Closer To The Ideal

I am checking out Founders Space, a new community site aimed at entrepreneurs. I get the sense that the goal here is something like the better discussions on LinkedIn, without all the spam. It is a good idea. There are certainly some good conversations out there, but on places like LinkedIn, the spam gets out of control. Founders Space is moderated, which I assume will ensure a fairly good quality.

I like this from the post, Can entrepreneurs be made?

In fact, all evidence points to the fact that you can make a successful entrepreneur with the right mix of education and guidance, and they do not come in any single mold. Graduating from Stanford and being under 20 is no guarantee of success. In fact, first-time entrepreneurs who are 40+ often have a higher rate of success, which makes sense, since they have a wealth of experience to draw upon.

In my experience, setbacks are the main cause of burnout. If you work very long hours, you need a steady stream of success to keep justifying the fact that you are working hard. If you sacrifice a lot of important things in your life, then the only way you can justify it to yourself is with success in that thing that the sacrifices were for. I see this show up in a number of very different scenarios:

1.) A woman gives up her career to focus on child raising. If she ends up great friends with her children, then she may afterwards feel the sacrifice was worth it. If, instead, her kids hate her, then eventually the magnitude of what she sacrificed will come to seem immense.

2.) A male scientist gives up on every form of recreation that he enjoys and instead spends 10 years focused on nothing but his research. If he wins the Nobel Prize, he may feel that those 10 years were well spent. If, instead, his research turns out to be a blind alley, leading no where, the loss of 10 years will certainly strike him as bitter.

3.) A woman decides not to have children but instead to devote herself entirely to leading her design business. If she ends up with an international business with lucrative clients in 80 countries, she may feel that her sacrifice was worth it. If, instead, the company goes bankrupt, she will almost certainly face a crisis of meaning.

The harder you work, the more rewards you need to feel that your sacrifices are justified.

There is no easy way out of this. Every decision has an opportunity cost. Balance is bunk.

Jory Des Jardins writes of her father:

I went to college and missed the complete collapse of not only my Dad’s business, but his attitude toward work. I caught glimpses of change when I came home to visit. His car had stopped running and was left to rot behind our house. The roof on the house was falling apart. His boat had been left in the lake one winter, unclaimed, and had to be confiscated by the city. He rarely ever left the house. He had moments of inspiration and futzed around on his computer, wrote op-eds to the local papers, watched C-Span and called in to talk to Congressmen, took on stints of work with some family members, played bridge online, and read, copiously. But it was clear he no longer had a desire to work like he did when he first became an entrepreneur.

Once her kids had grown my mother started to work full-time. But after 11 years she learned that her position was being relocated, and my Dad knew he had to start looking for a job. He had many strikes against him, a man in his late 50s with a spotty-to-non-existent employment record over the past 15 years, and self-employment before that. He did eventually find a job doing what he’d come to learn by working with his former clients–selling cars.

He dutifully worked his hours and even took pride in the products, insisting to his kids that we really didn’t know just how impressive Buicks could be. When I visited from California, he shared stories of whom he encountered at the dealership, young couples buying their first cars, or older people trading in their beloved 25-year-old vehicles. Some bought cars, some didn’t; but they all were included in his stories. He seemed more sanguine, or content, or maybe he was just punch drunk from years of struggling with work. He’d given up on the idea of proving himself. He was humbled. He was also dying.

When Dad passed away at 60 he left almost nothing. I’d always harbored these hopes that despite his 15-year hiatus from work Dad always had a plan. Things were growing; he just hadn’t shown us where he hid his ambitions. I expected incomplete manuscripts, unfinished business plans, an account opened for the purposes of starting a small-scale venture. But there wasn’t anything, not even savings. He had really died at 45, when he lost his desire to work.

My impression is that this is a classic, timeless statement about someone who tries for something with every iota of energy that their soul possesses, and then fails.

Jonathan Abrams talks about why his company failed:

Ask Abrams what he’s learned and you’re confronted with a torrent of mea culpas, disclaimers, and recriminations from a man who is at once bitter and resigned. “I take responsibility,” he says. “I was naive. I thought these big-shot guys were going to help Friendster.” His biggest regret, he says, was turning the company over to Silicon Valley’s best and brightest. As Friendster sputtered, Abrams says, he suppressed his entrepreneurial instincts, keeping quiet when he probably should have been lashing out.

With Socializr, Abrams is doing what he would have done at Friendster if he’d stayed in control. “Friendster was never finished–it was a prototype that I stopped having the ability to develop,” he says. Like Evite, Socializr helps concert promoters, bars, and anyone else who likes to host gatherings invite people to their events. Abrams hopes that lay users who receive invitations through Socializr will create profile pages on the service as well, which could develop into a full-fledged social network.

…But the most important lessons from Friendster have less to do with what Socializr does than with how Abrams plans to run it. Abrams was seduced by the experience of his “all-star team,” assuming that talented people would come up with the right solutions. This time, he plans to favor quick and dirty engineering solutions over the elegant but not necessarily practical ideas that were imposed by Friendster’s management. Having only two employees helps–as does making do with less than $1 million in angel funding. The idea is to grow slowly, have fun–and, above all, avoid hot-shot venture capitalists. “I’m hoping it’ll be like 2002 and 2003, when I didn’t have a lot of money and I got a lot done,” he says.

Caterina Fake on the New York startup scene

Matt Mireles advances the classic arguments for why NYC is not a good place for a startup in his piece for Business Insider — raising money is hard, and talent is scarce — but I’d like to make a couple of points to the contrary

Read the whole thing.

Yesterday I wrote that patents are often bad for the economy.

Today, I see this article about how patents delayed the Industrial Revolution:

In late 1764, while repairing a small Newcomen steam engine, the idea of allowing steam to expand and condense in separate containers sprang into the mind of James Watt. He spent the next few months in unceasing labor building a model of the new engine. In 1768, after a series of improvements and substantial borrowing, he applied for a patent on the idea, requiring him to travel to London in August. He spent the next six months working hard to obtain his patent. It was finally awarded in January of the following year. Nothing much happened by way of production until 1775. Then, with a major effort supported by his business partner, the rich industrialist Matthew Boulton, Watt secured an act of Parliament extending his patent until the year 1800. The great statesman Edmund Burke spoke eloquently in Parliament in the name of economic freedom and against the creation of unnecessary monopoly — but to no avail.[1] The connections of Watt’s partner Boulton were too solid to be defeated by simple principle.

Once Watt’s patents were secured and production started, a substantial portion of his energy was devoted to fending off rival inventors. In 1782, Watt secured an additional patent, made “necessary in consequence of … having been so unfairly anticipated, by [Matthew] Wasborough in the crank motion” [2]. More dramatically, in the 1790s, when the superior Hornblower engine was put into production, Boulton and Watt went after him with the full force of the legal system.[3]

During the period of Watt’s patents the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; while between 1810 and 1835 it is estimated to have increased by a factor of five.[4]…

In most histories, James Watt is a heroic inventor, responsible for the beginning of the Industrial Revolution. The facts suggest an alternative interpretation. Watt is one of many clever inventors working to improve steam power in the second half of the eighteenth century. After getting one step ahead of the pack, he remained ahead not by superior innovation, but by superior exploitation of the legal system. The fact that his business partner was a wealthy man with strong connections in Parliament, was not a minor help.

Was Watt’s patent a crucial incentive needed to trigger his inventive genius, as the traditional history suggests? Or did his use of the legal system to inhibit competition set back the industrial revolution by a decade or two? More broadly, are the two essential components of our current system of intellectual property — patents and copyrights — with all of their many faults, a necessary evil we must put up with to enjoy the fruits of invention and creativity? Or are they just unnecessary evils, the relics of an earlier time when governments routinely granted monopolies to favored courtiers? That is the question we seek to answer.

This is pretty funny, except, sadly, it is wrong:

Strictly speaking the complaint was phrased in terms of “diversity”. This is the peculiar diversity of the American academy, where a gay Jewish man in New York, an Englishman in London, a 4th generation zainichi kankokujin (ethnically Korean who was born in Japan), and an Irish Catholic dogmatist living in a rice field in Central Japan are so close they are practically brothers. True diversity, of course, is the 5-member iStockPhoto of attractive twenty-somethings sitting on the college quad who check different boxes on the demographic inventory and think alike in every way that matters.

That is a good joke about how diversity is often defined in the US, but my friends in the Academy are generally showing more nuance, especially these last 4 or 5 years. The true stereotype being attacked here is the one formulated mostly by marketing departments at corporations across the land. The iStockPhoto described sounds like something out of the Apple marketing division, no doubt used to promote iPhones.

This is a good question:

If demographic diversity is a proxy for diversity of thought, is there some reason we’re not measuring diversity of thought? Is it hard to measure somehow?

Yes, it is hard to measure, especially if you want to measure diversity of good ideas. It is impossible to measure diversity of good ideas when you are hiring, because only the passage of time will reveal if an idea was good or not. Starting with a diversity of staff is form of buying insurance – get diverse staff and hopefully you will get a diversity of thought.

Short term anecdotal evidence is bad:

I mean, I would be sympathetic to “We can’t build products for women if we don’t have more women in the room” if it weren’t so laughably false. (Context if you need it: 90% of my customers are ladies. They’re also older, better educated, less coastal, and more religious than would be anticipated of the customer base of most B2C startups. I’m pretty much your typical 27 year old male engineer… well, for certain quirky values of “typical”.)

Diversity of thought is useful in the same way diversity of genetic traits is useful – it is at its most useful in a crisis, when you face an inflection point. Therefore, it plays out mostly over the long term. You need 15 years of data before anecdotal data begins to carry weight. You need to survive a crisis.

My beef with the discourse of “diversity” in a nutshell: it screams “give us more women” and whispers “give us more women like us”. We want more women to be early stage startup employees working for equity and battling code until 2 AM in the morning.

Not sure who the word “us” refers to. I’ve read arguments that career trajectories should be reshaped to allow parents to both work and spend time with their family. But, to me, the question of “Why are there no women in tech” is less interesting than “Why are there less women in tech than 20 years ago?” One can’t argue “It’s biological” when one is comparing one group of women to another.

But my gut instinct has always been that people avoid joining startups because joining startups sucks. The question isn’t what are we doing that’s keeping ladies out of the Valley, gentlemen. The question should be why in God’s name are we still here.

A common rhetorical technique – Phillip Greenspun tried the same thing here. Also, pointless. As long as men are willing to do startups, it remains a valid issue to ask why are there so few women.

Your sales pitch as a startup is “Turn your back on all that! We’ll work you 100 hours a week, pay you nothing while requring you to live in a freakishly expensive area, give you social status one rung above the homeless, take two to three years of your life, ruin your relationships, and with better than 90% probability subject you to the most crushing defeat of your professional career with no lateral move except into doing the same thing over again.”

Maybe there is something in this. The bit about “100 hours” is nonsense – I’ve got 3 female friends who became doctors, all of them had to work an endless stretch of 70 to 90 hour weeks. Women are not afraid of working extremely long hours. Possibly the extreme riskiness of startups plays some role, though I’d be curious how that risk interacts with gender. My friends who became doctors at least knew that if they could make it through then the rest of their future would be relatively assured.

If we fix this, it will result in more ladies at the margin seeing startups as an attractive career choice. It might not change the percentages in the Valley. Heck, it might even make it more skewed towards the guys. I don’t profess to know and, honestly, I don’t really care that much either — it is worth doing regardless for the benefits to human welfare.

True, most of the advice is good in terms of human welfare. I suspect most of it is wholly irrelevant to gender issues.

Mark Suster writes about the difficulty of staying in shape when you are an entrepreneur:

I was now 38 and in worse shape than my previous experience. The time zones, the travel, 2 kids, pressure, managing the sales process, speaking at conferences Somehow I had yo-yo’d back to where I was previously.

In early 2007 I focused exclusively on the sale to Salesforce.com. I stopped doing conferences, traveling or pitching to VCs.

As a result I freed up the time to get back into shape. I swam every morning and ran every afternoon. I started “pulling doubles” often doing the swim then run one after the other. I began bike riding and dreamed of become a triathlete again. I lost 22 pounds between January 1st and March 27th through a combination of serious exercise and watching my calorie intake. I was on top of the world again.

Except that after the acquisition, my job at Salesforce.com required that I commute more than an hour each way from Palo Alto to San Francisco. So 2 hours of potential exercise vanished. The work pressure mounted, the food piled in, the sleep disappeared and the exercise was non existent.

I would like to finish this post on a happy note but I can’t. After I left Salesforce.com I moved to LA and became a venture capitalist (no, that’s not the sad part and had a new challenge to prove myself in a new field. My hours picked up, I worked hard to establish myself in a new city and a new industry. My wife said to me, “I thought you weren’t supposed to work entrepreneur hours when you’re a VC?” I still felt like an entrepreneur. I had something to prove.

I lost perspective and my life hasn’t been in balance since then. Exercise hasn’t been enough of a priority in 2008-09. But now I’m nearly 42. This time it’s for real. After a recent international trip with limited sleep I went to the doctor with chest pains again. It’s still acid reflux. But this time it’s combined with high blood pressure. I’m still in the manageable zone of hypertension but the doctor said I’ve got to change my ways. He also ordered me to take medicine to control my blood pressure.

So the yo-yo continues. But with 2 beautiful kids and a lovely wife I have much more to be serious about. It’s easy in your 20’s to imagine you’d never be in my shoes. I thought that, too. But I’ve spoken with many entrepreneurs in their 30’s who are going through some of the yo-yo health issues that I have brought on by work, travel, food choices and stress. And one doesn’t have to look beyond the most prominent technology bloggers, early-stage Silicon Valley angels or even some of the biggest names in tech (Marc Andreessen, Reid Hoffman, Marc Benioff) to find people suffering like I have been.

It’s far more productive to make sure that exercise and healthy eating creeps into your routine. Find something else to cut out – not this. You know what I’m talking about – it’s far easier to stay in shape than it is to get into shape.

Daniel Chu posts this bit about being an entrepreneur:

Entrepreneurship is about challenging the status quo. So, you have to expect people to disapprove you.

Hence, Tina wrote, “I didn’t ask for anyone’s permission. I just did it!”

Tina has a PhD in neuroscience, but founded a seemingly unrelated multimedia company, BookBrowser. And when she named herself the President and CEO of the company, her father, a corporate veteran, freaked out because in his mind, you can only get promoted or be proven by others to get that title. The reality is: no, you don’t.

Obviously I’m biased, since I’m trying to do a start-up in New York, but everything about this rings true:

Tumblr and Posterous are the two most prominent “tumblogging” sites, i.e. sites that make blogging more straightforward by making it easier to post media. Both were launched within six months. (Actually, Posterous was started later than Tumblr.)

But now Tumblr has been an Alexa Top 100 site for a while and is still growing strong. Meanwhile Posterous has about 4 times less uniques. Yet Posterous has everything to win: it’s a Y Combinator company with top-tier investors like Chris Sacca and Mitch Kapor. Its founders are experienced software engineers with computer science degrees from Stanford. How come it’s eating dust from a small startup started by a high school dropout?

The answer is as easy as it is counter-intuitive: Tumblr is a New York company and Posterous is a Silicon Valley company.

Or, to put it another way: Posterous is an engineered product, while Tumblr is a designed product.

Posterous is extremely well engineered. There’s nothing wrong with it. Every single thing about it is well thought out. But it’s not just that it’s less pretty (though it is). It’s just not designed as well as Tumblr is.

…In fact, everything about Posterous is nice. It’s very nice. I’m not here to bash Posterous, I think it’s a tremendous product and I wish them the best of luck.

But everything about Tumblr is better designed. I used the landing page as one example, but there are tons of features where Tumblr shines by its gorgeous design.

Meanwhile Posterous is typical of the Silicon Valley engineering mindset where everything is measured, ranked, weighted. It’s like Google. And having terrible design like Google is great if you have a technology edge. But if you’re in a market where what matters is design edge, that’s not enough. There needs to be great design, by which I don’t mean looks (though they’re important), but how it works for the end user.

…The first is that New York has truly come of age as a startup hub, with its own “style”, its own way of doing things, its own mindset, which can sometimes — not always, but sometimes — kick Silicon Valley’s ass.

Daniel Chu on what it takes to be entrepreneur:

Without commitment, you will not start your own business. Many “experts” advise people to start something small on the side while keeping their day job. I personally think this is not going to fly because why would you spend the time to think about other people’s business during the day when you can actually use the time to think about your own? If you can, then you are probably not that serious about your business.

…Or let’s say if you only have one hour to spend with your own kid versus somebody else’s kid, whose kid are you going to spend the time with?

If you cannot find that personal, emotional connection with your own business, just forget it since you will be able to use those few extra hours to work for a job and get a promotion sooner.

Hence, first step — commitment, and that is — quit your job immediately.

This is my own attitude as well. I strongly disagree with the approach taken by 37 Signals in such posts as “How many hours should I work per week?“:

Investment bankers may work 18 hour days…but look at the state of the investment banking business. It’s not the quantity of hours you work, it’s how you spend the hours you do work and what you’re working on that matter.

Too many people think they have to work 80-100 hour weeks. They think, “No amount of work is too much work.” They pull all-nighters or sleep at the office.

But you don’t have to work superhuman hours. A normal workweek should be plenty. Even less is ok. In fact, being short on time is a good thing. It forces you to focus on the essentials. There’s no time for things that don’t matter. There’s only time for the basics. And if you want to build something great, you have to nail the basics first.

Basecamp, our flagship product, was created on the side while we were still doing client work. With just 10 hours a week of programming time and 10 hours a week of design time, we made a product that took off.

They repeated the point in “It doesn’t have to be all or nothing with a startup“:

Startup mythology demands that to create something great, you need superhuman sacrifices. You need to work for no pay, you need to put in 120 hours/week, you need to preferably sleep under the desk and live off pizza as a sole form of nutrient. As a result, you need to abandon your family and risk life without insurance.

Hogwash!

We’ve repeated this story so many times that it’s starting to wear a little thin, but here it goes again: Basecamp was created with 10 hours/week of programming time and as a 3rd or 4th project alongside paying customers for the designers over the course of about 6 months. In other words, we didn’t drop everything we had to create Basecamp, and you don’t have to either.

There are plenty of startup ideas that can be done without millions in funding, thousands of man hours, and dramatic risk. But I can excuse people from failing to see them when blinded by press and popular opinion. Everywhere you turn it’s stories about how ever-younger entrepreneurs with nothing to lose are defying all odds and making mortal sacrifices to reach their impossibly unlikely goals and succeeding.

Did I say hogwash already?

Possibly this works for 37 Signals, though I am suspicious. There is a wealth of research suggesting that time on task increases learning and productivity. However, it is true that “time on task” is not meaningful in itself, but rather, “time on completed tasks” is crucial:

But meaningful time on task is a misnomer because it is not exactly about time; learning in schools is about completing tasks that directly relate to the goals of instruction. These lesson tasks tend to be either open-ended, such as developing critical thinking skills or improving composition skills or alternatively are tightly focused, such as covering content on a high stakes state-wide test. For example, a recent evaluation conducted in seven schools in the Pemberton School District, reported a relationship between the number of CompassLearning lesson activities completed and performance on the New Jersey state-wide test. On average, students gained 1 scaled-score point for every 13.0 CompassLearning reading lessons and 1 scaled-score point for every 12.4 CompassLearning mathematics lessons completed. Whether the goal is broad in intent or tightly focused, stating the goal for online instruction and then completing lessons that address that goal are crucial.

For my part, I need a few hours to get into work mode. I’m often inefficient in my use of time, especially in the mornings. I make up for it by working more time – 10 or 12 hour days are normal for me. I suspect that someone at 37 Signals might suggest that I’m “not really working” for the whole of those 12 hours. I’m not, that is the whole point – I’m not working the whole of that 12 hours, but I am attempting to get into a work frame of mind for those 12 hours. Sometimes it takes me 12 hours to get 8 good hours of productive work. The folks at 37 Signals are missing an important psychological element – the danger of distraction, which becomes greater when one works less.

Their example of Basecamp, where they worked 10 hours a week, is especially pointless. What matters is how many hours a week people are focused on work, not how many hours a week they are focused on any particular project. How much of your time do you spend in work mode, thinking about work problems? Studies have shown that big breakthroughs tend to come after long, intense contemplation of a problem. Innovation requires time:

During the past few years I’ve noticed a curious paradox heading its ugly rear among business leaders tooting the horn for innovation.

On one hand they want the rank and file to step up to the plate and own the effort to innovate.

On the other hand, they are unwilling to grant the people they are exhorting any more TIME to innovate.

Somehow, magically, they expect aspiring innovators to not only generate game-changing ideas in their spare time, but do all the research, data collection, business case building, piloting, project management, idea development, testing, report generation, and troubleshooting in between their other assignments.

Tooth fairy alert!

This is not the way it happens, folks! Not only is this approach unreasonable, it’s unfair, unbalanced, and unworkable…

You cannot shoehorn game-changing innovation projects into the already overcommitted schedules of your overworked workforce.

If you do, it won’t be innovation you’ll get, only half-finished projects and a whole lot of cranky people complaining to you in between meetings.

Aspiring innovators don’t need pep talks. They need TIME. Time to think. And time to dream. Time to collaborate. And time to plan. Time to pilot. And time to test. Time to tinker. And time to tinker again.

That’s why Google and 3M give its workforce 20% of their time to work on projects not immediately connected to its core business. That’s why W.L. Gore gives its workforce a half day a week to follow their fascinations. That’s why Corel instituted it’s virtual garage program.

…The fear? If you give people “freedom” they’ll end up playing video games and taking 3-hour lunches. Alas, when fear takes over, folks, (the same fear Peter Drucker asked us all many years ago to remove from the workplace), vision is supplanted by supervision and all his micromanaging cousins.

Time to innovate is not time wasted. It is time invested.

The great business guru, Peter Drucker, says innovation arises from focused, disciplined work:

Most successful innovations, according to Drucker, come from a conscious, purposeful search for innovation opportunities. He saw four areas of opportunity inside organizations: unexpected occurrences, incongruities, process needs, and industry and market changes. Opportunities also exist outside organizations in its social and intellectual environments: demographic changes, changes in perception, and new knowledge. Together these seven account for almost all opportunities for innovation.

Effective innovation is simple and focused. If it tries to do too many things, people will get confused and implementation will be compromised. He also states that innovation is hard, focused, purposeful work. It requires knowledge and focus, and often, requires ingenuity. The foundation of entrepreneurship is the practice of systematic innovation.

Time on task explains why it is productive to work 90 hours a week, while taking lots of work breaks:

Working 90 hours a work week requires frequent, and highly effective, work breaks. In the center of Macintosh work area in Bandley 3 we had a ping pong table, a nice stereo system, and a Defender video game machine. We found that competitive play gave us a jolt of adrenaline, and a refreshed mind-set when we resumed work. We also learned a lot about our coworkers and how they excel during competition. While playing Defender one day I got some great insight into how Burrell accelerates his own learning process.

There is a huge difference between playing video games at work, versus playing them at home. At work, you know that you are going back to work, so your mind stays in work-mode. When you are done playing videos, your brain is both focused on the problems at hand, and also refreshed and ready to look at things anew. At home, when you play video games, your brain drifts to other forms of recreation, as you know you won’t be working for the rest of the day.

I’ve had friends who have sometimes suggested to me “Maybe you’ll be more productive if you work less.” I’ve tried it, it does not work for me. The less I work, the more distracted I am.

37 Signals seems relatively isolated on this issue. Most of the people who’ve written on this issue have suggested that time on task has a positive relationship with productivity.

Relevant to Daniel Chu’s question “Will you share your venture idea with others?” , Breck Yunits suggests that a startup needs to go live as fast as possible so as to to escape the bubble:

What is “the bubble”?

The bubble is the early, early product development stage. When new people aren’t constantly using and falling in love with your product, you’re in the bubble. You want to get out of here as fast as possible.

If you haven’t launched, you’re probably in the bubble. If you’re in “stealth mode”, you’re probably in the bubble. If you’re not “launching early and often”, you’re probably in the bubble. If you’re not regularly talking to users/customers, you’re probably in the bubble. If there’s not a steady uptick in the number of users in love with your product, you’re probably in the bubble.

Why you secretly want to stay in the bubble

A part of you always wants to stay in the bubble because leaving is scary. Launching a product and having it flop hurts. You hesitate for the same reason you hesitate before jumping into a pool in New England: sure, sometimes they’re heated, but most of the time they’re frickin freezing. If the reception to your product is cold, if no one falls in love with it, it’s going to hurt.

Daniel Chu asks “Will you share your venture idea with others?” He then lists the pros and cons:

Benefits:

* You will get lots of feedback, mostly in the form of disbelief or rejection. However, that’s what you need to shape your business, and that’s what every business gets on a daily basis.

* You can practice your pitch before you do it in front of VCs.

* You may unintentionally find your partners / board of directors.

Risks:

* You will get discouraged and eventually give up on the idea.

* Others will steal your idea and implement it before you.

* Your competitor will find a way to destroy you before you are ready to launch.

I posted the following as a comment over there.

“Others will steal your idea and implement it before you.”

My sense is that the risk of this is typically exaggerated. I know you know this, so my comments here are not directed at you, but allow me to expand on this thought, perhaps to start a conversation.

Startups tend to be experiments – how can anyone steal the result of an experiment before the final results are known? Suppose, early in 1928, Sir Alexander Fleming told someone “I’m looking at the lifecycle of staphylococci”. Could someone then see the potential for killing staphylococci? That would be quite a jump. The big discovery happened by accident, but in an environment where Fleming and his assistants were looking for something new. It’s worth noting that at least 3 other researchers, starting 30 years earlier, in the 1890s, had already noted the negative effects that some mold could have on the growth of bacteria. And yet those previous researchers never realized the potential of what they were looking at. Assuming we all want to be the equivalent of Fleming (that is, we all want to be the ones to come up with the world-changing discovery) then we need to think about what he had that the previous researchers did not. For one thing, he had an openness to accidents. For another, he had a great crew and/or circle of former assistants – Merlin Price gave him important feedback at a crucial time.

Fleming did not know that penicillin existed until he found it. So he wasn’t looking for it. But when he accidentally stumbled across it, he had the insight to realize its importance.

A lot of big breakthroughs arise by accident while people are pursuing something else. An excellent current example would be Twitter. Roll the clock back to 2005 – Odeo launches their service for podcasting. The service does not take off. They are frustrated. They ask themselves, “How can we popularize these podcasts?” They start thinking about a messaging service, something lighter and easier than blogging. They talk to some folks who’ve been thinking about the potential of cell phones. They start a service. It soon becomes much bigger than Odeo. They are smart enough to realize the potential of what they’ve got.

What idea could you steal from either of these folks, before the moment that they realized the potential of what they had? The “lifecycle of staphylococci”? Who cares? It is a boring subject. Podcasting? Who cares? Lots of people tried podcasting startups, none of them made any serious money.

Until those folks realized the importance of what they had, there was nothing interesting to steal, and after they realized the importance of what they had, they had the advantage of being way ahead of everyone else.

I think all any startup can really aim for is be like Fleming’s lab in 1928 – go looking in an area that should have some potential, keep an open mind about what you’ll find, surround yourself with excellent people like Merlin Price, and be ready to change direction when you discover something unexpected and yet amazing.

I wrote that comment last night. I may have been guilty of underestimating the risks of someone stealing your idea. However, startups are mostly about execution. Most of the time, when you hear an entrepreneur claiming that others stole their idea, all it means is that that entrepreneur had terrible execution. It is important that we avoid becoming John Pratt:

I cannot tell you how painful it is to watch 5 assholes take your idea and run with it and not even give you credit. I hate all 5 of them for that. If I see them, I may punch each one of them in the face.

Can anyone read that and avoid the conclusion that Pratt is a terrible entrepreneur? Rage, accusations and self-pity, all condensed into a short online rant, and then followed up, in the comments, with insults aimed at everyone who read his rant? I read those words and conclude the man lacked the emotional stability to be a successful entrepreneur. Any risky venture will have its share of setbacks which must be born stoically – facing ruin an entrepreneur should aspire to the same calm resolve with which Robert Scott faced his death in Antarctica:

We took risks, we knew we took them; things have come out against us, and therefore we have no cause for complaint, but bow to the will of Providence, determined still to do our best to the last.

I should add, it is rare to have truly unique idea, especially in the area of the web. What I’ve seen, over the last 8 years, is this recurring pattern: the possibility of a new kind of site/service begins to emerge. The people I know realize it and become excited by it. We begin working on the software. 4 to 6 months later we are ready to launch. At exactly the same, several hundred other startups emerge, all with roughly the same idea. They, too, had the idea about the same time we did, and they too have spent the last 4 to 6 months working on their site/service.

I’ve seen this pattern recur with blogging software, RSS readers, podcasting, file storage, calendar software, online social networks, and video sales. Every year there was a new idea, and a race to be among the first to come out with that idea.

Rather than trying to avoid competition, one should expect it. You won’t be successful because of your uniquely creative idea, you will be successful (or not) because of your execution. And your energy should go toward executing well, rather than trying to keep your idea a secret. Again, I might draw a parallel with Robert Scott’s expedition to Antarctica. He and his team never expected to be in a race to be the first to the pole, but when they arrived in Antarctica they soon learned that a Norwegian team was nearby, also attempting to be first to the South Pole.

Scott received the news on 22 February, during the first depot-laying expedition. According to Cherry-Garrard, the first reaction of Scott and his party was to rush over to the Bay of Whales and have it out with Amundsen. However, Scott recorded the event calmly in his journal. “One thing only fixes itself in my mind. The proper, as well as the wiser, course is for us to proceed exactly as though this had not happened. To go forward and do our best for the honour of our country without fear or panic.”

To go forward and do your best, without fear or panic, is good advice for any startup.

I am surprised that I’ve never before linked to all of this stuff. This story has shaped my thinking on a lt of things. First of all, I learned SQL by reading Phillip Greenspun, back in 1999. And the way Arsdigita fell apart (and Greenspun’s and Michael Yoon’s and Eve Anderson’s various accounts, have played a huge role in how I think about a large range of issues, from funding, to startups, to ethics, to how different people try to manage the truth.

Michael Yoon’s account has always struck me as possibly being the closest to the truth, partly because he is the most self-critical.

So now I present an alternative perspective, the lessons that I learned from ArsDigita, both good and bad. This is not an apologia for the VCs who funded ArsDigita or for the post-VC management of ArsDigita, of which, for a time, I was a member. I recognize that the VCs and the management team (again, I include myself) made many mistakes and, at times, committed outright wrongdoing. My hope is to show you that there is much more to the story than what Eve wrote in her diary and that my truth is not as black and white as hers.

…Eve’s article reminded me, ironically, of the story of Adam and Eve. According to her, pre-VC ArsDigita was truly Edenic:

A company that was profitable from Day 1. A company that built products that were useful to many other companies. A company that had ethics, that treated the breadwinners (programmers) with respect, a company that could afford to help people and give away software and training, while still having enough left over to grow and save a few $million in the bank.

Then came the Fall:

… until the venture capitalists arrived on the scene. Lying to customers and employees became commonplace. Greed replaced philanthropy as each of the company’s unique programs was dropped. … The technical and managerial incompetence of the VCs and those they hired drove the company into the ground.

I read Milton in high school, so Eve’s thesis is clear enough to me: Venture capitalists = Satan.

But what exactly happened when the VCs “arrived on the scene”? Did they arrive in a Publishers Clearing House Sweepstakes van, ring the doorbell, hand us one of those enormous checks, and then trick us into signing it before we could read the fine print? Or did they break down the door, walk us down to the ATM at gunpoint, and demand that we deposit their $38,000,000? Facetiousness aside, my point is that the management of pre-VC ArsDigita (including Philip) signed the VCs’ term sheet of its own free will. (In the spirit of full disclosure, I should mention that I thought that taking the money was a good idea, mainly because I thought we were going to go public and get rich; had it been up to me, I probably would have made the same decision.)

Eve’s description of the transaction itself is impersonal: “In late March 2000, ArsDigita received $38 million in financing, primarily from General Atlantic Partners and Greylock, with a bit thrown in by Bain and Trident Capital as well.” ArsDigita is presented as a passive entity, not doing anything, just receiving, but that is misleading. We were not merely receiving; we were taking.

So why did we take? What was the Forbidden Fruit that tempted us to risk Eden? Here is Eve’s explanation of why we took the VC money: “A small group of developers earning lots of money, making clients happy, and developing and releasing a useful software product is wonderful, but … to make a substantial impact on the world, you gotta grow.” On the desire to make a substantial impact, I agree with Eve. I came to ArsDigita with a deep cynicism about the IT industry, and saw ArsDigita as an opportunity to show the world a better way. (When it appeared that we might make a lot of money in the process, that only made me happier.)

Of course, “making a substantial impact” is a rather vague goal, so I’m not even sure if my definition of “a substantial impact” coincides with Eve’s. My main objection, however, is to the implication that a blend of altruism (”making a substantial impact”) and manifest destiny (”you gotta grow”) was the reason that we took the VC money. In the open source world, there are many examples of software (notably, Linux and Apache) making a substantial impact on the world without the benefit of a large infusion of VC cash.

Philip’s explanation of why we took the money is more substantial than Eve’s. The first reason he presents is: “Companies don’t like to rely on enterprise software from small companies. There is too much risk that the vendor will go bankrupt. Open source ameliorates this risk to some extent but the tendency to stick to IBM, Microsoft, and Oracle is strong. We tried to present a face of financial invincibility to the world.” In other words, companies would refuse to buy from us unless we could appear to be “financially invincible,” an appearance that, presumably, we’d project by sitting atop a mountain of VC cash. Certainly, a 38 million dollar vote of confidence from top-tier VC funds is a boon when trying to persuade prospective customers of your staying power, but, just a few paragraphs earlier, Philip relates how “customers were knocking like crazy,” name-dropping Siemens as “a good example” of our clientele, brought to our door by the Boston Consulting Group. With one of the world’s largest corporations on our client list and one of the world’s most prestigious management consultancies as our partner, weren’t we already defying the conventional wisdom that said we had to have VC backing in order to land big customers?

Philip provides three more reasons for taking the capital:

We figured that we could use the extra money to place some bets on product development and marketing. Under the product development rubric we thought we’d not make the client teams carry the full weight of ACS development on their shoulders. If they found a client whose needs were similar to what we wanted in the product, we’d do the job for a low-ish price to get experience with that problem … and develop reusable code to enhance ACS. Under the marketing rubric we’d expand our “education marketing” program. Finally, we wanted working capital. A company with $20 million in revenue really needs to have about $10 million in the bank in case a customer doesn’t pay, the economy turns soft, an important project is late, etc. Because we’d been growing 1000 percent per year we never had more than a couple of million dollars in the bank.

These all seem reasonable enough, but were they, in addition to the Face of Financial Invincibility, really compelling enough — independent of any other consideration — to convince Philip, the majority owner and CEO, to sign that term sheet, to give up his complete control of the company? I don’t think so. I think Philip wants to have it both ways, maintaining that ArsDigita was so innovative and visionary that giants like Siemens came to us, while, at the same time, claiming that we needed VC dollars and the VC stamp of approval in order to survive in the market.

So what else was motivating Philip? My theory is impatience, a perfectly understandable emotion in those Gold Rush times. I felt it too. When I first joined ArsDigita, Philip used to ask me about Sapient, because he was interested in the fact that they had never taken outside investment and yet managed to make it big. The nutshell version of Sapient’s story is that they started as two guys in 1991 and slogged it out for years, growing organically, until they went public in 1996. In 1999, the notion of waiting five whole years to cash out was absurd. Philip stopped asking me about Sapient, presumably after he’d made up his mind to pursue the VC crapshoot.

Writing now with the benefit of hindsight, my point is not to say “I told you so” (because I didn’t). Rather, my point is that we pre-VC ArsDigitans, must also bear responsibility for what happened to the company.

Writing now with the benefit of hindsight, my point is not to say “I told you so” (because I didn’t). Rather, my point is that we pre-VC ArsDigitans, must also bear responsibility for what happened to the company.

Philip disagrees:

How could these three guys [Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO)] have achieved such dreadful results? For that it is worth looking at what kind of leadership is required for a software products company. First, you probably want someone who has previously founded and run a company or been CEO at a company founded by others (i.e., not someone who has been an employee his or her whole life). Second, you probably want someone who has previous experience as an executive in the software products business. Third, you probably want someone with domain knowledge. Fourth, you probably want someone with technical knowledge.

Whatever strengths Peter, Chip, and Allen may have, all three were 0 for 4 on the qualifications listed above.

So what does this say about Philip, that he so poorly qualified his own investors? It’s not as if Philip met Peter and Chip for the first time on the day after we got the money. Philip’s four qualifications are not subjective. From the sound of it, Philip should have been able to ask Peter and Chip four yes-or-no questions each and then rule them out on the spot. If nothing else, Philip is at least guilty of inadequate due diligence.

As for Eve, she concurs with Philip, saying: “Greylock and General Atlantic Partners have mis-managed ArsDigita into the ground.” She does not acknowledge that the pre-VC management made a single mistake, justifying even the decision to accept the VC money with the facile rationalization that “you gotta grow.” She appears to believe that it is 100% someone else’s fault that ArsDigita failed.

To me, this is a gross oversimplification, a symptom of deeply entrenched denial. ArsDigita was a good company, especially in the beginning, and I miss it, the way that it was back then, but I think it’s false to claim that ArsDigita was perfectly noble in its aspirations to grow, an innocent victim of the VCs’ ruthless predations. I also think it’s disingenuous to gloss over the fact that, at the end of the day (to borrow one of our second CEO’s favorite phrases), we took 38 million dollars of someone else’s money.

The truth I see is more complicated. How could it not be? After all, we were, and are, human beings, blessed and cursed with the full array of human traits: idealism, optimism, ambition, arrogance, naivete, jealousy, and, last but certainly not least, greed.

..There is at least one more lesson to be learned, from Eve herself, who writes:

Richard Buck was very impressed with my work and told multiple people that I could do as much work in one day as most people do in two weeks. Given what I’ve written about Richard Buck so far, one might be disinclined to lend much credence to his opinion of my work. But my performance reviews have concurred: dedicated, brilliant, super-efficient, “capable of doing anything she sets her mind to,” extremely high standards, a “tough but fair” manager. So I was certainly no slacker by anyone’s standards.

Eve appears to believe that Richard Buck is dishonest about everything except his high opinion of her. Similarly, she presents snippets from performance reviews as evidence of her own excellence. This excerpt illustrates what I call Oblivious Sacred Cow Syndrome. Whether you like it or not, whether it’s fair or not, if you are a co-founder/team leader/VP/girlfriend of the chairman/etc., you are a Sacred Cow, and people will blow smoke up your ass. I know this from firsthand experience, because I too was a team leader, and I saw people hesitate to be honest with me, for fear of causing offense.

My fellow team leader DVR felt no such compunction when he wrote, in a peer performance review, that I was too concerned about making people happy and that, while he had never seen me offend anyone, he had never seen me inspire anyone either. (He also complained that I didn’t work enough hours, but that’s another topic altogether.) While this criticism stings, as do the criticisms of ACS 4 that I discussed above, I value the fact that they aren’t blunted by Sacred Cow deference, that they are honest, and I have tried to learn from them.

In many ways, the worst thing about being an Oblivious Sacred Cow is that you miss the opportunity to learn from your own mistakes, since no one is willing to tell you when you make one. Of course, if you actually believe your own hype (or appear to), that only alienates you further. I saw this happen to Eve at ArsDigita: While members of Eve’s team frequently complained about her lack of management skills, few, if any, felt comfortable addressing their issues with her directly; instead, many of them simply requested a transfer to a different team. Similarly, while everyone granted that Eve was prolific, people who had to use and/or maintain her code (for example, her ACS 3.x Ecommerce module) often derided it as ugly, full of kluges, etc. Of course, it’s not nice that all of these criticisms were made behind Eve’s back, and the excerpt above makes it clear that Eve is blissfully unaware of these alternate perspectives on her performance and abilities. She would, I expect, say that they are flatly untrue. However, whether or not these criticisms of Eve were completely fair or accurate, the real question is: Wouldn’t Eve herself have been better off if people had felt that they could approach her with their criticisms? At least then, she would have had the opportunity to refute some of the criticisms and learn from the rest.

In many ways, the worst thing about being an Oblivious Sacred Cow is that you miss the opportunity to learn from your own mistakes, since no one is willing to tell you when you make one. Of course, if you actually believe your own hype (or appear to), that only alienates you further. I saw this happen to Eve at ArsDigita: While members of Eve’s team frequently complained about her lack of management skills, few, if any, felt comfortable addressing their issues with her directly; instead, many of them simply requested a transfer to a different team. Similarly, while everyone granted that Eve was prolific, people who had to use and/or maintain her code (for example, her ACS 3.x Ecommerce module) often derided it as ugly, full of kluges, etc. Of course, it’s not nice that all of these criticisms were made behind Eve’s back, and the excerpt above makes it clear that Eve is blissfully unaware of these alternate perspectives on her performance and abilities. She would, I expect, say that they are flatly untrue. However, whether or not these criticisms of Eve were completely fair or accurate, the real question is: Wouldn’t Eve herself have been better off if people had felt that they could approach her with their criticisms? At least then, she would have had the opportunity to refute some of the criticisms and learn from the rest.

Eve Anderson’s account is probably an important contribution to the overall record. All the same, I have trouble giving it the same credit as Michael Yoon’s. First of all, there is no trace of self-criticism, no self-reflection about the obvious mistakes Phillip Grenspun and others did to damage the company (including the initial decision to take venture capital money in the first place). Also, she has apparently removed her essay from her website (the old link simply redirects to the front of her site). The fact that she felt the need to take it down suggests that she was embarrassed to have others reading it, which suggests that she is not comfortable with everything that she said in it. (She currently works at Google, she remains active in the tech community, possibly she felt her essay was overly accusatory, in a manner that those who work with her must surely fear – after all, if they ever fire her, will she write that way about them?). Since she removed her post from her site, I had to track it down using the Internet Way Back Machine. As I am afraid this will disappear entirely at some point, I quote it at length (the following copy is from February 12th, 2002):

This is a story about a company. A company that was profitable from Day 1. A company that built products that were useful to many other companies. A company that had ethics, that treated the breadwinners (programmers) with respect, a company that could afford to help people and give away software and training, while still having enough left over to grow and save a few $million in the bank.

That is, until the venture capitalists arrived on the scene. Lying to customers and employees became commonplace. Greed replaced philanthropy as each of the company’s unique programs was dropped. But, this is a company, and the goal is to make money — any positive impact on the world is secondary, right? The real question is: how much money did they make?

The technical and managerial incompetence of the VCs and those they hired drove the company into the ground. All but 10 of the 240 employees were fired, laid off, or quit. All of the $40+ million in venture capital was squandered. The monthly operating profit turned to loss as more talentless executives were hired who threw out the company’s old, useful products and put their blind faith in engineers who spent millions building complicated software that solved no business problems.

This is a story that will teach you something about building a software product, about profitably running a company, and about what can happen if unqualified organizations obtain control.
The Birth of ArsDigita
Since the early days of the Web, I had been building web sites for big-name clients in California with my friend Aurelius Prochazka. Meanwhile, Philip Greenspun and two of his friends, Jin Choi and Tracy Adams, were doing similar work out in Massachusetts. When I moved to Massachusetts in 1998, we joined forces and were quickly able to quickly attract high profile clients, such as Levi Strauss, Environmental Defense, and MIT Press.

Our band of programmers, called ArsDigita (”Digital Arts”), was profitable from the beginning. We had no office, no marketing staff, no letterhead. But we did have a few thousand dollars’ worth of computer equipment and our five motivated selves.
The Birth of the ACS
It didn’t take long for us to realize that we were solving some of the same problems over and over again for each of our sites. It doesn’t matter if a site sells custom-made slacks, lets people share their photography knowledge with other enthusiasts, helps people fight environmental battles against companies polluting their groundwater, facilitates the trading of financial instruments, or helps people find the best combination of red, white, and sparkling wines for their next soirée.

Every site we built needed:

1. to talk to a relational database management system (RDBMS) to facilitate the collection of content from its users
2. a means for registering users and recognizing them upon their return to the site
3. a permission system to enable administration of the entire site, a section of the site, or an individual content item
4. a mechanism for grouping users so that they can be served content or given permissions appropriately

Instead of reproducing this for each client, we wrote a general data model, a few web pages, and some shared procedures, and called this collection of code the ArsDigita Community System (ACS).

We distributed the ACS free and open-source, not merely to be altruistic, but because it made sound business sense. If you are doing professional services, the best way to get your name out, have more clients find you (yes, free marketing), and improve the code base is to share it with the open-source world.

The ACS began as a small core of functionality, but more opportunities for code reuse quickly arose. Many of our clients wanted discussion forums. Quite a few needed ecommerce. Polls and portals and intranets and calendars and address books were repeatedly requested. It would have been foolish to build this functionality one-off for each client. It would have been a wasted opportunity to build this only for ourselves and not let our work reap the benefits of an open-source release. Hence we began the release of ACS modules that could run on top of the core. Dozens of useful modules were created, and that is what led to the adoption of the ACS by programmers and companies world-wide.
Growth
A small group of developers earning lots of money, making clients happy, and developing and releasing a useful software product is wonderful, but … to make a substantial impact on the world, you gotta grow.

And grow we did. At first it was difficult to hire people because developers don’t feel safe working for a company with no office or regularly-scheduled payroll. So, in the fall of 1998, we moved into an office. It didn’t cost us much to rent a lovely old house in Harvard Square (complete with showers and kitchen, both which were well-appreciated after nights of obsessive coding). In January, we began a payroll system so that people’s paychecks would no longer be tied to when our clients paid the invoices. Even if people were earning a bit less than before the structure was imposed, they were happy with the change. We were still earning a large profit each month. And now it was easy to hire people.

On January 1, 1999, ArsDigita had 5 employees. By January 1, 2000, we were up to 57, almost all of whom were developers. We had very little overhead and profits were rising. Around this time, we started looking in earnest for venture capital in order to accelerate growth and to allow ourselves the luxury of taking developers off of paying client projects so they could work full-time on our core product, the ArsDigita Community System (ACS).

By the end of March 2000, we had 110 employees (almost double what we had 3 months previously), 7 offices, healthy profits, plenty of cash in the bank, and $20 million in annual revenue, with the revenue figures still on an upward trend.

…Life post-capital
Revenue continued to rise to about $25 million in 2000. Is this due to the VCs’ genius and vision, or merely a result of the momentum built up before their arrival? Was the subsequent downfall, starting in mid-2000, due solely to the effects of the weaker economy in the United States?

It became increasingly clear to the employees, the customers, and the outside developer community that the VCs and those they had put into management had no idea what they were doing. They discarded the practices that had made ArsDigita a profitable company, destroyed the company culture, and showed their complete technical incompetence by throwing out the ACS, which had been repeately used to solve real business problems, and replacing it with new, partially closed-source software package that was hard to use, had serious performance problems, and met only a small fraction of the business needs that the ACS did.

By the middle of 2000, it was clear that the new management did not understand the mission in front of them. New engineers at our company were routinely complaining about the level of competence and experience we were provided by aD. Communications with the new CEO were unreasonable and frustrating. Contacts at aD went from programmers to project managers to sales VPs. All these people were trying hard, and in some cases doing pretty well – but aD had lost the things that made it unique and successful.
– Josh Stella, former ArsDigita client, April 26, 2001

One of the reasons I joined ArsDigita is its inspiring mission statement, which states that we do not ever lie to customers. The mission statement goes on to say that companies who lie to their customers need to spend time training their employees in the official lies before they can talk to customers, thereby making lying unprofitable…. This week, we were not honest with our customers about the severity of the security holes we discovered in the ACS. We employees even had to sit through a training session so that we would know how to discuss the security holes with our clients. This is a serious contradiction of our mission statement.
– Walt Mankowski, former ArsDigita employee, July 14, 2000

It was sad to see the company slowly being destroyed. It was as if all the life was being sucked out of the company and we had no idea why. Everything that made ArsDigita what it was slowly disappeared until all that was left was just another buzzword-spewing faceless corporation. ACS users moved on, joining in support for projects like OpenACS that still had the spirit of the former ArsDigita… Meanwhile, aD corporate slowly began to shut down programs, including the one that got me to be an ACS user in the first place: ArsDigita Prize. One day a small message appeared that said simply “The prize has been cancelled for 2001.”
– Aaron Swartz, past ArsDigita Prize winner, April 24, 2001

It is easy to locate marketing copy on ArsDigita.com. However, it is difficult to get to the information that is actually interesting to anyone building or running an online community, or deciding whether to hire ArsDigita’s services.
– anonymous user of arsdigita.com, September 4, 2000

ArsDigita was the company I dreamed of working for when I graduated… In 2000 everything began shifting. ACS 4 seemed an excellent thing, and everybody was excited, but it was never finished and then everything just turned to Java. Nothing against Java, but even I know that you can’t sell a product that’s not here yet. What happenned to the culture? None of the names and faces we knew posted to the bboards anymore. A few aD faces posted regularly, but mostly we saw a bunch of people only posting questions about the products they should be familiar with, and sporadically. Allan Shaheen only addressed developers twice, in what seemed to be posts typed by his secretary. ArsDigita’s website turned to being a brochure more than anything else, which is not bad if you don’t forget other things.
– Roberto Mello, computer science student, April 24, 2001

For months now, I’ve been trying to figure out how aD’s management can just ignore the ACS community (and the ACSish market) they way they have. Barely speaking to us; releasing incomplete, unscalable, untested software to us; and finally just abandoning the whole thing midstream. And the only thing I can think of is that they are trying to clear out the community, get rid of the community memory, for when they rollout their closed source, java solution.
– Jerry Asher, developer, April 25, 2001

I heartily agree with you about the unfinished condition of ACS 4.x. We (furfly) have lost at least one prospective client because of it, perhaps more, and the project we’re working on now is waaaay behind schedule, much of which is due to our stumbling over ACS 4.x issues. This is not to say that it is unusable, or unfixable, but only that it is unfinished – I don’t want to disrespect the hard work that went into it, only the decision to release it before it was ready.
– Janine Sisk, Furfly co-founder, April 25, 2001

ArsDigita, an e-commerce company in the midst of layoffs and a major product overhaul, is bucking the trend of comrades selling open-source software… The change will allow the company to reach profitability by the first quarter of 2002… The company laid off 29 employees in the last week.
– CNET, April 5, 2001.

The founders fight back
Philip Greenspun has never been one to hide his opinions. If he thinks that an idea is stupid, he will bluntly say so. Therefore, Philip had many things to say after April 2000.

Philip’s harsh words displeased the other board members (Allen, Chip Hazard from Greylock, Peter Bloom from General Atlantic, and ArsDigita’s COO, Ern Blackwelder) so much that they stopped having board meetings after December 2000. Instead, they had “investor meetings” where all the board members except Philip (the chairman) were invited. In March 2001, Peter Bloom sent Philip an email, threatening public humiliation if Philip didn’t resign from the board. Philip went to visit his lawyer who reminded him of his rights as majority shareholder.

It was time to regain control of our mis-managed company before it became nothing but a shell. On April 5, Philip Greenspun and Jin Choi, together holding a substantial majority of ArsDigita’s shares, had a shareholder vote that gave the founders majority control of the board. They demoted Allen from President and CEO to only President, elected Philip CEO (one spot on the board is reserved for the CEO), promoted Tracy Adams and me (both already Vice Presidents) to Executive Vice President and placed us on the board as well, removing both Allen Shaheen and Ern Blackwelder. The two venture capitalists retained their seats on the board. But we had control.

Yes, it had required drastic measures to ensure that our ideas would be heard, but we were willing to now work hand-in-hand with Allen and the VCs to return ArsDigita to a state of health. But we didn’t get the chance. Six days later, on April 11, 2001 Allen Shaheen, Ern Blackwelder, General Atlantic, and Greylock filed a lawsuit against Philip, Tracy, and me:

ALLEN SHAHEEN, ERNEST )
BLACKWELDER, GENERAL ATLANTIC )
PARTNERS 64, L.P., a Delaware )
limited partnership, GREYLOCK )
X LIMITED PARTNERSHIP, a )
Delaware limited partnership )
and ARSDIGITA CORPORATION, )
a Delaware corporation, )
)
Plaintiffs, )
)
v. ) Civil Action No. 18821
)
PHILIP GREENSPUN, EVE A. )
ANDERSSON and TRACY E. ADAMS )
)
Defendants. )

Now, I’m not a lawyer, but I never understood how it could possibly be legal for ArsDigita Corporation to be listed as a plaintiff, since that would have (obviously) been against the wishes of ArsDigita’s majority shareholders. And how could it be legal for General Atlantic Partners, Greylock, Allen Shaheen, and Ern Blackwelder take hundreds of thousands of dollars out of ArsDigita’s bank account and use it to pay their lawyers to sue ArsDigita’s majority shareholders?

The case came very close to going to court but, at the last possible moment, the plaintiffs came to a settlement agreement with Philip. Perhaps the plaintiffs were afraid they would lose the case because the judge had looked at their “evidence” and said that he was uninterested in approximately 90% of it. The plaintiffs’ lawyers had wasted their time and, more importantly, ArsDigita’s money, preparing a case about Philip Greenspun’s personality instead of thinking about whether someone’s personality gives one a right to try to illegally seize control of a company.

In the settlement, Philip received $7.6 million. In return, he gave up more than half of his stock, resigned from the board, promised not to attempt to execute any control over the company, and signed a non-disclosure agreement. Before the settlement, Philip owned more than half of ArsDigita’s stock. Now that the VCs owned more than half the stock, they had no need to settle with any of the other defendants.

The VCs poured a few more $million into ArsDigita so that it could take a few more gasps of air before collapsing.

…Now, What?
What has ArsDigita been doing over the past year?

Lying to the employees and to the press:

Tech startups aren’t exactly on the front burner nowadays in the market for initial public offerings, but ArsDigita is steaming ahead anyway with plans to go public next year… The four-year-old Cambridge, Mass. Web software company is hoping to kick off its initial public offering some time in 2002… If it keeps growing and building its customer base, and the IPO market continues its gradual comeback, ArsDigita will be able to take itself public, Shaheen figures.
– Steve Gelsi, CBS.MarketWatch.com, May 24, 2001, a few weeks before Allen Shaheen admitted during his deposition that he didn’t think ArsDigita would ever be able to go public

Firing people, spending money:

Beginning Thursday, ArsDigita Corporation has cut a confirmed 24 (from 165) employees and announced plans to close the Berkeley, CA, office. Rumor from several connected inside sources has the final tally climbing to 67 (or higher) over the next few weeks. Late last week the CEO was demoted by the VCs and replaced with Dan Keshian (http://www.greylock.com/team/DanKeshian.asp), one of Greylock’s partners, while they wasted another $10 million (reportedly) on the company, presumably to help it stumble along to a fire sale. Those not yet gone are those in engineering, upper management, or are working on billable projects. Those on billable projects will be terminated upon project completion. Standard severance is reportedly 1 month salary plus unused vacation.
– FuckedCompany, October 11, 2001

Building products that nobody wants to use:

When the VCs and Allen Shaheen seized control in April 2000 the company had revenue, profits, a customer list of AOL, HP, MIT, Oracle, Siemens, etc., a $160+ million valuation, $41 million in cash. In about 1.5 years the same company had a product that nobody wanted to use (though it was based on more fashionable tools), no profits, no cash, and few customers. Despite the infusion of more cash and a new CEO, a Greylock partner, in the fall of 2001, the company continued to spiral downward. Now they are dead and RedHat is buying some bones.
– FuckedCompany, February 7, 2002

And trying to make some money for themselves out of the scraps:

ArsDigita, a privately held software company in Cambridge, was shut down on Tuesday. At least some of the company’s assets, primarily from its professional services division, will be sold to Red Hat Inc., an open-source Linux software company in Durham, NC, according to sources close to the company… Dan Keshian, a venture partner at Greylock, became ArsDigita’s CEO in the second half of last year to lead the company to profitability. Keshian was not present when the shutdown and sale were announced to employees.
– Jeff Miller, Mass High Tech, February 7, 2002

Lessons learned
Over the past 1.5 years, the VCs and their management team have taken a profitable, healthy, interesting company and:

* spent the profits that ArsDigita had saved
* spent all the capital raised
* destroyed an excellent software product
* released a horrible product a year behind schedule
* hired a slew of incompetent managers
* fired the people who made ArsDigita profitable
* repeatedly lied to customers
* repeatedly lied to employees
* repeatedly lied to the press
* repeatedly lied to the outside developer community
* and given themselves big bonuses as a reward

Greylock and General Atlantic Partners have mis-managed ArsDigita into the ground.

What can we learn from this? Be clear about control. Don’t assume that people with MBAs know a thing about business, let alone technology. Don’t throw out your prime source of revenue before another one is in place. Fashionable programming languages don’t equal useful software. Don’t lie. And steer clear of General Atlantic Partners and Greylock.

Daniel Markham notes that most startups fail.

He also links to this rant by John Pratt , the guy who did Fundable:

I cannot tell you how painful it is to watch 5 assholes take your idea and run with it and not even give you credit. I hate all 5 of them for that. If I see them, I may punch each one of them in the face. If you have never started your own company and then had someone else steal the credit for what you worked hard to develop, you don’t understand.

I think it is unwise to write in this style about your own failed startup. If you’ve got a story to tell about betrayal, it is important that others on the Web corroborate your story. A good example here would be Phillip Greenspun. First of all, in telling his story, he uses a measured tone, and he seems to stick to the facts:

By March 2000 we had grown to 80 people. I was still CEO and beginning to feel nervous that, for every task in the company, I could not say exactly who was supposed to do what and by when. But we were profitable, with monthly service contract revenue coming in at a $20 million/year rate. We’d paid nearly $1 million in income tax on our profits for calendar year 1999. Not so bad considering that we built everything from a $10,000 investment.

We’d never sought venture capital but our revenue and profits were bringing some of the top East Coast firms to our door. Most of the time these guys were being forced by the frenzied times into investment in a company and figuring out how to get revenues later (and profits much much later). ArsDigita looked a lot better than than the typical “wing and a prayer” bunch of guys with a fancy spreadsheet. Despite 1000 percent annual growth, we had cash. Most of our revenue was recurring. Most of our customers were happy and loyal.

But what is really important is that the other folks that Greenspun worked with all seem to agree on what happened. Eve Andersson writes:

The marginalization of Philip Greenspun started taking place quickly as Allen Shaheen discovered that it was difficult to work with someone who wouldn’t let him get away with incompetence and dishonesty. Over the course of 2000, more and more responsibility was taken away from Philip and given to so-called professional managers who didn’t understand the Web or software development. Instead of firing Philip outright, he was banned from decision-making meetings and was put in charge of the less profitable parts of the company.

In March, 2001, Jin Choi, the company’s 2nd-largest shareholder was fired. Jin didn’t seem to mind so much because he has never had any tolerance for anyone he deems stupid.

Around the same time, the VCs pushed out Aurelius Prochazka. Aure had built up most of ArsDigita’s west coast operations. Most of the clients were there because of Aure. He had trained most of the developers. He had personally built some of the most important modules of the ACS. He could construct an enterprise-quality site himself that would normally take a team of 4 or 5 developers to create.

John Pratt should take note. One guy ranting on the Internet is a lunatic, but several people all agreeing with each other is a story.

“Good Lord! Where’d I get THAT?”

I love this line from Sarah Lacy, which matches my own experience when traveling off the beaten path:

I will take four days out to roundly smack-down anyone who says Nashville is a better city, and now that the dates have changed from Dec. 31-Jan. 3 to Dec. 27-30, it even overlaps nicely with my 34th birthday.

Thirty-effing-four. I’m telling you I look every bit of it after this year of travel. I also have an interesting collection of scars, bites, bruises and scrapes from life in all these far flung places. A lot of mornings of yelling “Good Lord! Where’d I get THAT?” in various hotel showers. But I wouldn’t trade it. Seeing the world and meeting thousands of its entrepreneurs over the last year have permanently changed my worldview and changed me as a person. It’s a good kind of pain. I mean—assuming I do actually get this book done by next August. Not totally sure I won’t yet wind up kidnapped, in jail or in an insane asylum.

She puts it very well. Not that I’ve traveled like she is doing now, but I recall various adventures hitch-hiking, jumping into various cars and trucks, and then jumping out, and later being surprised at all the odd bruises I picked up.

This is an unusual post by a stock market short-trader and investor, about a time they shorted Peet’s and almost got burned. For me, the most interesting part was the comparison of entrepreneurial culture in Australia and the US.

As an Australian the success of Starbucks (or Peet’s in San Francisco) puzzles me. Australia is blessed with a plethora of interesting and sometimes quirky, often very stylish cafes. For those who are interested here is a photo of my local (Bronte) strip of coffee shops. They are better than any strip I know of in New York, SFO or Chicago. The coffee is better too – and that is widely commented on by visitors to our shores.

It’s not that Australia is even a particularly coffee addicted country. Per capital consumption is not huge by developed country standards and is lower than the United States. We just have a better coffee scene.

It puzzles me why. There are awful lot of things that the United States does (substantially) better than Australia so this is an oddity deserving some explanation.

American coffee chains (particularly Starbucks but also some of the donut variety) have tried to break in and mostly failed. Starbucks closed most of its stores last year after multi-million dollar losses. They couldn’t cope with the Australian competition. Which is odd because in most things the US is a far more competitive market than Australia – and US senior management tend to be more battle hardened than their Australian peers (see my piece on the use of American CEOs in the Australian context). Its just the competition in cafes is far more fierce here.

I would love to be corrected – but I think the reason has to do with our wage structure. American low-end wages are very low indeed whereas Australia has minimum wages at quite high levels. Hiring unskilled labour to run a coffee shop according to a formula (and devoid of in-store entrepreneurial talent) works in America but does not work in Australia. Also entrepreneurial talent in America has too many opportunities to waste itself in a coffee shop – whereas small-time competent entrepreneurs will open a small coffee shop in Australia. [Maybe one of the good things about America is that it uses entrepreneurial talent well.]

Leah Culver is answering some questions about failure of Pownce relative to Twitter. She was lead developer. I’m frustrated by her answers, since she seems to give credit to Twitter for being highly focused and well-run, whereas anyone following the story is aware of how untrue that is. There was a lot of discussion last year about Why Can’t Twitter Scale? The lead programmer at Twitter, Blaine Cook, was either fired or quit. So how does that square with the praise Leah offers them?

Andrew: OK. All right. We talked about what you did well, what do you wish you did differently?

Leah: That’s a really good question. I really hated that the comparison to Twitter. I think, if I were to do a new start up or a different company, I would pick it in an area where there wasn’t such good competition, determined competition. I think there is definitely different levels of start ups and Twitter was definitely (laughs) a good start up, and it’s really hard to compete or be compared to.

Andrew: Why were they such good competitors? It seemed like they were down most of the time that you, guys, were up. It seemed like they weren’t doing that much on their site, it was just text. You, guys, did so much more, you are more alive. What made them such good competitors?

Leah: I think because the team is very focused, they have an excellent team.
Excerpt 2

Leah: You know, I feel like it’s really unfortunate that people saw it as that kind of rivalry because we never, that was never the intent. When we launched the site and we first got like they compare us to Twitter, it was like shocking because Pownce is definitely a very different type of a site, a different type of feel, a different type of community. I think that, you know, maybe the press jumped on it as an opportunity to write about something that just, you know, that rivalry was just never there.

Possibly, Twitter deserves praise for being more flexible than Pownce? Both companies started off thinking they’d be more like a CMS, Twitter adapted the most, into something different. Or perhaps this is a story about companies die once they are acquired by other companies? If Pownce hadn’t been bought by Six Apart, it would be forced to keep evolving itself.

Paul Graham writes about startups, reviewing feedback he has received from those who went through his “School for Startups”. The most common feedback was about the need to be careful when choosing business partners.

What people wished they’d paid more attention to when choosing cofounders was character and commitment, not ability. This was particularly true with startups that failed. The lesson: don’t pick cofounders who will flake.

Here’s a typical reponse:

You haven’t seen someone’s true colors unless you’ve worked with them on a startup.

The reason character is so important is that it’s tested more severely than in most other situations. One founder said explicitly that the relationship between founders was more important than ability:

I would rather cofound a startup with a friend than a stranger with higher output. Startups are so hard and emotional that the bonds and emotional and social support that come with friendship outweigh the extra output lost.

We learned this lesson a long time ago. If you look at the YC application, there are more questions about the commitment and relationship of the founders than their ability.

Founders of successful startups talked less about choosing cofounders and more about how hard they worked to maintain their relationship.

One thing that surprised me is how the relationship of startup founders goes from a friendship to a marriage. My relationship with my cofounder went from just being friends to seeing each other all the time, fretting over the finances and cleaning up shit. And the startup was our baby. I summed it up once like this: “It’s like we’re married, but we’re not fucking.”

Several people used that word “married.” It’s a far more intense relationship than you usually see between coworkers—partly because the stresses are so much greater, and partly because at first the founders are the whole company. So this relationship has to be built of top quality materials and carefully maintained. It’s the basis of everything.

A Shout Out to My Pepys writes about their experience at dom com startups:

The dot coms I have known were all doomed. Almost all of them were the classic two-founder startups going after a niche in the market. All of them needed outside money to achieve their goals, and in every case the outside money wrecked the company. Uncontrolled hiring wiped out the competence and the culture of these places within months. Executives who came in with the outside money were out of their depth and resorted to arbitrary decision-making and tyranny, and sometimes deliberately failed at their fiduciary responsibilities.

Here are some examples of things I saw at dot coms: People hired to do nothing to make a company look bigger; openly racist senior executives allowed to carry out their prejudices; nonexistent products fraudulently sold by salesmen who then left with their money; stolen patents; illegal or impossible business plans designed to fail just after an executive had left for a better job; and indecision actually written into the procedures of the company to resolve differences between founders.

These things happen at bigger and better-organized companies, but it’s possible for all of them to occur at once at a startup dot com without any consequences for anyone involved. Too many of those places were all the boys playing the treehouse, complete with NO GIRLS sign, with the difference that being pushed out meant real broken bones down below.

In particular, the “two cofounders” startups were disasters. I’ll make an exception for the last one I worked at, where both of them were smart nice guys who knew what they were doing and cooperated. Everywhere else it was a disaster: Beavis & Butthead meet Leopold & Loeb. They were all white college grad males. Almost always one was technical and the other was business. They were inevitably rivals and often boyhood friends. Neither one could be completely in charge, and neither one could be seen defeated. I’ve seen situations where the two actually alternated between winning and losing the argument, so that the company sailed along zig zag for months.

I won’t ever work for a two cofounders startup again, unless it’s the last two. The rest is just the whole company as fifth wheel in the meltdown of a friendship.

I’d add sexism to the list of complaints. The last startup I worked had a project manager whose behavior seemed straight out of the 1950s. At one point, when we were trying to hire designers, I set up a lunch where the project manager could meet the 2 most talented designers I knew. These designers just happen to be one male and one female. The project manager spent the whole time talking to the male designer, the existence of the female designer was barely acknowledged. Embarrassing for me. I apologized to her later and explained that I had no idea that he was like that.

Still, I don’t think startups are uniquely awful. In the comments of the above post, someone writes:

A lot of my friends and I talk about the mythical “just a job” job as a way to be able to pursue outside Interests (like sleep) instead of struggling with being assimilated by a Very Friendly Startup. I half-tried it once, but I didn’t have anything to take the place of my emotional/personal investment, and the company in question had a monstrous work environment (really openly-hostile; people didn’t throw chairs in meetings anymore, but the people who used to throw chairs in meetings were still around and everybody knew it and “what am I going to say to X?” was used as a way of intimidating one by proxy) so I found myself a corporate nihilist with no work ethic or fear of being unemployed or whatever to drive my participation — in short, I just didn’t put up with the shit and left.

I’m left with the feeling that unprofessional behavior is common. It’s a sad fact, but there is a lot of it.

This summer I was part of a project that, in my opinion, made many mistakes. The entrepreneur and his project manager felt they could build web software even though they had no programmer as part of their core team. They felt the technical work could be handled by a team in India. The 2 of them spent most of their time trying to raise venture money. They spent a lot of time honing their VC pitch – many hours were spent polishing the slides they used in their PowerPoint presentation.

Last time I checked in with them, they project had fallen several months late, they had mostly used up their initial money, and they were having trouble fundraising.

My own theory of the right way to go is “Form an awesome founding team and get your product out the door ASAP. Then, forget everything else, VCs included, and just build.”

So I was really glad to see Meebo CEO Seth Sternberg giving exactly that advice.

These 2 paragraphs, in particular, speak to the mistakes that I just saw on that last project:

At the exact moment you had your idea, ten other people had the exact same idea. There was just something in the environment that made it the right time for folks to think that one up. The race has already begun! Who’s going to execute first? Who’s going to execute best? If you want to waste nine months trying to raise VC money for that idea, great. But six months in, you’re gonna cry when you see someone else put out that same product you’re pitching me right now. Like I said, forget everything else and just get your product out the door. Now.

…First and foremost, find a great founding team. One person is almost never enough. You just can’t do it all. Rather, team up with one or two other people who have skills synergistic – not overlapping – with your own, but with similar goals and passions. I can’t tell you how frequently teams of three business school students tell me they’re going to start the next great consumer Internet company. When I point out that they’re all business people, and wonder who’s going to build the product, they almost always fall back on “we’ll get a couple of undergrads to do it,” or, “we’ll outsource it.” If I hear either one of those, I know the startup’s already dead. Sorry, folks. Harsh, but probably true.

Interesting info on startup founders. The suggestion is that Silicon Valley venture capitalists prefer younger entrepreneurs because younger entrepreneurs are easier to push around.

I’ve got a message for all the Silicon Valley venture capitalists who think a CEO is over the hill after age 40. Old guys rule. And they are far more likely to be the founder of a successful technology company than most of you understand. How do I know this? Research that my team conducted, based on a survey of 549 entrepreneurs in high-growth industries, showed that the average founder of a high-growth company launched his venture at age 40. We also learned that these founders are likely to be married and have two or more kids. They typically have six to ten years of work experience and real-world ideas. They simply got tired of working for others and wanted to rise above their middle-class heritage.

These clearly aren’t the talented 20-somethings who have “great passion” minus the “distractions like families and children…that get in the way of business” which Sequoia Venture’s Michael Moritz raves about (also in this Building 43 video). Or the ”very low paid” young entrepreneurs who, according to Google’s Eric Schmidt, make “all the right things happen” by “working themselves to death”. But these are the companies which Silicon Valley VC’s seem to flock to. And maybe that’s one reason why the failure rates of VC investments are so high.

Cringley predicts the world of higher education is facing a revolution:

There is enough good material available for free online right now that it would be easy to create a virtual university (WikiVersity?) with the only thing missing being the granting of degrees. It’s that whole “degree from MIT” thing that allows that school not to worry about sharing its lecture bounty, because in the education system lectures are viewed as worthless unless they lead to a degree.

Why is that?

My friend Richard Miller (he designed the Atari Jaguar video game console eons ago) is one of the smartest engineers I’ve ever met yet he doesn’t have a degree in engineering. Apple II designer Steve Wozniak got his degree from UC Berkeley only after leaving Apple in the early 1980s. In both cases their employers couldn’t have cared less.
What drives the education industry is producing degrees while what drives the computer industry is producing products and services.

When was the last time any employer asked to see your academic transcript? Have they ever?

What’s missing here is the higher education equivalent of a GED. Someone will come up with one, or they should, because all the other parts of the system are ready to go.
Cushing Academy, a tony prep school in western Massachusetts, is right now replacing its 20,000-volume library with a “learning center” containing 18 eBook readers, three giant TV screens, and a $12,000 espresso machine. I wonder why they need a building or even a room at all; wouldn’t it be cheaper just to give each kid an eBook reader and a Starbuck’s gift card?

Sounds appealing, doesn’t it? I, for one, always hated school. Always. And I have long wondered why people put up with the current structure of education. But I would not be the entrepreneur that Cringley wants. I would not invest in this particular revolution, for 3 reasons:

1.) Never underestimate the shocking conservatism of the American people, and their general unwillingness to change.

2.) People who go to college are trying to reduce their risks – they want a guarantee that they will be allowed into the middle class (their parents also want that guarantee). The market for safety is not going away any time soon.

3.) The people who are willing to take risks, the true entrepreneurs, are few and far between. (And many of these people don’t bother going to college.)

In other words, so long as the universities can claim that they are reducing risk, they are immune to any challenge from the Internet. So far the Internet has proven itself capable of setting up radical challenges to existing institutions, but it hasn’t replaced any institutions and become the new status quo. The revolutionaries are not yet the new conservatives. We are at least 20 years away from the day when those of us who believe in the Internet can say “4 legs good, 2 legs better.”

A comment I posted over at Hacker News:

I am concerned by the public’s changing mood, in regards to entrepreneurs. In the 1970s the American government began the process of deregulation, which allowed some important innovations in the industries that were deregulated. Transportation was probably the first big industry effected, followed by many others.

My impression was that there was a stretch when some combination of the public mood and the government’s emphasis conspired to encourage small startups. The 1980s and 1990s were clearly good in this respect.

The mood of the last decade has been increasingly punitive. An increasingly harsh attitude toward flexibility in the law has been evident elsewhere for some time, but in the last 10 years that attitude has increasingly been expressed in the field of business. The Sarbanes-Oxley Act is the most evident expression of the new trend – what once would have been treated as a civil matter is now treated as a criminal matter.

At some point during the next 30 years I expect breakthroughs in biology to allow for a new wave of startups, if the government and the public allow those startups to exist. In matters relating to health, it is worrisome to consider what a punitive legal attitude means – a medical treatment that fails to perform leads to jailtime, rather than a lawsuit.

I think it is urgent that everyone who cares about entreprenurial culture in America to make the argument, to their friends and to strangers, that innovation in business depends in part on tolerance, and that, in practical terms, this means most matters of conflict should be treated as civil rather than criminal cases.

Once upon a time, before the mid 1800s, most Western countries treated bankruptcy as a criminal matter, rather than a civil one. The liberalization of bankruptcy law was one of the factors that allowed our modern economies to gain the dynamic nature they now enjoy. I would guess that most of us know someone who has tried to do a startup, failed on their first attempt, and then later met with greater success on successive tries. Tolerance of failure is the first pre-requisite of a dynamic economy.

Since the public seems at risk of forgetting this fact, we all need to make that case, to whoever is willing to listen.

Someone responded:

When you cross the line into experimenting with medical treatments, you’re not gambling with other people’s money, you’re gambling with lives. You can’t just equate it to any other kind of start up, it has to be held to a higher standard.

I then responded:

Regarding medical innovation.

Other fields also threaten people’s lives. If you build a new kind of jet engine, which gets through testing but which then is responsible for a spectacular crash, then your product has killed a few hundred people. And yet, unless there was fraud in the documentation of the tests, there have not been criminal cases in the past. I worry that in the future there will be criminal cases. Again, the trend that I worry about is that what used to have been treated as a civil matter will, in the future, be treated as a criminal matter. We do not need to focus on the medical field. Many other fields can cause people to die – industrial automation, the transport and disposal of toxic chemicals, the construction of buildings (which could then fail and kill people). All industries are in need of innovation all of the time, yet innovation brings with it risk, including the risk of death. How much innovation will we get if we make these matters criminal?

I should emphasize, just in case people forget, that fraud has always been criminal. It has been criminal for centuries. So the move to criminalize more aspects of business is not a move to make fraud criminal. If you think that the Sarbanes-Oxley Act made fraud criminal, then you are mistaken. Fraud has always been criminal.

Sarbanes-Oxley is representative of the new trend. The overall goal was to encourage greater accuracy in the reporting of a company’s financial health. This goal could have been reached through a variety of methods, including both the carrot (rewards) and the stick (punishments). Rewards could have included tax breaks for meeting some additional level of compliance. Punishments could have included fines levied against companies that failed to meet a higher level of compliance. These approaches would not have raised the risk of jail time for CEO’s. Instead, Sarbanes-Oxley decided to go with the heaviest kind of punishment of all – to treat infractions as criminal offenses, potentially meriting jail time.

This punitive attitude is going to have a chilling effect on the amount of innovation we can expect in any field.

The venture capital model is broken:

Within the past 3 years I’m seeing a huge tsunami of innovation that has nothing to do with technology advantage (a cornerstone of the venture capital market) but instead business model or market demand oriented solutions – technology is become less of a core driver. This is turning the venture playbook upside down.

The article mentioned above talks about what I call “market factors” from a venture perspective- the liquidity market (and regulation mainly liquidity). Because of the breakdown in liquidity there are just to many company that is causing a “backup” in the system. The venture capitalists depend on liquidity to exit out the companies in their portfolio. So if the venture capitalists don’t change their model the trickle-down effect hurts entrepreneurship.

I would like to see new funding models. It would help if the various state governments (in the US) offered standard models for incorporation other than the C-form. I started a company in 2003 where we used the flexibility of the law, in regards to LLCs, to mimic certificates for my tiny company. Then I got all my friends to buy a share for $100. So that company was an LLC that in many ways imitated a C-form corporation. But myself and my business partners burned through $5,000 of legal fees to get the right agreement. I would love to see the government offer that model as a standard, a sort of hybird of C-form and LLC. The goal would be to make it easier for entrepreneurs to raise money from strangers, without having to look toward Wall Street. I realize some people will respond with concerns about fraud – those concerns are valid, but they can be gotten around by other aspects of the LLC model, especially the understanding that everyone has some of the old rights that a partner would have had in a partnership – in particular, the ability to examine the corporate accounts. We now know, from examples such as Enron and more recently with GE, that big companies, even with formal audits, can lie about their finances. The best protection against fraud is transparency.

I wouldn’t say that the model I worked out in 2003 is necessarily the one that the whole world should follow, but I do strongly believe that there are C-form/LLC hybirds out there that can facilitate early stage funding while also lowering the risk of fraud.

I’ve been reading John C. Bogle’s book, Enough. He makes the argument that we live in an era where our business leaders have forgotten what enough is. However much they have, they need more: more cars, more jets, more yachts, more homes, more money. Bogle feels that the ethical lapses we’ve seen in recent years were facilitated by the loss of the concept of enough. It is a good book. People who are interested in questions of business ethics should read it.

On a related note, today the news page over at YCombinator pointed to this old article “How Much Scratch is Enough?” written by Ryan D’Agostino.

Okay, let’s see. Say I give myself eight years—no, better make it ten. Just to be safe. I figure I’ll definitely want a great apartment in Manhattan. Near Central Park. Plus a summer house in, say, the Carolinas. Nothing too big, but nice. Also, enough to put a couple of kids through college. Prep school too. Oh, and Colorado. A condo, on the slopes. Gotta have a nice set of wheels—Beemer—and an SUV (to get around Colorado). Then maybe I’ll open up a little cafe somewhere, or get a boat. Yeah, a boat would be cool. Ten years. Figure $15 million. I think I can do it. But then I’m out. Definitely. Out for good. Just sailing around on my boat.

This is how it starts: with a pledge. A promise to yourself that you will make a certain amount of money—that you will hit your number—by a certain age, and that you will, upon reaching that carefully calculated goal, get out. Go sail your boat. Or open your bookstore or your bed and breakfast, or be a philanthropist or whatever. You won’t have to worry about money. You’ll invest a big, juicy nugget and live off the interest, which will be more than enough.

For some people, though, that word becomes a stumbling block: enough. It makes the calculations tricky, and sometimes, it changes the plan. Enough creeps slowly but steadily upward, like ivy spreading imperceptibly over an entire side of a house, and once it does you can’t picture what the house looked like before. At first, you aim high—way into the millions—and while part of you knows that chances are you won’t really end up with that much, part of you knows there’s a chance you will. You see the number in big, block numerals in your mind, and the corners of your mouth curl up into a little smile, just for a second, when you picture yourself hitting the mark.

Bogle and D’Agostino are both criticizing consumption (cars, houses, jets, etc). I’ve no problem with that. I’m critical of consumption too. But I think it is odd that they both write as if consumption is the only thing that a person might want money for.

For my part, I will never have enough money.

I have in my head an unlimited number of ideas for new businesses. Some are web-based, and of these, some are content sites and some offer a software service. But also, some of the businesses I’d like to pursue have nothing to do with the web. I’ve some software ideas to help biologists and, in particular, to help people learn biology (I’ve just been studying biology myself, so I’m aware of things that could help me learn it better). Some of these ideas are simple, such as a calculator that allows certain kinds of very easy programming (easier than Matlab). And having only recently started studying advanced math, I’m aware that people who take up math as adults, and who are self-taught, may have a set of questions that are different than what high school students ask. And I’ve various creative endeavors I’d like pursue. For instance, I’ve been writing a screenplay for a movie loosely based on the events that occurred at Enron.

The various ideas I’ve got in my head right now could keep me busy for 40 years, and I could easily burn through $200 million pursing them all. I really doubt that I’m going to succeed at all of these endeavors, and I seriously doubt I’ll ever have anything like that kind of money, but I figure I might as well just give it a try and see how far I get. And if a miracle happens, and I end up with $200 million, I’m very certain that by that time my overall goals will have expanded to the point that I’ll need a billion to fund my further ambitions.

I will never have enough money.

D’Agostino suggests that when you finally get the millions of dollars that you’ve been aiming for, you smile: “You see the number in big, block numerals in your mind, and the corners of your mouth curl up into a little smile, just for a second, when you picture yourself hitting the mark.”

I think the opposite is true: the most exciting part of launching a new business is the first dollar that you get. The first few dollars bring a huge thrill, even though the numbers are trivial:

“Our first $100 dollars!”

And then:

“Out first $1,000 dollars!”

And then:

“OMIGOD! Our first $10,000 dollars!”

After awhile the thrill starts to fade. No one celebrates when a new business reaches the $30,000 mark. I assume there is some satisfaction to reaching a $1,000,000 (never been there myself) but I have trouble imagining it is as exciting as the first few dollars that come in, those early dollars that give you your first clue that maybe you’ve a product or service that people will actually want to give you money for.

I do not need multiple cars, houses, jets or yatchs. 10 years from now, I’ll be happy if I have a small apartment in New York City, my current Volvo, which I hope to keep going despite some body rust, and $100,000,000 of software projects that are all going well.

In his fictional scenario (I assume it is fictional) D’Agostino says: “But then I’m out. Definitely. Out for good. Just sailing around on my boat.”

I can’t imagine ever wanting to get out. The thrill of launching and running a business is the most fun thing I’ve yet discovered. If I got out, what would I do? I’d simply get back in.

I’ve worked with entrepreneurs who are obsessed with secrecy about their idea. Some of them ask me to sign non-disclosure agreements, just for hearing the basic idea of their business. This kind of secrecy is always a mistake. If you’ve got an idea for a business, you should talk about that idea with everyone.

A frequent question entrepreneurs have when they are just starting their company is: how secretive should I be about my idea? My answer: you should talk about it to almost anyone who will listen. This includes investors, entrepreneurs, people who work in similar areas, friends, people on the street, the bartender, etc.

There are lots of benefits to talking to people. You’ll get suggestions for improvements. You’ll discover flaws and hopefully correct them. You’ll learn a lot more about the sector/industry. You’ll learn about competitive products that exist or are being built. You’ll gauge people’s excitement level for the product and for various features. You’ll refine your sales and investor pitch. You might even discover your idea is a bad idea and save yourself years of hitting your head against the wall.

Paul Graham offers advice about how to keep your startup from dying:

The number one thing not to do is other things. If you find yourself saying a sentence that ends with “but we’re going to keep working on the startup,” you are in big trouble. Bob’s going to grad school, but we’re going to keep working on the startup. We’re moving back to Minnesota, but we’re going to keep working on the startup. We’re taking on some consulting projects, but we’re going to keep working on the startup. You may as well just translate these to “we’re giving up on the startup, but we’re not willing to admit that to ourselves,” because that’s what it means most of the time. A startup is so hard that working on it can’t be preceded by “but.”

In particular, don’t go to graduate school, and don’t start other projects. Distraction is fatal to startups. Going to (or back to) school is a huge predictor of death because in addition to the distraction it gives you something to say you’re doing. If you’re only doing a startup, then if the startup fails, you fail. If you’re in grad school and your startup fails, you can say later “Oh yeah, we had this startup on the side when I was in grad school, but it didn’t go anywhere.”

You can’t use euphemisms like “didn’t go anywhere” for something that’s your only occupation. People won’t let you.

One of the most interesting things we’ve discovered from working on Y Combinator is that founders are more motivated by the fear of looking bad than by the hope of getting millions of dollars. So if you want to get millions of dollars, put yourself in a position where failure will be public and humiliating.

Zed Shaw is moving to San Francisco. He wrote the following comparison of entrepreneurs in San Francisco and New York City:

To give a great example of what it’s like in NYC, I received this email from someone when I posted I was looking for work in SF

I have an idea for a business involving level 2 stock quote analysis that will be able to ask arbitrary questions of the NYSE data stream using indexed log files in Hadoop as well as a backup idea to cannibalize the enterprise search market by doing what they do for cheaper money using this technology and lucene. In both cases, I’ll need a badass coder to help me with the application and deployment parts, ideally using a dynamic JVM language. … I have personal funds to work for 6 months so I’m planning on doing this for 2-3, presenting a prototype to some financial people and ideally getting funding and connections to sell it in one fell swoop. Just registering the idea. Real-time analysis of a whole bunch of email could be an option as well, if you had a business idea.

Yes, I actually did receive this in response to my blog post. This is actually a very common pitch and style for the NYC entrepreneur. This cocky, muscular, alpha-male-wannabe “my dick is bigger than yours come work for me and make me rich” is tiring and the main reason I’m leaving. If NYC entrepreneurs want to know why they can’t find “techies” (another way of saying “fucking nerd”), all you have to do is read the above.

By comparison the companies that contacted me from San Francisco were all incredibly polite, professional, and told me exactly why I should work for them. Each one immediately pointed me to their existing technology. Each one told me their funding levels. Each one had their business model thought out to some degree. There wasn’t a single company that I thought didn’t get the business, or was trying to screw me.

When it comes down to it, the primary difference between the companies who contacted me in SF vs. NYC is this:

* NYC prospects were looking for a badass/ninja/rockstar beta-male “techie” employee to make them rich creating lame applications for giant Finance/Fashion/Marketing companies.

* SF prospects were looking for a partner to get rich with them creating great products for customers.

Now obviously the SF companies are all really looking for an employee to make them rich. The difference is in their approach and how they don’t say it so blatantly or in such a gigantic douchebag way. Their touch was lighter, more collaborative, and definitely not with the attitude of me being some “beta-male” to their “alpha”. That lack of cocky dickwad douchebag in the SF technology scene will be refreshing and interesting.

There is some truth to his account of entrepreneurs in New York City, though I also ran into a lot of the same attitude in Virginia. I’ve run into a lot of clients who have the attitude “I am a genius, I just need some coder to bring my ideas to life.” Invitations to real collaboration are rare. My sense is that a lot of the entrepreneurs that I’ve dealt with on the east coast are at the unconscious incompetence level of learning. They simply do not know how little they know, nor do they know enough to appreciate how much I know.

I recently oversaw a project that had me working with a distributed team (in the US, Europe and India). The same project also worked exclusively with independent contractors, whose work was hired on an assignment basis. The work was for a new web-startup. I have some concerns about such an arrangement being used for a new, innovative project. I’m going to attempt to explain my concerns in this essay.

First, I’ll talk about using freelance, independent contractors for a web start-up. The seeming advantage of having no permanent employees is that the operation has no fixed costs. An advantage? It depends. If you really want to avoid all fixed costs, simply close your business. Being in business means having expenses, the real issue is whether you are making a profit – does the labor you hire help you make more money than the cost of the labor?

The project I oversaw moved slowly, and some of the slowness can be attributed to the freelance nature of the labor we hired. The programmers would do whatever we asked them to, and they all did high quality work. However, because we made no long term commitment to them, they of course had to keep busy with other work. Sometimes we needed them but they were busy with their other clients. Also, they were not part of the conversations we were having in New York City, so they lacked a broad overview of the project and its goals, so they could not easily take the initiative to move ahead on their own.

If a project has no particular deadline, or if it is simple, then working with independent contractors is a great way to keep fixed costs low. However, if a project is suppose to move fast, or if it needs to achieve certain deadlines, and especially if it is very complex, then I would recommend against the use of this kind of arrangement. For fast moving, complex projects, you need full-time, committed programmers.

Now I’ll offer some thoughts about agility, and the importance of physical proximity.

Agile practices have 2 main hopes:

1.) to allow a fast-forming team to quickly become highly-productive.

2.) to control costs by ensuring discipline in regards to goals and deadlines.

I used the word “hopes” instead of “goals” because the ultimate aim of agile practices is more of an ideal to be aspired to rather than a reality that can be achieved, and by that, all I mean is that we are constantly learning more about what these practices truly mean, and in the future we can reasonably hope to do better than we are doing today. I’m speaking for the entire profession of computer programming when I say this.

I am in the United States, in New York City. I’ve been working on websites since 1996. I’ve worked on many small teams, and over the years I’ve used some agile practices, such as frequent iterations, frequent in-person consultations with the client, and unit tests. When I started on this last project, I first thought it would offer the chance to experiment with a fuller range of agile practices. However, I came to realize that most agile practices depend on physical proximity. The programmers need to be able to meet, preferably every day (”every day” in the sense of casual conversation, not “every day” in the sense of “let’s have a formal meeting”). Consider some of these practices:

1.) pair programming (two people looking at the same screen, checking for errors)

2.) the use of index cards to map objects

3.) stand up meetings (meetings kept short and lively because everyone is standing)

None of these make any sense if the programmers are in different countries.

I’d also add code reviews. One can do a code review at a distance, but I think in person is much more effective. And code reviews don’t make much sense when you are working with independent contractors. Code reviews are meant to develop each programmer’s long-term abilities, and also they are useful for helping the whole team agree on certain programming habits. But one would have to have a long-term relationship with the programmers before doing such a thing would make sense.

Programming is an art, and art needs passion. Many agile practices are aimed at soliciting a greater emotional commitment from the programmers. I might write “For an agile project to go well, the programmers need to emotionally commit to it” but that isn’t quite right. What would be more correct would be “For an agile project to go well, the programmers need to emotionally commit to their own professional ideal.” That is, they need to care about the craft of programming. They need to be constantly pushing themselves to always be better programmers.

I would never argue that agile practices are needed on every project. If a project is routine, then long-distance, non-agile practices might be perfect. For instance, suppose you decide to launch a new online magazine. After researching your options, you decide you will use WordPress as the software that powers your site. I’d suggest you find a good designer, local to you, and work with them to come up with the design. Once you have the design, the rest of the process is mundane. You could certainly hire a team in India to install WordPress and implement your design for you. And you would not need agile practices for such a project. In fact, you do not even need great programmers for such a task. Mediocre programmers can do a reasonable job with tasks that are standard, routine and mundane.

However, I would argue that agile practices are needed at projects that need to be fast moving (this would include most start-ups), or at any project where the aim is to create something altogether new and unique. If your project is venturing out into the great unknown, if you are going where no one has ever gone before, you will need a team of excellent, committed adventurers to go along with you.

Let’s look at the history of agile practices, going back centuries.

In the 1990s, DARPA invested some money in agile research, which lead to such books as that by Goranson: Agile Virtual Enterprises.

Goranson looks back at the whaling industry of the mid-1800s and examines how 2 small towns in Massachusetts were able to capture 90% of the whaling industry, when most of the actual hunting was done in the South Pacific. He found that the patterns of hiring and team building had much in common with what start-ups aspire to nowadays – a tight-knit, fast-forming team of highly competent professionals held together by a commonly understood body of professional ethics and expectations.

Goranson emphasizes the role of geographical concentration (and therefore physical proximity), to the evolution of culturally unique traits, leading to competitive advantages:

Geographical and professional isolation allowed for the evolution of a unique and very effective system which for many years put a brand new, fairly high risk/high payoff, virtual enterprise in the water at the rate of one every two weeks. The return of each whaling expedition triggered the formation of another. It was considered an invitation to bad luck to reuse the same combination of partners, so during the six to nine months it took to recondition the ship for another voyage, the owner of the boat assembled a new group of key players who would join him in setting up the basic physical and social conditions needed for a successful venture.

The primary partners required to launch a voyage consisted of a ship owner, an insurer (of the ship cargo), a provisioning financier to supply the expedition with food and other consumables, a captain, and often a manufacturer who agreed to buy the oil at a set price. This component of the partnership was formed in the first couple of months, the partners being determined partially by availability.

A month or less before the ship was ready to sail, a secondary group of partners, the crew, was formed. They shared a distinct cultural background; almost none of them had, or would ever, serve in the navy or the merchant marine. This professional distinctiveness, coupled with an intense geographical concentration, fostered the development of a unique culture based on the virtual enterprise.

Goranson uses the word “agility” to refer to fast forming supply chains, and also (relatedly) the ability to overcome the administrative costs that might keep a new supply chain from forming (in the early 90s, when DARPA funded Goranson’s work, one problem seemed especially prevalent: the fact that the most innovative technologies in America were being developed at small start-ups, and yet large Fortune 500 companies were having difficulty integrating small start-ups into their supply chains, because of the administrative hassles of developing relationships with a multitude of small companies). He uses the word “virtual” to refer to an organization that is project-specific and not meant to last. For instance, in the modern context, the best examples of agile, virtual enterprises are in the movie industry. Each movie is its own independent business, and the production of each movie entails the fast formation of a team of highly competent professionals who understand they are being hired to work on a specific, time-limited project, which will disband as soon as the project is done.

Whaling ships and modern web start-ups share certain traits::

Every voyage included a team of skilled craftsmen – carpenter, blacksmith, cooper, and a sailmaker (often a boatwright, a rigger and a cook were also in this class) – whose combined expertise allowed the enterprise to respond effectively to a broad range of situations. Each of these professionals, along with the tools, supplies, and sometimes apprentices they brought abroad, formed an essentially self-contained business which was integrated into the enterprise as a whole. In these cases, it was not just the person who signed up for the voyage, but their business. From the shipowner to the cook, everyone was paid with a pre-arranged percentage of the take.

In other words, every ship was its own little agile, fast-forming start-up.

Goranson’s use of the word “agility” is somewhat different than the way the word “agility” is used by its proponents in the software industry, but the meaning of the word overlaps for both groups in the sense of “the ability to get supply from a new source quickly”. Consider the words of the Agility Manifesto:

We have come to value:

Individuals and interactions over processes and tools

Working software over comprehensive documentation

Customer collaboration over contract negotiation

Responding to change over following a plan

With only minor tweaks of the wording, you could use the above as a statement of the professional culture that pervades Hollywood. The emphasis is on doing what is necessary to get something working into production fast. By contrast, the slow moving process of low trust, heavily documented, laborious negotiated, carefully vetted contracts are anathema in this context.

(Stephen M. R. Covey has a written a book called The Speed Of Trust, which does an excellent job explaining how much a project speeds up when the participants can trust each other, and therefore how important it is to work toward facilitating the long-term development of trust in any business relationship.)

Goranson emphasized that one of the legal traditions that the whaling industry and movie industry share is a very strong reliance on verbal contracts, as opposed to written contracts and detailed documentation. Goranson points to the bankruptcy of Kim Bassinger as an outstanding example of the importance given to verbal contracts in the movie industry. (Bassinger met some producers for dinner to discuss the possibility of her starring in their movie Boxing Helena. She promised, over dinner, to star in the movie. When she later backed out of her promise, they were able to sue her for $8 million.) The Agility Manifesto de-emphasizes contracts, but still puts a heavy emphasis on the importance of verbal communication, a point made clear by “Customer collaboration over contract negotiation”.

Goranson emphasizes the role that geographical concentration played in allowing this culture of virtual enterprises to flourish. I believe that geographic concentration still plays the predominate role in allowing the continued evolution of unique agile practices.

I’ve had it suggested to me that the cheapness of overseas programmers (in places like India) can speed a project up, simply because, since they are cheap, you can hire a lot more of them. This is flatly contradicted by Fred Brooks thesis in The Mythical Man-Month. When the System 360 project was running late at IBM, Brooks tried to speed up the project by adding more programmers to the team. But he found that the additional programmers actually slowed the project down. Each new programmer became one more person who needed to be kept up to date with the latest documentation – and every few additional programmers required that a new manager be brought into the project to manage them. The growing complexity of communication across a growing mass of workers helped to slow the project down, rather than speed it up.

In this sense, the cheapness of overseas programmers actually encourages bad habits. Because they are cheap, you may get tricked into thinking that you can hire a lot of them. But the more you hire, the more time you will need to invest trying to keep everyone unified in their understanding of what the code is suppose to do. And after a certain number, you’ll need to start hiring additional managers.

If you are a project manager, and you rely on the cheapness of your programmers to keep a project’s costs under control, then you need to fire yourself. There is only one correct way to keep costs under control, and that is through disciplined focus on goals and deadlines. Agile practices have evolved to make it easier to keep complex projects on track. To the extent that geography matters to agile practices, then geography matters for the goals and deadlines of your project.

Nicole Radziwill approaches this subject from a different angle, but she makes a similar point about the importance of geography:

Space does matter. We know this when we are designing facilities and plant layouts, for example, because one of our common considerations is to minimize traffic between areas and departments. More often than not, we do this to minimize the time spent moving people or equipment around a plant, so that time is not wasted. But the same concept could apply to our supply chains. Why aren’t we minimizing the time that components or goods spend traveling through the supply chain, when it could lead to reductions in energy costs? Furthermore, why aren’t we shortening our supply chains to strengthen local and regional businesses, and train the next generation of skilled workers (who can actually do something useful for the regional economy)?

The logic has been something like this: energy is cheap, therefore transportation is cheap, and transportation is easily available and accessible through third-party providers like FedEx and UPS. But I can’t shake the feeling that “supply chain status quo” is not good for quality in the long-term – because it encourages us to source the products and components that are most affordable, rather than the ones that might help us cultivate a quality consciousness in our local areas.

To offer a partial answer to the question that Nicole poses, I think the reason why products get sourced to where they are most affordable (at the current moment, in the short term) is that people tend to fear losses more than they value potential gains. There is an abundant literature on this subject. In regards to sourcing, buyers go with what is cheapest in the short-term, rather than developing long-term innovations that might lead to much greater gains in the future. Consider:

Prospect theory… argues that people center their expectations around a variable and moveable reference point. The reference point is most easily thought of as the status quo, though it is not always so. In most situations, people are more likely to ensure that they preserve their current situation, than to risk losses by seeking potential improvements. Indeed, people tend to sacrifice a great deal in order to maintain their current situation. As Levy notes, “people tend to be risk-averse in choices among gains, but risk acceptant with respect to losses.” This is often the problem in intractable conflicts; the risks required to resolve the conflict seem much too great compared to the potential losses. This sort of framing is what leads ultimately to hurting stalemates. Loss-oriented framing is, ultimately, this tendency to minimize losses while missing opportunities to improve one’s situation.

The status quo of any culture, in the short-term, can be regarded as an under-developed blandness, relative to the unknown brilliance of some unknown future innovation. It takes a leap of faith to believe in that unknown future brilliance. It is easier, and safer, to go with what is cheapest in the short-term. This is cowardice, but it is extremely common. True business leadership is rare.

In terms of developing some unknown future brilliance, I’m thinking especially of those cultural traits that, in part, give rise to comparative advantage. There is, at this point, a mountain of literature about the advantages that agile teams have when it comes to fast-forming, fast-moving projects. Agility is a cultural innovation that deserves further refinement, and each nation, depending on its legal traditions and its labor laws, is going to develop agility in a unique direction. The future development of these potential innovations is undermined by the extended supply chains that send work to distant parts of the world. I’m arguing that, just as Goranson stressed geographical isolation as playing a role in the evolution of a uniquely competitive culture in Massachusetts, then the dispersal of work from a geographic center must lead to the opposite – the dissolution of uniquely competitive cultural traits.

I can imagine someone reading this essay and raising certain objections. What about Linux? What about Apache? Certain open source projects have been successful with teams that are scattered all over the world. But then, these were not fast moving projects. Teams that never meet in-person can become highly productive, but it takes years. And by the time these projects hit their strides, much of the core team had, in fact, traveled to different countries and met each other in-person.

One other fact argues for the importance of physical proximity. For a team to be highly productive, it needs to have both high levels of communication and high levels of trust. Body language is important to trust. In a normal, in-person conversation, the bulk of the communication is non-verbal. Below I’m going to quote from an article that is aimed at teaching salespeople how to make more sales. On a start-up, the team members are not trying to sell products to each other, but they are often in the position of having to try to sell a given strategy to each other. One team member may feel that their site should be pitched to consumers, another team member may feel strongly that the site needs to be pitched to businesses. The success of the start-up depends on all of the team members being to able to listen to all points of view, take in the maximum amount of information and opinion, and reach the best decision.

It really doesn’t matter how knowledgeable you are about your product line or how many closing techniques you have mastered, unless you earn your prospect’s trust and confidence you’re not going to make the sale.

…Body language is a mixture of movement, posture and tone of voice. Research indicates that in a face-to-face conversation, more than 70 percent of our communication is nonverbal.

Our body language reveals our deepest feelings and hidden thoughts to total strangers. In addition, nonverbal communication has a much greater impact and reliability than the spoken word. Therefore, if your prospect’s words are incongruent with his or her body language gestures, you would be wise to rely on the body language as a more accurate reflection of their true feelings.

On a slightly humorous note, I’d like to offer a movie review. The best movie ever made about an agile, virtual enterprise was Akira Kurosawa’s 1954 movie, The Seven Samurai. Of course we need to translate the movie into business-speak before the comparison becomes clear. I’m only partly kidding when I write this. I really do believe this movie offers a good example of some of the above ideas.

In the opening scene, we meet the client (poor village farmers). We then come to see their problem: bandits who plan to raid the village as soon as the harvest is in. The villagers then go to a big city to hire a contractor who can solve this problem for them. They meet Kambei, a samurai. Though the villagers can pay very little, he takes pity on them and agrees to help them. He therefore steps into the role of project manager. He must then assemble a team, and this part is pure agile enterprise in practice. The city is full of many samurai, and out of this sea of potential recruits, a group of 6 is selected. These are highly skilled workers with a strong emotional commitment to their own professional ideal – that is, they all strive to be the best samurai that they can be. The 7 samurai then set out for the village. They almost instantly form a tight-knit, highly cohesive team, because they share a commonly understood body of professional ethics and expectations. The enterprise is “virtual” in the sense that Goranson uses the word – it is project-specific, and will disband as soon as the project is complete. At the village, the samurai work in close consultation with the client to ensure the goals of the project (the defense of the village). Finally, after a decisive fight, the goals of the project are achieved – the bandits are defeated. The client is happy. The surviving samurai then disband.

In this movie, the samurai are recruited in the same fashion as sailors might have been recruited for a whaling ship, or the same way that a computer programmer might be recruited for a web start-up.

To recap, my current experience teaches me that:

1.) Agile teams should be small (as per Brooks).

2.) They should meet in person several times a week.

3.) Everyone on the team must be highly competent.

4.) Everyone on the team must be emotionally committed to their own professional ideal.

5.) For the duration of the project, everyone on the team should be full-time

Furthermore, on projects that aim to be unique or innovative, or on projects that are complex, or on projects that need to be fast-moving, I will be discouraging clients from these practices:

1.) part-time, independent contractors

2.) distributed teams, with workers geographically dispersed.

One last point, unrelated to the rest. A number of people have said to me that they feel the cheapness of overseas workers (in places like India) is driving down wages in America. I do not believe this is true. Wages in America have declined over the last 40 years, but that is because the American people have themselves become unwilling to invest in their own country. Consider the fact that in 1955 the average middle class family saved 17% of their income, but in 2000 the US savings rate hit 0%. Wages will decline in any nation that does not invest in itself. By contrast, consider Germany, which has a high investment rate. Not only does Germany have higher average wages than America, it has also had more economic growth over the last 30 years. And right now China is saving and re-investing 40% of its income. I do not know a single American family that saves 40% of its income. Most of my friends, even those with college educations and good paying jobs, only save 10% or 15% of their income. It is wrong for Americans to first engage in an orgy of over-consumption and under-investment, and then blame poor nations like India and China for the obvious problems that must result from such reckless behavior.

Penelope Trunk, on the folks who do not understand her, and the entrepreneurs who do:

I’m going to answer the question people ask me most often: “What do I do when my company is out of money?”

Here is the answer:

1. Lay people off to save money
2. Forgo salaries to save money
3. Make a sale to generate money
4. Cut back your family’s spending to redirect money to the company
5. Kill your personal credit to redirect money to the company

All those options suck, of course. I should know. I did them all. And each time I wrote a blog post about how I was going nuts from funding, or making my family crazy from funding, commenters would tell me I look too crazy for anyone to fund.

But entrepreneurs wrote to me to tell me that they understand. Because most entrepreneurs have experienced something similar. They just don’t write about it. And investors are not stupid: They know this is what happens to entrepreneurs. That’s why investors are investors and not entrepreneurs.

Lots of people told me to throw in the towel, but entrepreneurs never did. Because entrepreneurs knows that having a successful startup is really about not quitting. You never get the business model right on the first try. You never feel like you know what you’re doing, and you always have to adjust and adjust until you find what works. If you have passion and energy and faith, you keep going.

But it has to be an insane amount of passion and energy and faith, because there is no sane reason to have a venture backed start-up. A start-up does not get funding if it is a reasonable business model. A start-up gets funded because it’s shooting for the moon, and investors fund companies to have a lottery ticket to the moon. So the odds are terrible that any entrepreneur will succeed. It is always a more sane financial decision to work at a corporate job for a paycheck.