable to make radical internal changes to their business except through after-the-event M&A. Startups get the opportunity to change the world not because corporations are technically unable to do the same thing, but because they are usually politically unable to follow such a demanding path. It is not the inhumanity of corporates that stops them, but their humanity.

From where I’m sitting, then, industry incumbents seem to be neither dinosaurs nor dragons. Rather, they are like elephants – big and powerful, with huge appetites, but with poor eyesight and all too often crashing around with their trunk tied in a knot. If you’re nimble and alert, they should be little danger to you!

Green hardware shoots…?

Something’s going on in the UK hardware scene, though it’s yet to be captured by any aggregate statistics I know of – as always, where’s a journalist when you really need one?

What I mean is: for a while, it has felt as though my company has been one of the very few ‘proper hardware’ UK tech startups (medical / energy aside) out there, but now I’m hearing about an upswell in UK electronics design work that began mid-2010, and that began to go seriously big over the last month or so.

Sure, a lot of that is bound to be part of the semiconductor sector’s overall bounce back: and the move by chip suppliers to put out small pitch (i.e 0.5mm) mobile-class SoC devices (which you (a) laser drill or (b) give up on and go home) has meant that low-end pooling has ceased to be an option for a lot of new boards. All the same, it does indeed seem that UK companies are now actually building stuff (shock, horror, etc).

Perhaps all this is a leading indicator of a flurry of hardware startups that will reveal themselves in early 2011, or just budgets shifting back from present-tense survival to future-tense R&D: I guess we’ll see soon enough. Yet even though I’ve said for a long time that hardware is the new software (i.e. that there’s much more of a business case to be made for investing in defensible rapid-prototyped hardware plays than in indefensible Internet software plays), that remains my personal contrarian position, and still a couple of years from becoming accepted as mainstream investment thought. Though… feel free to catch up with me when you’re good and ready, guys. 🙂

As an aside, there’s something seriously wrong with 0.5mm pitch between pins – though it’s great for mobile devices (which need to be ultra-compact and ultra-mass-market), it’s a lousy design choice for everyone else. Even though the same chip with 0.8mm pitch would occupy ~2.5x the space, the space saving comes at the cost of layout agony, of fabricating multiple layers, of laser drilling, of bonding layers together, etc. The production issue is that much as the whole point of manufacturing is to design something and then build a million of them (don’t get me started on ‘niche’), applying small-batch lean manufacturing mucks up the whole economics model assumed by 0.5mm. But I’m clearly getting too technical here, so I’d better stop. 🙂

A spotter’s guide to business angels…

The core definition of a business angel is someone who uses their own money to buy equity stakes in (what they hope and believe  to be) high-growth small businesses. Even though big wins rarely happen, it is generally thought that angels’ overall return on a reasonably diversified portfolio should amount to over 20% (in the fullness of time). Angels certainly hope this is true (and that “the fullness of time” doesn’t go on too long), or else they’d put their money into fine wines or racehorses instead.

Yet this broad definitional umbrella covers many distinct subtypes of business angel: so I thought a spotter’s guide to business angels might be a useful resource.

Horvath and Wainwright (as nicely summarized by Alan Gleeson) divide angels into

1. Guardian Angel (adds value from high-level experience in a relevant industry)
2. Operational Angel (adds value from significant low-level operational experience in a relevant industry)
3. Entrepreneurial Angel (adds value from hands-on experience as an entrepreneur)
4. Hands-off Angel (cash rich and time poor, so don’t really add much value beyond finance)
5. Control Freak (irrationally believe their wealth proves they have all the answers, they want control but are best avoided)
6. Lemming (invest purely from social proof [i.e. who’s already in], rather than from any due diligence)

Unfortunately, I think this is a bit more specific than practical. To me, a more useful starting point for classifying angels would be based on their readiness to invest.

• Latent angels – go along to angel meetings & presentations but have yet to make an investment. ~60% of active UK angels.
• Passenger angels – have an active portfolio (say, 5-10 investments), but pretty much always come in second. ~35% of active UK angels.
• Lead angels – proactive angel investors, that do due diligence and are comfortable leading an investment round. ~5% of active UK angels.
• Fallen angels – angels burnt too often to want to invest again, but who still have investments in their portfolio that have yet to exit/die.

So, if you’re pitching to a group of (say) 20 angels, the chances are there’ll be just one lead angel and seven passenger angels there – a single person in the room who would be prepared to fully engage with your pitch, do due diligence, and try to negotiate a valuation. So, if you’re going to get to a deal from a single pitch event, you’ll have to…

• Outpitch the other presentations by a mile (and here are some tips on how to do this);
• Establish quick rapport and a good connection with a lead angel who isn’t tapped out and has room for another company in his/her bulging portfolio;
• Just happen to be pitching an area where that lead angel is comfortable investing;
• Be running your company within an easy drive of that lead angel’s Home Counties mini-mansion 🙂 ;

Put like that, pitching to angels is a devastatingly bad numbers game: the chances of herding all these cats into a line to shoot with a single silver bullet is practically zero, so you will almost inevitably have to pitch multiple times to come close. What is worse, in the UK’s horribly misguided pay-to-pitch (and then pay 5% or more to fund) angel group culture, this means that you will end up spending a lot of money to advance in only small increments towards a deal.

My own experience is that each network and group I’ve approached when looking for funding for Nanodome has produced no more than a single angel each, which (given that both security and manufacturing are outside nearly all angels’ comfort zones) is almost certainly doing very well. On the one hand, it’s great to have a amassed a collection of passenger angels (and indeed passenger funds) all genuinely interested in having a slice of your company’s seed round, but the challenge remains finding a lead angel – and I’m not sure that UK plc currently has enough lead angels to fund all but a tiny number of startups. Caveat pitchor!

Corporate Venture Capital, revisited…

The startup world has changed dramatically over recent years, as have both venture capitalists and business angels. We’re now surrounded by latent angels, passenger angels, lead angels, angel syndicates (both overt and covert), super angels, and (saddest of all) fallen angels: while VCs now often collaborate with angel groups on seed rounds, and compete with  new mid-range “micro-VCs” (which of course might actually be super angels or upscale angel syndicates). Really, all this finely-nuanced jargon of, errrm, ‘angelicity‘ is enough to spin anyone’s head to the point of dizziness.

However, there’s another player in the startup finance field to which entrepreneurs rarely pay much attention: corporate venture capital (‘CVC’). You see, a typical corporation doesn’t really have a mandate for high-risk early stage tech company acquisitions, no matter how good the technology and strategic fit may be. In practice, the way the world works is that a corporation board would rather greenlight a $30m acquisition than a $1m punt: M&A has to have a certain scale in order to generate a business fit. Which is therefore why angels and VC funds exist – broadly speaking, a Series A investment is designed to make a $1m punt on a $3m valuation to build the investee company rapidly into a $30m acquisition target for corporations who don’t have a remit for making that $1m punt.

What has happened, though, is that a single bad meme has ravaged the financial supply side: that software (and specifically Internet) plays are able to scale so well that they alone have the capacity for bridging this gap. This excessive focus on software (and I’m a software engineer with an MBA, so I feel qualified to give an opinion) has led to the overall field of tech investments being pretty much stripped down to Internet software tech investments, healthcare tech, and energy tech. Everything else is a no-go, basically (or “we’ll come in second if you can find a fund to lead”, AKA “passenger funds”).

From where I’m sitting, it seems to me that the open mindedness to high concepts that made the original wave of VC funds so profitable has long been lost, in the barrage of tech analysts contemporary VCs hire and devote to ever narrower investment fields. Risk is a good thing, it’s part of the whole asset class – it’s what stops corporations from making worthwhile punts while offering substantial returns. Hence to me, a VC that shuns risk is like a pizza company that shuns tomato sauce… yet this is basically what we now see.

Part of the reason for this is undoubtedly the overwhelming amount of gaming that goes on: it can be a lot of work to tell a genuine (but possibly slightly flawed) opportunity from the thousands of hopeful-but-essentially-fake proposals put forward by business school students, who have just devoted 2-3 years of their life to learning how to construct a killer business plan. But all the same, we have seen a systemic VC shift from seed to later stage investments – in fact, I’ve seen it recently suggested that a more accurate name for VCs might in fact be “expansion capitalists”.

It’s not hard to see from all this that there is an ongoing supply/demand mismatch between the kind of (software-scalable) Internet companies that angels and VCs build and the kind of (market profitable) technology company hardware corporations want to acquire. Which is really where corporate venture capital fits in: these are the seed stage / early stage investment arms of corporate giants, that are set up to put money into areas of strategic importance to the corporation – to make the kind of physical market-building investments that VCs apparently can’t.

So, if the current crop of VCs aren’t a natural fit for Nanodome, should it instead look to CVCs in the security industry (such as Robert Bosch Venture Capital, Siemens Venture Capital, Schneider Electric Ventures & Aster Capital, Panasonic Ventures, Samsung Ventures Investment Corporation, etc) or in industries with overlapping supply interests (such as Intel Capital)? Very probably…

Shortening The Odds…

Basic startup funding market statistics (to the best of my knowledge):-

Chances of VC funding: 1 in 1000
Chances of angel funding in London: 1 in 500
Chances of angel funding elsewhere in UK: 1 in 100
Chances of an angel expressing interest but being unwilling to lead a round or do due diligence: 1 in 15

Moreover, these are the approximate chances of a startup’s getting a single term sheet or offer, at which point it’s still in a hugely disadvantaged negotiating position, by which I mean that getting to the stage beyond that where you have multiple suitors (sufficient to gain competitive valuation) is yet more unlikely still.

All of which would seem to point to a number of basic reactions, all of them rational:-

1. The deck is so badly stacked against startups there’s no real point trying, so give up
2. The deck is so badly stacked against startups,  bootstrap / look for JVs / customer funding etc instead.
3. If we produce sweary big-font presentations and a metric-centric business plan, perhaps we can get Dave McClure interested?
4. If UK angels don’t want to invest in anything short of a money tree in full bloom, how can I get onto AngelList? Should I jump on a plane headed West?
5. The odds for all of these are way too long, how can we shorten them?

The way I see it, the central problem is that so many pitchers (if not in fact the overwhelming majority of them) are trying to game the funding system: specifically, too many of the pitches I’ve seen are constructed around a relatively modest idea that has been inflated and contrived to fit a perception of what angels/VCs are believed to want. That is, it’s an OK business idea reshaped around what pitchers think pitchees think pitchers should be pitching – and there is an entire business self-help industry of pitch templates & business plan books to help confuse the issue further.

Of course, once you start producing what you think investors think they ought to be seeing, they themselves start wondering if they’re being gamed; you then start being ironic and/or defensive to signal that you’re not actually gaming them (even though you are, really); at which point the whole attempted transaction gets tied up in a circular self-referential knot of analysis paralysis, and nobody gets anything. Welcome to 2010, baby.

What many pitchers also don’t seem to realise is that angels haven’t done very well out of startups over recent years: overinvesting in a single company, losing the lot when it crashes, and then completely dropping out of angel investing in disgust is an all too common pattern. So actually, current angels are not really interested in repeating their recent set of mistakes – but at the same time, they don’t have any great UK investee role models going forward to inspire or excite them. It’s tough out there… really tough. 😦

OK, unlike 90% of startup blogs, I don’t claim to have an Ultimate Deck, some secret set of Slides That Always Succeed: but I’ll happily tell you stuff that I think will dramatically shorten your odds when you’re presenting. I know it’s aiming fairly low, but if you’re OK with that, here they are…

• Keep It Stupidly Simple. That is, big font (i.e. 30-point) presentations, not too many slides, all designed to Get The Basic Point Across – i.e. how you think your company will turn their money into substantially more money. If the audience don’t know this utterly clearly within 60 seconds to the point that they could successfully explain it to a five-year-old playing a video game, you’re unlikely to get anything. Novice pitchers think their presentation needs to sell on its intellectual and financial persuasion: but in reality, at this relatively early stage in the investment funnel what you need is a “We-Buy-Any-Car.com” sledgehammer to get the message across.
• Be Excited & Enthusiastic. For heaven’s sake, why would an angel want to invest in an utterly dreary company? At least 25% in the mix for almost all angels is a bit of buzz – so if you don’t happen to exude breathless excitement about what your company does, find someone in your company who does and get them to pitch it instead.
• Angels Invest In Their Comfort Zones. I’m no paragon of perfection here, as this is essentially where my own pitch falls down – for how many UK angels are there out there who have made their money out of manufacturing  (let alone security cameras)? You see, according to investment theory, a rational angel should aim to balance his/her investments by including many different types of startup (i.e. not all social media, not all geolocation, etc), to build up a portfolio not overexposed to any single sector. In practice, however, angels tend to invest in companies (a) in markets they already know, (b) that work  similarly to how their own company worked to make themselves rich, and (c) not too far from their Home Counties mini-mansion. Few are genuinely contrarian, or obsessed by tech or business novelty for its own sake: so please don’t expect them to be comfortable with your ker-razy Opt-In Double-Decoupled Freemium Affiliate model.
• Tell A Great Story. Tell them your development milestones & epic struggles to date, your engagement with customers and what you have learned, who you have met and who supports you – and where it’s all going, and what’s in it for investors. And don’t forget that at the end of all your hard work, probably half of them have to then make an even bigger sale than you do – convincing their wife or husband that your pipsqueak company is just a brilliant opportunity. Stories are great tools for helping people pass on your powers of persuasion.
• Build Up A Real-World PR Buzz. There’s nothing more exciting to an angel than a company that is gaining traction and engagement. A real-world PR buzz can sometimes be the signal that a startup is just about to move out of reach of angels, for why would a profitable, happening, buzzy company need angels?

Don’t believe for a moment that following these ideas slavishly will automatically get you funded (and no, I don’t have a system for roulette or blackjack too), but I do honestly think these are all pretty good ways of shortening your odds. But… what do you think?

Why is the business world so uncertain?

In some ways, it’s all very well people like Eric Ries saying that startups operate in an environment dominated by uncertainty, but where does this uncertainty come from? It’s no good throwing your hands up and saying “I dunno, m8″, it has to come from somewhere… but from where?

I suspect the answer will turn out to be closely related to what I discussed in my post on intuition & startups, but as you’ll see, it’s a bit of a subtle one. It runs like this…

Firstly, the Internet has opened up what I think of a near-instantaneous conduit for sending and receiving ‘claimed certain’ information. Yet the act of typing itself – somewhat like writing a business plan – forces you to give shape to your swirly, incomplete, ever-developing thoughts about a subject, insofar as it forces you to tag something as ‘certain enough to be written down‘. However, for reasons it would probably take an entire book to cover, typing is also an extraordinarily difficult medium for trying to express your doubts, fears, issues, contradictions, concerns, mismatches, in fact the whole gamut of uncertainties.

Secondly, the wider point is that our modern, atomistic, scientific language has co-evolved with typing (and, to a very large degree, with the serial tyranny of printing. When we write, we serialize our thoughts, give them a book-like shape as if it were the only way they could ever be expressed. Of course, the trap here is that we children of this serial revolution can be tempted to think that this is the only way of thinking – that we can only reduce things to logical positivistic facts, suitable for scientific management of some sort. If language defines our thought, we must be hugely careful that that language does not constrain our thought solely to ‘facts’.

Thirdly, because Internet search has so dramatically de-skilled research (in fact, one of the first ten words my son was able to say was was “Google”), we have greater & quicker access to (claimed) certain knowledge than ever before – finding out the basics on nearly anything can be achieved in a matter of seconds, which is probably two orders of magnitude quicker than 30 years ago. Of course, this has also made it transparently clear how unreliable a lot of this (claimed) certain knowledge is (c.f. the endless debates about countless individual Wikipedia pages).

So, if you put the act of typing, the dominance of scientific language, and the widespread dissemination of (claimed) certain knowledge together, you should be able to grasp where I’m heading here: which is, that by stripping out all of the certainties of business knowledge (effectively by commoditizing them, in all their unreliable glory), the gory, raw material of business becomes that which remains – uncertainty. And we don’t really have satisfactory language or typing tools for expressing this.

In fact, I’d say the best place to glimpse uncertainty in modern business is probably YouTube (or, to be more specific, online business video sites). However cagey business people attempt to be, interviews are normally far more telling than any documents they might produce on the same subjects. All the things that worry people, all their practical concerns, all the ‘startup jelly’ they haven’t yet managed to nail to the wall, these all tend to come out by various means – tics, gestures, discomfort, physical unease… these all express the underlying tensions of where people and their companies are at.

So, when our knowledges are in conflict, our bodies often reflect it too: in fact, I’d say if a typical startup owner were to express themselves genuinely, he or she would be a writhing mass of physical conflict. Arguably the biggest mountain startup managers have to climb is to get past the lies, self-deceptions and statistical mythologies which support most industries’ status quos, in order to find anything like a sustainable position for their company going forward. But I’d say you’ll almost never achieve that by relying on press releases or competitor-commissioned ‘research’: learning isn’t just about reading stuff on the web, learning is about seeing for yourself how things do or don’t work, and then really taking what you see on board.

I can only really suggest you talk to a broad range of customers throughout your company’s value chain (I hate the word “stakeholder”, it makes me think of Abraham Van Helsing) to find out what’s bothering them, to find the itches they can’t currently scratch, and only then try to make up your own mind.

But this takes time. Hence, the biggest lie about the Internet is that it lets you learn useful stuff fast, when in fact the stuff that migrates to the web becomes commoditized and not-so-useful. [*] Hence the big underlying story here is that the Internet devalues certain knowledge, while making uncertain knowledge immensely valuable. Just thought you’d like to know that!

[*] Apart from articles on this blog, of course. 😉

Intuition and startups…

Because startup managers operate (as Eric Ries likes to say) in a zone of uncertainty, I believe that they need to make maximum possible use of a little-appreciated cognitive faculty we all have – intuition.

Now, I have to say that I strongly disagree with the definitions of intuition commonly used, particularly philosophical definitions (and especially Immanuel Kant’s). Wikipedia is also unhelpful, insofar as its core definition of “thoughts and preferences that come to mind quickly and without much reflection” is far closer to ‘instinct’ and/or ‘unconscious reasoning’ – and I think that intuitions need have nothing to do with speed, and can also involve a lot of deep reflection. Really, to me the essence of  intuition is captured only very imperfectly in all of these descriptions.

Rather, having thought about intuition for the last 25 years, I think a more useful definition of it goes like this:

Whereas logic is the means by which we combine certainties together, intuition is the means by which we combine uncertainties together.

But this is not to say that I think startup managers should rely purely on intuition: no, I think they need a rounded combination of MBA-style thinking (based on financial and situational logic) and intuition (based on fathoming how all the incomplete / unreliable / agenda-coloured  pieces of knowledge fit together), and the good judgement to know when the two are applicable. Basically, you need to be good in certain and uncertain domains: logic and intuition are not either-or choices, you need both.

All the same, show me an individual piece of knowledge that is absolutely certain and I’ll show you a tautology (real-world world data always have epistemologically fuzzy ‘haloes’ around them), so to a very large degree you need logic and intuition to make sense of anything. Hence, if you put on your best Harvard Business School Professor hat and try to reduce everything to flat scientific facts ready to be logically combined, you’ll end up painting a very unrepresentative picture – yet this is the conceptual bedrock on which  the whole MBA ‘case study’ approach is built (and so is the reason why ‘pure’ MBAs are unsuited to running startups). Similarly, the whole ‘business plan’ culture is based on the same presumptions of contextual, operational and financial certainty, which is probably why they are proving less and less useful as time goes by.

Ultimately, logic helps you work with data that you pretend is ‘knowably certain’, and helps you answer questions: while intuition helps you work with data that you pretend is ‘knowably uncertain’, and helps you ask questions. So, intuition is what you use when you to try to give shape to uncertainties – essentially, to make them manageable – which is therefore why startup managers need it so much!

Note that there are a few people who get at least some of this right, most notably the “Recognition Primed Decision” (RPD) literature. But honestly, I’m not aware of a whole lot of useful stuff on intuition available in any form out there – do any business schools run modules on business intuition? (I would happily run one, but I’m not aware of any demand for this.)

In the end, even if you can’t define intuition or read much about it, startup managers still need to be able to use every day – which is probably why running a startup is hard!