Polishing my mirror

reflecting the collaborative reality of our networked world

Category: Corporate Culture

Small Business is a FARCE!!!

When billionaires who run global corporations wax poetically about virtues of small business you better believe that big global business is the business of our times.

In a globalized world, size matters
In 2011 Marc Andreessen famously started talking about the disruptive nature of technological innovation as “Software Eating the World”. Today, everybody, from entrepreneurs like me to VCs, along with the news media, is chasing Unicorns. And by unicorn, obviously I mean a startup with valuation above one billion dollars. Not small.

If we work backwards from this billion dollar unicorn valuation, and take the most absurd valuation of 20x revenue for a growing tech company, you would need $50M a year in revenue to support that $1B valuation. However, most small businesses are not growing tech companies and $50M is not a small amount of revenue.

Unicorns are global
It is important to note that as technology is shrinking our world, the conventional big businesses are becoming bigger and more global as they expand for growth abroad. Listed companies on average get 50% of their revenue from international sources. For tech companies that is 60% of their revenue and it’s growing. Let that sink in for a minute, 60% of US tech companies’ revenue comes from abroad. Just to be clear, that is more than half and that is not small.

The USA news tends to look on itself, but there is more to our world as the big companies found out. Unfortunately, in today’s capital-intensive world the opportunities that existed in the labor-intensive emergent industrial society in EU and US which created our middle class in the mid 20th century do NOT exist for the globalized masses in the Emerging Markets.

When people are talking about US companies holding more than $2 trillion in profits overseas, and just seven of the biggest tech companies account for a fifth of this, it is not just a result of tax shenanigans. It is where the growth opportunities are and where the business is: overseas.

The unicorns that we are all chasing are tech companies. Inherently, most tech startup’s are global from the get go. Facebook, Google, Pinterest and Uber are all global companies. We even compare our startups to countries not businesses: If Facebook were a country, it would be the most populous nation on earth. Facebook valuation at IPO was over $100 billion. That’s not small and everybody is trying to build the next Facebook-sized company: a company that has a small staff, impacts billions of people and makes billions of dollars.

What exactly is small business
The US Small Business Administration defines what constitutes small business by industry. Generally, it is a business with less than 500 employees or some annual revenue maximum. For a law office or a doctor’s office, the annual revenue maximum is $11M, for a dentist it is $7.5M, and for a construction company it is $36.5M, just to name a few. Not sure I would call 500 employees a small business. However, in comparison to McDonalds or UPS, who employ around 400,000 people each, one could draw an arbitrary line at 500 employees.

The US Small Business Administration’s definition in terms of revenue and the number of employees really does not help us to frame an image of the elusive small business. The average person on the street imagines small business not much different than what an inhabitant of Paris or London would imagine it in the mid 1800’s. Back then, almost all of the businesses were small business. The corner store, the hairdresser, the butcher, the lawyer, the seamstress, the baker, and yes, the candlestick maker. All of it.

Historical perspective
As industrialization was spreading into the world from the late 1700’s UK, railroads that connected the emergent centers of manufacturing and the steel used for the railroads and manufacturing became our first big businesses. In 1901, US Steel became the first company with valuation over a billion dollars when JP Morgan refinanced it after he purchased it from Andrew Carnegie. We only went up in scale from there.

Slowly but surely, from the mid 1800’s, technology has been improving, railroad networks continued growing, manufacturing continued expanding and people’s lives were changing for the better. Over time all the small general stores started to be displaced by new and much bigger department stores. In the developed world, the idea of having many products and services under one roof took off and permanently reshaped peoples shopping habits.

One world
The pattern of increasing size, scale and scope continues today. Have you ever shopped at eBay or Amazon.com? Every industry continues the quest for economies of scale. We have many global brands now. Coca Cola became the first global brand after WWII, but pick an industry, any industry, from manufacturing, consulting, software, banking, automotive, you name it, and you will find that today they are all completely global. I just went to a baby store in Cali Colombia to get new level 3 nipples for our Dr. Brown bottles, and a few Fisher-Price teether toys for my twins. You can buy all the same brands in Colombia and anywhere else that you find at Babies”R”Us in the US. Our twins are used to air-conditioning so we went to buy a room AC unit at a local equivalent to Home Depot. Again you can get the same brands as in the US: Whirlpool, Black&Decker, Bosh, Panasonic, Electrolux, you name it. When I needed an antibiotic, I had a choice of Pfizer or Abbot. The same story is happening in the world over. In Lagos, I was drinking Johnny Walker, blowing my nose into a Kleenex, and driving in a Toyota to the airport. The Chinese are famous for buying western brands despite the high prices, particularly, when it comes to taking care of their little emperors, their kids. You can buy Nestle products all over Latin America, including on the trail to Machu Picchu. And so forth and so on, this list could go on forever and extends into services as in Clifford Chance for legal or McKinsey for consulting.

Global mega corporation
The point is that whether you see it or not, more and more industrial and consumer goods and services are provided by global companies the world over. As a side note, executive compensation tends to be proportional to company size which explains some of the exec comp increases from the last three decades. But where are all the small companies which we started out with in the 1800’s? The Department Store displaced most of the specialty shops. Big Box retail epitomized by Wal-Mart displaced most of small city small businesses. And now Amazon goes beyond Wal-Mart. Global food franchises displace small restaurants. For example, that was very visible in NYC after the recession. The growth of Chipotle and Shake Shack epitomize that small restaurant demise. Both Chipotle and Shake Shack were listed with valuations above $1B. Not small. Just when you thought your taxi driver was local, Uber came in, a company with over $50 billion valuation. On a side note, I love having Uber in Cali Colombia as much as I love it in Brooklyn: makes life easier.

What’s left to be eaten up by software? We still have insurance agents and small wealth advisors all over the US. The robo-advisors are effectively displacing wealth managers as discount ticket agents such as Priceline displaced travel agents in the late 90’s. Insurance is not far behind and with the advent of the self-driving car, auto insurance will for a big part disappear from consumers’ lives. Healthcare, as practiced by independent doctors is still small business, however, the level of VC money going into that field makes me think that’s not for long. The classic argument for local business was that your plumber and your cleaning lady would both always need to be local. Well, there are Uber-like companies getting into this space as well, like Angie’s list and nannys.com. In Atlanta, there is HUX , however, Amazon is exploring getting into services as well. It’s the beginning of the end of local.

On the continuum from everything being a small business to everything being efficiently provided by mega corporations operating on a global platform, we are a little more than half way there. The monumental scale of the global business reality we live in is greatly misunderstood and vastly different than the romantic perception the term small business evokes in most people, even when billionaires themselves talk about small business.

The Numbers
I do not have numbers going back to the 1800’s, so I will look at the data available from the US Small Business Administration. From 1977 to 2012 the split between the number of small and big businesses has shifted marginally towards big business. The number of businesses with less than 500 employees grew at 1.5% annually, whereas the number of businesses employing more than 500 employees grew at 1.8%. The real split is at 100 employees. The number of firms with fewer than 100 employees kept track with population growth of 1% per year and the number of all bigger companies actually grew at 2% a year. That is a sustained and steady change. As of 2012 we are talking about 5.7 million small firms and 18 thousand big firms.

When we look at the employment numbers, more than half -or 52%- of the working population now works for big businesses, whereas, in 1977 more than half -or 54%- of the population worked for small businesses employing less than 500 people. On average, the big business employees make 30% more than the small business employees as of 2012. That gap was 27% in 1992. That demonstrates a steady growth and an impressive advantage of big corporations. However, that is partial information capturing only the US.

The small business numbers in US hide inside them the rise of the precariat, the increasing shift to freelance labor. Many of the freelancers operate as a small business under the US Small Business Administration, though not all. Nearly 1 in 3 working Americans is an independent worker, and that’s not explicitly captured in the numbers.

Although the number of big and small firms and the number of employees working for big and small businesses and their average salaries have shifted only marginally in favor of the bigger firms according to data available from US Small Business Administration, the big firms became massive global organizations. If we use S&P 500 as a proxy for the big firms, the market cap of the average S&P 500 company has grown at 10% a year for the past 38 years. In 1977, the average market cap of an S&P 500 company was $1.25B and today it is $40B. All the S&P 500 firms combined had a total market cap of $623 billion in 1997. Today it is $20 Trillion. Just for perspective, the total size of the US economy as measured by GDP is estimated to be $18 trillion this year. That is not small.

Technology and globalization are shrinking our world and creating unicorns in the land of ever increasing global corporations. Thus, Marc Andreessen’s statement “Software is Eating the World” has to be restated as: “Software is enabling big companies, old and new, to grow by eating small business everywhere.” This statement is perhaps not as sexy, but it is more descriptive and more accurate. Hence, small Business is a farce.

_ _ _

So it’s a farce, now what? We need to address the reality of our emergent post-industrial world and not play up the importance of small business without acknowledging the structural challenges posed by the emergent reality of our connected globalized world. Preaching the gospel of small business without understanding those forces that are driving our post-industrial society is at best a harmful red herring and detracts from addressing the rise of global corporate entities that surpass in economic scale and power many countries. We can debate whether it is a good thing or a bad thing, and that’s a separate debate, but we need to have that informed debate.

Why I believe global tech companies are a net positive
Ironically, all this globalization with the Unicorns’ and mega corporations’ growth will have a counterintuitive and positive result on the nature of business. We are actually going back to relationship based businesses and will witness the slow death of the transactional culture. The transaction culture emerged as a result of the 1970’s deregulation and ensuing market competition. The return to the relationship culture is brought by the same technology revolution that is shrinking our world and creating unicorns. I am talking about the vendor and product review process on Amazon, Airbnb, the vendor review process on eBay, and about the behavioral change among all the global hotels and restaurants as a result of our reviews on TripAdvisor. I’m talking about all the Uber drivers and clients that review each other. Yelp and so on and so forth. Welcome to the new networked reality.

The humanizing Facebook/LinkedIn effect, that is, your identity being verified and permanently out there, will have a profound impact on how big business evolves as it eats small business. This is shaping positive changes in retail and in finance and all of business. I view it as an opportunity for the consuming public to get closer to the brands and service providers, and via this new feedback loop, help businesses serve us better with more relevant products as we continuously iterate in a more dynamic connected system. Many of the feedback loops connecting consumers to brands and corporations are business opportunities yet to be realized and yet to make our lives better. My professional and personal goal is to help connect the big businesses to big numbers of people and make the world a better place for all. That’s the idea behind Stocks You Love.

Growth of precariat is the wind beneath my wings, thoughts on replicating the Starbucks success in social finance.

Did anybody explain Starbucks success as perfect timing of product release with the tidal rise of outsourcing and emergence of Freelance labour? As I am searching for my next startup I watched Bill Gross, founder of Idealab, TED talk where he identifies timing as the biggest factor of success for a startups.

As reatail investors we are pushed towards dollar cost averaging and advised against timing the market, howaver here as entrepreneurs we are told that timing the market is the biggest success factor? What gives?

I know that Howard Schultz is from Brooklyn and Sara Horowitz runs the Freelancers Union out of Brooklyn. Do they even know each other? Regardless, I seriously doubt that in 1987 as he was taking ownership of Starbucks, Howard Schultz made a calculated analysis looking at the level of outsourcing among US business and the rising number of skilled class of career jugglers and independents who get income from contract gigs, projects, part-time jobs, temp work, moonlighting and consulting and said to himself: all those wonderful people without a stable income source will permanently need a temporary place to work from, why don’t I create Starbucks. I do not think he knew that.

The story we are told is more intuitive. “When I walked in this store for the first time—I know this sounds really hokey—I knew I was home,” Schultz remembered. “I can’t explain it. But I knew I was in a special place, and the product kind of spoke to me.” So that sounds a lot more like the follow your passion and intuition advice than a calculated planned well thought out success driving strategy is the only way to go advice.

Perhaps we can find a happy median in value investing: find what you love and wait for affordable pricing before buying to hold and cherish. Find your passion and wait for your opportunity to enter the market?

Can we really benefit from the Bill Grosse’s insight about importance of timing in the success of a startup? Or do I have to rely on my gut feeling telling me that social finance is where it’s at. This is the opportunity of our life time because it viscerally feels like home to me?

If I am looking to join a FinTech startup targeting the rise of social finance, what would be mine freelance union equivalent factor? What would be that yet unseen wind which will drive Starbucks type of success for social finance space?

If you want the answer or to discuss this further you can meet me at my office, the local Starbucks.

Love Is NOT Enough: An Analysis of Failure To Launch.

This is a retrospective on my failed attempt to build a startup. I wanted to change the world of wealth management. I wanted to be the next John Bogle, and just as the founder of Vanguard, I wanted to move the needle on accessibility of wealth management to the consuming masses. As it is for many founders, my story was a passionate love affair with my business idea. For hours at a time, I contemplated the systemic problems with our pensions, 401k funds and my brilliant idea for restructuring the retirement savings industry.

My specific goal for that startup, other than to build an operating company, is not the focus of this story. What is relevant is that as happens to many first time founders, I run my startup for far too long, beyond a rational stoping point. I want to share my reflections on how that mistake happens and my take on how to avoid it.

Passion and love are great motivators. However, if you fall in love with your business idea, you are also likely to smother the very business you are trying to build, not to mention you are likely to devote too much time and energy to an increasingly losing bet.

In no particular order, the following problems may arise for you as they did for me:

I became afraid someone would steal my beloved and brilliant billion dollar idea. Trust me when I say that the fear I had was palpable. When I talk to first time entrepreneurs today, there is no mistaking the person who is talking in circles, carefully avoiding revealing any business details that would presumably allow someone to steal their precious idea. When pressed for detail, the founder will ask you to sign a NDA.

The unfortunate result of this fear based protectionism is that it takes you, as a founder, a lot more time to fully develop your idea. Serial entrepreneurs, as well as investors, know that the determination, dedication, and sacrifices it takes to actually build a business are not easily copied. As a founder you stand to gain far, far more from the feedback you get from others than any potential risk you face of someone running off with your idea. I regrettably wasted several months protecting my idea with an NDA. Just talk to everybody. Do it openly and listen.

Intuitively, as a founder you create an origin myth, the story you tell people of how you came up with the idea. As you continue telling this story, to you it becomes the story of a real company, regardless of reality. In reality at this stage we are talking purely about potential and not a business. For you, as the founder, however, the volume of visualizations you have had of your business plan renders your business idea a very vivid and very real thing. Let’s call it your alternate reality.

It does not matter if people love, understand, or even care about your idea. You yourself see the brilliance of your proposed solution. It makes sense to you. As you tell the story, you start wondering how come I am the only one seeing this outstanding solution!?! I must be brilliant!! Inside your alternate reality you are a proud founder, or worse, Mr. CEO. Don’t do this. Retain humility and ask for honest criticism. Pride in your idea is a road to a painful drawn-out failure. The idea might be in fact brilliant but not viable.

Pride locks you in on a trajectory. It may be counterintuitive, but the fact remains that the more time you spend on your idea in absence of finding a product-market fit without creating a functional feedback loop from your customers, the more proudly delusional you become about the beauty of your solution. Going out and testing your product keeps you sane and allows you to adjust your track. Go talk to people. Do it fearlessly and openly before you fall in love with your solution to the point that it narrows your peripheral vision.

Your objective should be to test your idea and start a viable business. It is not just the development of the business idea, but actually the execution: testing the concept and starting the business. In days past, VC’s used to invest in ideas. Over time investors realized that in the process of execution ideas always change. They realized the team that executes is far more important than the idea. Do not try to develop the idea or product over years and then try to build the team in a month or two.

Chances are, if you operate out of fear and with pride, you will have a hard time attracting, building and retaining a functional team. I ended up with a super thought out business plan which I discussed to death, but no one to build a product and thus no product to test. If you shift your objective to test your business idea quickly, you will learn more and go further faster.

Build a team and fail quickly as many times as needed before you develop attachment to any solution. Listen to the team. Remember the objective is not to create the perfect idea, but to test your concept and build an operational company around it. That may take much iteration. It does not mean build another PowerPoint deck! Failing is not only ok, it is a valuable lesson.Your plan did not work. Great! You get to adjust your plan. Better to test and know that now than two years from now when you run out of money. Learn together as a team and let everyone involved evolve or move on.

If you are not open to the possibility of failing quickly, as you generate more and more powerpoint presentations, you may even end up imprinting in your head a very strong brand image of your business idea before you have any product or product-market fit. In that situation, you are done. Chances are your untested idea is not the solution everyone is looking for. However, by that time you may become afraid of adopting any new feedback or any brand change that you perceive might tarnish the pristine image of your imaginary brand. Yes, this may sound funny, but it is very real.

As the proud founder/CEO with a very clear brand image even before the product is built, you identify some team members you think may be good enough to execute what you view as your brilliant, flawless, well developed idea. With high levels of fear that your idea will be stolen and tremendous pride in the thinking behind it, there is only one possible outcome. I overvalued my contribution to what it would take to execute my idea, and I undervalued the contribution of the people I tried to recruit. In that moment, as the founder, you just do not understand why the rest of the potential team do not want to be part of this immense brand and mega corp you have created!? It is quite clear in retrospect and it is rather painful when you see others sabotage themselves like that. I wish I had learned these lessons before and I wish I humbly sliced the equity more evenly among the founding team without fear, to energize all. You are splitting an imaginary pie and there is good material available on how to do this. The key take away here is that splitting equity is an emotional exercise, not an arithmetic spreadsheet exercise. Do not confuse that. Motivate all to grow the total pie, do not create competition for your share.

Since I closed my startup, Stocks You Love, I have also been involved in two other startups. This has given me ample time to observe other founders make the same mistakes I made. The biggest discovery for me was that first time founder lessons are unfortunately not transferable. It is like the first time you fall in love. Everybody needs to experience it for themselves.

In other words, starting a company is experiential learning more than intellectual. Even if you know the theory, took Steve Blank’s and Eric Ries’ classes and read their books and have the right information and advice, you have to go through the motions to sense what’s going on. Just as you cannot learn to play a sport by just reading about it, you cannot learn how to start a company without putting theory into applied practice. Those lessons have to be experienced.

Obviously, it is good to surround yourself with people who are not first time entrepreneurs, as experienced people will have a better feel for what traps to avoid. However, if you fall in love with your idea, there is no guarantee you will be taking any advice from anybody. Be humble and listen to everybody.

Solicit advice wherever you can and enjoy the learning process. After talking to number of experts in any field you will become expert yourself. You will learn more than you realize. After failing in my first startup that tried to reform retirement savings, by chance I ran into and had a few hour discussions with a senior World Bank pension expert. I was in heaven! I knew my stuff and it was a validation of my research and passion.

You certainly learn a lot. However, if you want to put your learning to use, drop the love, share the learning, share the equity, test the market, be pragmatic, fail quickly if needed and move on until you succeed. The company you end up starting might be different from your initial vision, but chances are it will also be much better. That would be my advice to my younger self.

The fact that you spent 12hrs a day on a project does not make it a business or your job. It could just be a hobby or worse, love mixed up with business. Although you will still learn a lot.

Go do it, fail before you fall in love, and enjoy the process. Do not get discouraged. Just fail quickly and move on. Failing quickly may seem very counterintuitive. As a loving parent of your startup you want to give it time to grow-up and nurture it until it is sustainable. The problem is that most of us have limited resources and time, not to mention the pitfalls of misplaced love as described above. The fail quickly model is your friend as it avoids most of the love pitfalls and it allows you to iterate and learn from the process. The ideas may die, but the lessons you learn stay with you! That is a very positive thing and may be the difference that will make your startup a huge success!!!

Happily, I now get it and I’m looking for my next venture.

Best of luck with your startup!!!

Big business lessons for big and small companies from sending a USPS certified mail

The problem:

At the beginning of last week I mailed using USPS certified mail a two-inch thick blinder full of important legal documents to my lawyer in Pittsburgh. Because it was a certified mail, I signed up for e-mail tracking notifications. The next day, just before 11am, I got an email from USPS with a status update all in caps: UNDELIVERABLE AS ADDRESSED!!!! I Panicked!!! Hours spend preparing the documents, and here I was fearing they were going to be lost see. I called USPS customer service, and a nice lady told me that there was nothing I could do. Packages marked as undeliverable are automatically returned to sender. More panic. I do not live in USA, and they will not return it outside of USA when the package was sent from Brooklyn. I pushed the lady and she said, “well, we can launch an investigation if you like to find out what happened.” Ecstatic I scream YES PLEASE! She informs me that it will take 24-48 hours. A lot can happen in 24-48 hours, what do I do?

The solution:

Well, we are not living in the 50’s or 60’s anymore. We have Google. I googled post offices in the zip code of my lawyer. The people at the local post office were very helpful. However, the person who was attempting the delivery of my package was still out on the delivery route. I am told to call the next day in the morning before they go out on the run. In the mean time, I decided, out of desperation, to call the centralized corporate customer service to see if they have any updates. I talk to a gentleman who politely laughs at me, “you realize we need time to investigate” he says. He nicely points out that I have just initiated the investigation a few hours ago and that they need 24-48 hours. He apologizes that such are the rules, that my package will most likely be returned to sender, and he assures they will call me back once they get a chance to investigate. Well, next morning I call again the local office as instructed, and it turns out all of it was my fault. I have only addressed the mail to my lawyer by name, without specifying the big law firm where she works. It just so happens that the address is a skyscraper where three thousand people work, although the law office has a few hundred employees, finding my lawyer in the big building would be a monumental task, thus the my misaddressed mail rightfully marked undeliverable as addressed!!! Yup, squarely my fault!!!!! Once we figured my goof-up and I told the nice post office employee the name of the law firm, he smiled reassuringly, told me not to worry, that he knows that place well and he assured me that my package will be safely delivered there the next day. As far as I know the investigation on corporate end has not yet begun.

The business lesson:

Centralization and specialization has its problems, particularly when it comes to delivering informed customer service. Just like JetBlue flight attendants and pilots multi task and also clean the plane decreasing their aircraft turn time, employees in all big corporations will have to learn to undo some of the Henry Ford specialization, and learn to multitask. Given our current networking technology, we can design systems that route my help request to the source, as opposed to adding inefficiency and cost to the company at the corporate level. My example with USPS demonstrates that the customer service provided by helpful employees on the ground can not possibly be provided at any cost at the corporate level. The centralized employee will not know anything about the relationship of a law firm with the post office. For the corporate employee, that contract is rounding to irrelevant, on the ground people know their biggest customer. There is no amount of training that you can provide for a centralized employee to have that kind of knowledge. For me, the concerned consumer who trusted my very valuable delivery to USPS, the level of service and knowledge of the situation is huge. I am grateful for the autonomous helpful USPS employes on the ground who solved my problem before the centralized investigation was able to do anything. This example has significant organizational implications to major corporations like hotels, airlines, and car rental companies. This also highlights immense potential for small decentralized companies and startups who can find a way to collaborate across various regions to simulate the offerings, benefits and power of a massive global company, if only the small companies could find each other. Small is beautiful, even if you are global 😉

At RareBridge we love to connect all the small companies of the world!! Come check us out at https://www.rarebridge.com

I also like to give a shout out to the all the excellent people I have spoken with at the Pittsburgh post office who helped me to locate and to deliver my package. You guys rock! Thanks a million!!!