Wednesday, December 17, 2008

Entrepreneurship, Innovation and Other Buzzwords

We love hearing our policy makers and other economic leaders touting entrepreneurship and innovation as the prescription for our current economic ills. At Golden Capital Network we’ve been prescribing this for the last 10 years. Even so, we still periodically have to stop and clarify internally for ourselves the nuance of words like “entrepreneur” and “innovation.” They are more ambiguous than they might seem.

“Entrepreneur” is vexing not only for its difficulty to spell and pronounce, but because not all entrepreneurs are created equal. Yet there is no easy way to distinguish between them. Is the corner hot dog vendor an entrepreneur? Sure he is. But how closely related is the hot dog vendor to the 150 employee solar hot water heater manufacturer, or the 400 employee craft brewery, or the five person licensing shop with patents to use UV light to cure everything from crop rot to toenail fungus (to crib just a few real world examples from our own backyard here in far Northern California)?

Are mom and pop hot dog cart vendors, or other regional small businesses like them who sell products and services exclusively to a local market, going to bail us out of our economic doldrums? Probably not very quickly. Regional lifestyle companies are important to the economic mix, but in terms of economic impact, when we think about “entrepreneurs,” we like to think about companies that are “scaleable.”

Scaleability, to us, indicates how large and quickly a firm can grow, and it is a critical distinction among entrepreneurial ventures. Scaleability depends on the market, the products, and not to be overlooked, the aspirations of the actual entrepreneur. All the data indicate that scaleable companies have the highest potential to affect real, positive change within regional economies. They also show that entrepreneurs who were successful scaling large enterprise did so based on another, equally ambiguous concept: “innovation.”

The word “innovation” can be as troubling as “entrepreneur” in terms of misuse and misunderstanding. Steve Lohr, a longtime staff writer for the New York Times, helped us considerably with this one recently when he contrasted “innovation” with “invention.”

“Invention is coming up with a break-through idea… Innovation is the process that translates that knowledge into economic growth and social well being,” Lohr wrote in a Nov. 12 article profiling the Kauffman Foundation. “Invention is science. Innovation is economics.”

Innovation, in our experience is the application of new ideas, including technology and other inventions, in a commercial environment. Technology by itself is not necessarily an innovation, nor is an innovation necessarily technologic. It’s all in how the entrepreneur uses a technology, idea or invention to solve a problem that has a commercial impact, either internally to improve functions and operations in his or her own company, or externally as a product offering for the marketplace. This is the crux of “innovation.”

In the economic development industry, where we ultimately hang our hats here at GCN, the recent trend has been to use “technology entrepreneurship” or “technology economic development” as the phrase du jour. This might work in places like Silicon Valley or Austin, Tx – where a true “technology” industry exists – but it is not so accurate in most other places where there is plenty of innovation happening, but fewer actual technology companies.

Already we are seeing phrases like “innovation economic development,” “innovation economics,” “innovation brokering,” and “innovation facilitation” crop up to reflect this newer, more refined understanding of the nuance of how innovation and entrepreneurship interact on the ground and in the marketplace. At Golden Capital Network, where our mission for the past 10 years has been to “foster innovation growth entrepreneurship for economic development,” now that more people might get what we've been talking about, maybe we can get more done.

Tuesday, December 16, 2008

Valuation 2.0

The proliferation of social media and the rapid expansion of the userbase brings to mind the old saying about "there must be a pony in here somewhere".  With so many eyeballs being aggregated, surely social networks like Facebook and LinkedIn must be good investments.  But how good, and more importantly, how much?

Arjun Sethi recently published a compelling analysis on that examines how to estimate the value of Web 2.0 companies, and the challenges of doing so with traditional valuation models.

Since many of these companies are pre-revenue, or collecting only meager revenues, a great deal of the company valuation is a reflection of the capital invested, rather than a multiple of earnings.  For this reason, private equity firms are not a suitable investment partner for social network sites.

In other words, many of these social networking sites would not be a good investment for private equity because a large part of their value would actually come from the money invested by the private equity firm. Even more, the fact that many of these sites have shown decreases in member over the past year means that advertising revenues will likely decrease.

Because of this, the authors advise that venture capital frims would be better investment partners for these kinds of opportunities, since they have the agility to focus resources surgically, and to harvest returns through other means than selling the company on a secondary market.

Venture capital firms have more freedom to focus on the short-term to move in and provide a company with necessary capital and then seek repayment of the investment in one way or another. In addition, venture capital firms, by their very nature, are in a position to give smaller amount of money to companies in order to provide a source of capital for future growth. Rather than being determined about book values, equity, and changes in revenue, they can be more concerned about helping a company get off the ground or grow through a period of transition.
The paper is chock full of tables and charts illustrating its analysis.  Anyone interested in understanding valuations of social media companies will find it a worthwhile read.

Sunday, December 14, 2008

Wisdom From The Web

Streaming .TV shows by UstreamSo much of what I love about the Web is the serendipity and richness in the random connections I've made through the various network nodes I open.  For example, this morning I received two tweets from different but related contacts I follow.  The video above was posted by coworking pioneer Alex Hillman, co-founder of Independent's Hall in Philadelphia.  It's a brief address by "Chief Ideologist" Morten Lund of Lund XY Global Ventures at LeWeb 08.  He makes a very interesting point about how the economic downturn is irrelevant to entrepreneurs.  He notes that entrepreneurs can fail any day, whereas the big bankers have discovered that they can, too.  Some additional  sound advice from Lund is to focus on getting good people rather than good ideas.  Good people can make bad ideas successful, while bad people can tank good ideas.  This echoes Jim Collins' proscription: "First, Who."

About an hour prior to Alex' post came a link from New Work City's Tony Bacigalupo to an item from Belmont University's Dr. Jeff Cornwall about how the entrepreneurs emerging from the millenial generation are motivated less by making money and more by making a difference.  

I think what we have to get used to is that they are redefining what entrepreneurship is all about. To them, it is not simply a ticket to unimaginable riches.

When I talk to students about why they want to be entrepreneurs, the answer "to become the richest person in town" does not come up like it did back when I was teaching Gen X-ers.

They are using entrepreneurship as not just an economic tool, and not just a social tool as we see with their fascination with Social Entrepreneurship, but as a cultural tool.
What fascinates me about this is the synchronicity of the messages in these different channels, and that they both were brought to my attention by my colleagues in the coworking world.  Clearly, there's a close connection between coworking and entrepreneurship as it is evolving.  That connection is community.

We've been building and promoting venture communities as an engine for prosperity, and the challenge is keeping that engine fueled, lubricated, and driving initiatives that produce global impact while creating sustainable value -- and values -- at community, regional, and statewide levels.

Monday, December 1, 2008

More Wisdom From Tom Hayes

Author Tom Hayes was a featured speaker at GCN's New California 100 event last summer, and also spoke at the Venture Island - Chico "Make Or Break Beach" episode.

His book "Jump Point" is a fascinating peek into the not-too-distant future.  By 2012, Hayes projects that 3 billion users will be on the internet, equal to the entire global workforce, and that this inflection point will trigger significant social, economic, and entrepreneurial transformation around the world.

The next 100 million internet users won't be connecting via computers on broadband hardwired connections, but through a variety of interfaces, including cell phone handsets and application-specific appliances.

Now he and's Mike S. Malone have written a detailed analysis of marketing in this "brave new world of retail", recently published in the Wall Street Journal.
But companies with millions of members of online communities are now asking: What next? How do we sell them products and services, or mobilize them into massive de facto R&D, manufacturing and sales departments? We have been studying the challenge and have concluded that very few of the traditional techniques of classical marketing (call them Marketing 1.0), or even of eCommerce (Marketing 2.0) will work in the world of social networks. A very different set of tools, concepts and practices is needed. Call it Marketing 3.0.
As we have been learning, users on the Web have a different set of expectations, and command the capabilities to determine which messages will even reach them.  Anyone hoping to reach customers through this medium will find Hayes' article enlightening.