John Fitch was first. He spent the majority of his adult life fruitlessly attempting to capitalize on the novelty and uniqueness of his invention. Unable to raise funds from wealthy individuals, he solicited $300 from a hodgepodge of small businessmen, including tavern owners, grocers and physicians.

In a matter of months, he developed technology that was superior to that created by the world’s leading scientist over the prior 15-years, despite his lack of a formal education.

He debuted his technology in Philadelphia at the 1787 Constitutional Convention. It exceeded his expectations and thrilled those who witnessed it, including a number of prominent Founding Fathers. However, he was still unable to secure adequate funding to commercialize his technology.

Fitch spent the next three years traveling the country repairing clocks as a means of surviving, all the while saving money for the eventual launch his venture. In 1790, he began offering a service that eventually transformed world commerce and generated trillions of dollars of wealth. Unfortunately for Fitch, his adVenture folded 18-months after it began. 

In 1798, at the age of 55, a frustrated, destitute Fitch scrimped together enough money to purchase a handful of opium pills, which he used to end his life. His suicide note was prophetic:

“The day will come when some more powerful man will get fame and riches from my invention, but no one will believe that poor John Fitch can do anything worthy of attention.”

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First Mover Disadvantage

The alleged First Mover Advantage asserts that companies which are the first to exploit a new technology and/or market have an inherent advantage. Clearly, the allure of being first is significant. Who remembers the second man on the moon, the second person to fly an airplane or the second person to reach the North Pole? However in business, being first is often a disadvantage.

As noted Fast Followers II, fast-follower entrepreneurs must have a solid point of differentiation in order to succeed. In most instances, small companies do not have the financial wherewithal to bludgeon the competition and establish market share through brute force. Thus, it often pays to develop points of differentiation which are not based on product features. In fact, it is often more advantageous for an entrepreneurs to differentiate their offering through an alternative disruptive means.

In long-distance foot races, some teams deploy the “rabbit” strategy. A runner who has no chance of winning the race is designated as the rabbit and is instructed to set a very fast initial pace. The intent is that the runners from the opposing teams, not sure whether or not the rabbit can maintain her aggressive pace, will push themselves to keep up, while the rabbit’s teammates conserve their stamina and eventually pass the rabbit and their exhausted competitors.

Many first mover companies are rabbits. Unfortunately, they do not have teammates who can win the race on their behalf. It is important to identify such rabbits in business, as well as on the racetrack, so that you do not exhaust your company’s resources attempting to maintain pace with such competitors which have no chance of winning.

As discussed in Competing From The Fringe, a fast-follower strategy requires patience and ego containment. The following chart details a number of factors which determine whether you should attempt to exploit a first mover advantage or bide your time and enter the market as a fast follower.

Fitch To Fulton

John Fitch’s invention was the steamboat. He did not just create an esoteric, proof-of-concept prototype. Rather, during its first season, his ship travelled over 2,000 miles. In commercializing his technology, Fitch perfected the tubular boiler (some claim he and his partner outright created this invention) which decreased the weight of a conventional boiler by over 7,000 pounds. During a publicly witnessed time trial, his first steamboat travelled an astounding 8 miles-per-hour in still water.

In contrast, Robert Fulton, who had an advanced education and significant financial backing, was only able to achieve a speed of 3-miles per hour 13-years after Fitch’s maiden voyage. Another 3 years later, Fulton’s famous maiden voyage of the Clermont between New York and Albany traveled at less than 5-miles per hour, with a handful of passengers and no cargo. If Fitch and Fulton had raced to Albany, Fulton would have lost by 52-miles. It was not until 1812, 25-years after Fitch, that Oliver Evans, creator of the high-pressure steam engine, eclipsed Fitch’s speed record, by achieving a sustained speed of 9-miles per hour.

If Fitch’s technology was first to the market and was so vastly superior to that which came before (and for a long time after), why did he fail while Fulton succeeded? Some of the key factors which lead to Fast Follower Fulton’s success include:

• Competition – The topography of the Hudson Valley in which Fulton launched his first commuter steamboat made land travel more difficult than travel by boat. In contrast, Fitch’s Delaware River Valley was relatively flat and the high-quality roads allowed land commuters to travel more quickly than those who traveled by boat. As such, Fulton’s market offered consumers fewer competitive substitutes.
• Technology – Unlike Fitch, Fulton did not spend his time or financial resources building a steam engine. He used his political connections to export a top-of-the line engine from England, which generally maintained a tight embargo on the exporation of its leading technologies. In addition, craftsmen and metallurgists had made significant advancement with respect to machining capabilities and mechanical materials in the 20-years after Fitch’s failure.
• Capital – Fulton secured adequate financial backing early in his adVenture’s life, thus allowing him to focus on perfecting the then state-of-the art technology and not waste time or management attention raising money.
• Pragmatism – Fulton was more skilled organizer & a better mechanical designer than Fitch. Fitch was a visionary inventor, as described more fully in Inventors vs. Innovators, while Fulton was a practical innovator.  
• Theft – As Harold Evans declares in They Made America, Fulton “realized the promise of the known” by canvassing the discoveries made by others and selectively adapting them to apply to the specific requirements of water travel. In contrast, Fitch was forced to develop many of the core aspects of his technology.
• Market Segmentation – Fulton capitalized on the novelty of river excursions and catered to wealthy individuals who valued their time and wanted to travel in luxury. The glamour associated with the riverboats of the late 19th century originated with Fulton’s gaudy, garish accoutrements. Conversely, Fitch targeted a utilitarian market, charging 50% of comparable land travel and placing no emphasis on passenger comfort.
• Corporate Structure – Fulton created an organizational structure akin to a modern corporation, with department heads reporting to him. Fitch, along with his partner, were effectively a two-man-band, carrying out all the responsibilities of the organization.
• Social Optimism – Fulton expected people to like him…and they did. As described in PsyBlog’s The Acceptance Prophecy, individuals who assume people will like them tend to have positive social interactions. By Fitch’s own account, he was, “wretched, haughty, imperious, insolent and petulant”, hardly personality traits which would result in a socially optimistic proclivity. Hudson has been described as “confident”, “handsome” and “charming”, traits which lend themselves to a socially optimistic outlook.

John Fitch’s dying prophecy was not entirely correct. He has not been completely forgotten. Although they may not realize it, the thousands of commuters of the Philadelphia and Trenton corridor honor the inventor of the steamboat daily, as they traverse the John Fitch Parkway.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
______________________

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The track and field community initially scorned Fosbury’s approach, labeling it “unsafe” and “too unorthodox” for the average jumper to master. However, nothing sells an innovative idea like winning. After Fosbury set an Olympic record at the 1968 Mexico City games, jumping 7 feet 4.25 inches, track coaches all over the world took notice.

The adoption of the Fosbury Flop was rapid. The last high jumper to set a world record using the straddling approach was Vladimir Yashchenko in 1977. As shown in the chart below The Fosbury Flop had become the international standard by the 1980 Olympics.

Flop Innovations

In general terms, inventors often rely on new solutions, while innovators prefer working with existing solutions. However, problems and solutions are often not purely “new” or “old.” In many cases, a portion of a solution is “new,” and a component of the problem is “old.” Inventors vs. Innovators describes some of the general personality traits associated with entrepreneurial problem-solving styles. However, in reality, competitive advantages often result from a combination of invention and innovation.

Harvard Professor Michael Porter notes in his article, “What Is Strategy?”, that entrepreneurs should strive to create a sustainable competitive advantage by “…performing different activities from rivals’ or performing similar activities in different ways” (italics from original text). This is in contrast to the approach taken by most Big Dumb Companies (BDCs), which often focuses on performing the same activities as their rivals, only better.

Such innovations represent an opportunity to create a sustainable advantage, at least in the near-term, by changing the rules of the game and executing a pre-existing activity in a new way. As noted in Two Brothers, startups can out-maneuver BDCs by changing the key parameters upon which competition has historically been based. Rather than trying to do the same things better than their competitors, savvy entrepreneurs identify new, value-adding methods to better serve customers. They innovent new ways to create and deliver value to their customers, and this often results in a sustainable competitive advantage.

The association of innovators and inventors and their respective reliance on new and old problems and solutions is shown in the accompanying chart. Not surprisingly, most entrepreneurs fall somewhere in the middle of the somewhat academic “Innovator” and Inventor” distinctions, acting as Innoventors who address old and new problems in a flexible, non-dogmatic manner.

An Innoventor approach currently being deployed by RingRevenue. They recently entered the mature Affiliate Marketing world, which comprises hundreds of networks, thousands of advertisers and tens of thousands of online publishers. There has not been a significant innovation in the affiliate market since the unfortunate advent of the pop-up ad.

A significant problem in the Affiliate Marketing world is the leakage, which results when a publisher alerts a potential customer to an advertiser’s offer and the customer picks up the phone to contact the advertiser, rather than following a click path to purchase. In such instances, the publisher receives no remuneration for leading the customer to the advertiser.

Although advertisers always appreciate incremental sales, they ideally prefer to track the effectiveness of their advertising efforts. When leakage occurs, it is impossible for the advertiser to determine the source of any particular call.

RingRevenue’s approach to eliminate leakage is relatively simple, yet effective. Central to its platform are unique phone numbers issued to publishers for use in both online and offline ads. RingRevenue tracks calls placed to these numbers, which allows advertisers to enhance the effectiveness of their ad spends by compensating publishers for generating high-quality calls and/or outright sales. Most importantly, no changes need be made to the advertiser’s call center nor does the caller’s behavior need to be modified.

RingRevenue’s platform integrates with existing affiliate networks, such as Commission Junction, PepperJam and LinkShare. With RingRevenue, affiliate networks can address leakage while enabling advertisers to increase their sales, strengthen their consumers’ loyalty and improve the efficiency of their ad spending.

RingRevenue is an effective Innoventor, as it solved an “old” problem via a clever combination of new and existing technology. It has addressed the long-standing leakage problem by seamlessly integrating its sophisticated VoIP softswitch “invention” with the existing telephony system, affiliate networks and users’ traditional buying behaviors.

The Berkoff Blastoff

Fosbury is not alone in his role as an innovative, transformative force in the world of sports. Although you may not know his name, David Berkoff revolutionized the world of swimming by refining a technique whose origins date back to the 1920s – the dolphin kick.

In the late 1980s, Berkoff began consistently winning races by dolphin-kicking underwater at the start of each race and after each flip turn, for as much as 35 meters at a time. Berkoff quickly went from being a mediocre swimmer to a world-class champion, winning four Olympic medals in 1988. Not surprisingly, given the media’s love of alliteration, his technique was termed the “Berkoff Blastoff.”

Looking back on the impact of the “Blastoff” on his career, Berkoff confessed, “I probably wouldn’t have made the Olympic team [without it]. I probably would have been a good backstroker but not a great one. It was something that really kind of changed the way backstroke was swum.”

Berkoff’s initial impact was limited to his event, the backstroke. However, other competitors soon began utilizing his technique, which caused International Amateur Swimming Federation officials to institute a new rule precluding underwater swimming beyond 10 meters from the pool walls (which was later relaxed to 15 meters). The official reason given for this rule change was “the safety of the athletes.”

However, most fans of competitive swimming agree that the real reason for the ruling was the officials’ concern that the dolphin kick would migrate from backstrokers to include freestyle and butterfly swimmers. Thus, an otherwise non-competitive swimmer could conceivably defeat world-class champions by dolphin kicking the majority of the pool’s length. They feared swimming would become a largely underwater affair, which would diminish the differentiation between the various strokes.

Even with the significant limitations imposed upon it, the Berkoff Blast has significantly impacted the world of competitive swimming. A number of experts cite Michael Phelps’s ability to exploit the dolphin kick as a differentiating factor that contributed to his garnering eight gold medals at the Beijing Olympics.

According to Dr. Rajat Mittal, who applied his understanding of fluid mechanics to the world of competitive swimming, “…almost 90 percent of all the thrust, the propulsion for the swimmers, is coming from the part of the foot beyond the ankle.” Mr. Phelps enjoys a size 14-shoe. In addition, the fact that he can hyper-extend his ankle beyond that of most ballerinas does not hurt his performance either.

Obvious Works

“You miss 100% of the shots you never take.”
Wayne Gretzky, Hall of Fame hockey player

In both instances, Fosbury and Berkoff came upon their innoventions while engaging in their sport. They did not study the art of jumping or swimming in an attempt to create ideal methodologies. Rather, they both sought a better way and focused their efforts on competing in a new manner, on the playing field, not on the sidelines. As noted in Pressure, your ability to devise innoventions increases exponentially once you enter the market and are forced to fight for your adVenture’s survival.

For Fosbury, “It was not by design at all. It was just simply intuition. It was not based on science or analysis or thought or design. It was all by instinct. It happened one day at a competition. My mind was driving my body to work out the best way to get over the bar.”

As Berkoff notes, “It seemed pretty obvious to me that kicking underwater seemed to be a lot faster than swimming on the surface.” The key to his success was that he did not rely on the then-standard flipper kick when he tested his underwater theory. Similar to Fosbury’s initial adoption of the antiquated scissor approach, Berkoff reverted to a kick that had been attempted and subsequently abandoned by competitive swimmers nearly 90 years earlier.

Forty and twenty years later, respectively, the Fosbury Flop and the Berkoff Blast remain the standards of their sport. However, there are undoubtedly innoventor high school athletes who are attempting to Reinvent The Wheel and devise their own competitive advantages by changing the rules of the game. Let the games begin.

Full Disclosure: As of the writing of this article, I have no financial interest in RingRevenue. However, in my role as a Venture Partner at Rincon Venture Partners, I am currently evaluating a potential investment. To determine my current involvement in RingRevenue, if any, review Rincon Venture Partners’ Portfolio.
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]]> http://www.infochachkie.com/innoventors/feed/ 8 http://www.infochachkie.com/wheel/ http://www.infochachkie.com/wheel/#comments Tue, 25 Nov 2008 21:45:05 +0000 John Greathouse http://www.infochachkie.com/wheel/ Sometimes an entrepreneur should reinvent the wheel, as Revolution Motors has done with its Dagne electric vehicle, which utilizes a joystick to steer and brake the vehicle. The key to the success of wheel reinvention is knowing when and where to implement such dramatic shifts from past precedent.

The car brake pedal originated with stagecoaches, which required the use of the driver’s leg muscle to stop the stage, due to the horses’ “horsepower” and the coach’s weight. Use of the driver’s foot also freed their hands to hold the reigns. The foot brake made sense on stagecoaches, but it is less than optimal on computer-controlled, modern vehicles*.

Like the brake, early cars’ steering mechanisms were drawn from legacy modes of transportation.  Cars were initially steered via a tiller device, similar to that used to control a boat’s rudder. Ironically, such tillers were rudimentary approximations of a modern joystick.

Steering wheels were co-opted from sailing ships. One of the first uses of an automobile steering wheel was in Alfred Vacheron’s 1893 race car. After winning several high-profile races, Vacheron’s design became widely adopted. In 1898, C.S. Rolls introduced a commercial vehicle which incorporated wheeled steering and by the end of the following decade, tiller steering was a thing of the past.

Use of a steering wheel was logical, especially before the advent of power steering, as a large wheel required fewer revolutions to mechanically translate movement to the car’s front axle, whereas a tiller had a limited range of motion. However, the introduction of power-assisted steering eliminated the steering wheels inherent advantage.

Studies by DaimlerChrysler have shown that the reaction time between the hand and the foot varies significantly. The hand is approximately twice as responsive, due to the relatively small and nimble wrist muscles which react more quickly than the larger, less agile leg muscles. This difference in reaction rates is minute, but significant. A half-second of enhanced response decreases rear-end collision deaths by 90%, whereas the application of the brake a full second earlier reduces such deaths by 95%.

The major cause of front-end collision deaths is the combination of the driver’s compromised response rate and the subsequent impact of the steering wheel. Even with airbags and collapsible steering columns, the International Road Traffic and Accident Database notes that a significant percentage of the 50,000 drivers killed each year on US highways are crushed by the steering wheel. In fact, emergency responders are instructed to inspect the steering wheel at crash sites as a means of estimating the extent of the driver’s internal injuries.

If it is safer to eliminate the steering wheel and allow drivers to control the brakes with their hands, why do all mass-produced cars still utilize technologies which arose from stagecoaches and sailing ships?

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Familiarity might breed contempt in human relationships, but users’ familiarity with technology often breeds comfort that is difficult to overcome, unless the net benefits of the new solution are readily apparent and easily attainable. In addition, the legion of trial lawyers itching to dip their hands into the auto makers’ pockets also precludes dramatic design changes.

Letting Go Of The Status Quo

“The reason that God was able to create the world in seven days is that he didn’t have to worry about the installed base.”

–Enzo Torresi, Computer Industry Pioneer

Apocryphal stories which trace the size of the space shuttle’s gas tanks to the width of Roman roads make for entertaining reading. However, despite a multitude of Internet references to the contrary, there is no historical correlation between the ancient Roman standards and NASA’s Shuttle.

There is good reason that the Roman roads/NASA Shuttle story has been a fixture of business folklore for decades – it sounds plausible. Standards often remain in place beyond their useful lives, until a bold entrepreneur reinvents the wheel and devises a solution that is so much better than the existing one that existing users are willing to invest the time necessary to learn the new approach.

The Uninitiated

Adoption of wheel reinventions by Uninitiated Users, those who have not been previously exposed to legacy systems, is generally more rapid than by the general population, as such users do not have to “unlearn” an old way. In addition, their lack of affiliation with a legacy technology precludes them from feeling more comfortable with technologies of the past.

For instance, downloadable music and online players, such as Apple’s iPod, represent a reinvention of the wheel which was very easy for young, Uninitiated Users to adopt, as they had yet to establish strong music consumption behaviors. Older users, familiar with purchasing CDs, were generally slower to adopt online music.

Recumbent Incumbents

Entrepreneurs who free themselves from the constraints of standards can often create tremendous value for themselves and their users. Incumbent players have a far lesser incentive to accept the risks associated with inventing new wheels, as they perceive the status quo to be less risky in the near-term.

Incumbents must trade off delivering the minimum level of innovation demanded by their users and the degree to which they can maximize the return from their legacy know-how, processes and capital investments. Thus, recumbent incumbents, those which rest on their laurels, tend to be found in industries which have not experienced a recent wheel reinvention.

Auto manufacturers are classic recumbent incumbents. The major manufacturers in this mature industry have invested billions of dollars in developing better legacy vehicles. As they are rational investors, they prefer to maximize the value of these investments by profitably manufacturing as many internal combustion automobiles as possible. Although they are ideally positioned to lead the evolution to electric vehicles, their cars continue to rely upon their combustible engine expertise. This is particularly evident in hybrid cars, which utilize both electric and gasoline powered engines.

Incumbent players seldom have the worldview required to reinvent the wheel. For this reason, incumbents often make poor wheel-reinvention partners. Rather than struggling to change an incumbent’s worldview, entrepreneurs should partner with companies that have something to gain and nothing to lose by reinventing the wheel, even if such partners do not necessarily have extensive experience in the industry to be transformed. In the case of electric cars, producers of power storage devices make better partners than automotive companies, because wheel reinvention only represents upside to storage device manufacturers.

With no need to design backwardly compatible products, re-educate an established customer base, or abandon legacy processes and fixed-asset investments, a startup can focus on delivering its users optimal value, without slavishly paying homage to the status quo.

Users’ Return On Investment

An entrepreneur’s inherent flexibility to leverage the most productive and effective tools and methods is not a license to tweak conventional wisdom for the heck of it. Clearly most innovations do not warrant wheel reinvention. In order to determine which breakthroughs are worthy of such a momentous change, entrepreneurs should assess the following factors:

• Cost
• Performance
• Ease of use
• Change in behavior

Even if your new wheel is just as easy to master as the old one, adoption will be slowed and potentially thwarted based on the degree to which users must change their behavior. Thus, the greater the extent to which you can reinvent the wheel in a way that retains the users’ legacy behavior, the faster your solution will be adopted. One way to address this issue is to maintain familiar form factors, even if the underlying technology deviates significantly from the past. For instance, cell phones initially had a form factor similar to their landline brethren. Even Internet-based “smart” phones, which can do many things in addition to placing and taking calls, utilize the familiar 12-button keypad found on landline phones.

The combination of the new solution’s ease of use and the degree to which users must change their behavior represents the Learning Curve Investment required to derive benefit from the new solution.

Wheel reinvention is successful when the innovation delivers benefits that outweigh the combination of the Learning Curve Investment and incremental net costs or savings of the new solution. The User’s Return On Investment is derived as follows:

User’s ROI = Enhanced Performance – (Learning Curve Investment +/- Cost Differential)

As Kevin O’Connor points out in The Map Of Innovation, to be successful, any new solution must be significantly more beneficial and/or have a major impact on cost savings or productivity. According to Kevin, “A new solution has to be ten times as good or offer ten times the cost savings” of the legacy solution in order to motivate users to move from their comfort zone. This is true with any new product, but especially so when you are reinventing the wheel.

Quirky QWERTY

Urban legends aside, the QWERTY keyboard was not developed to slow down 19th century typists. In fact, research indicates that Christopher Sholes designed the QWERTY in order to minimize the clash of keys as they struck the paper, not to slow down typists. In addition, the QWERTY did not become the standard keyboard format overnight. It took a number of years, competing with alternative key alignments, before QWERTY became the standard. The design may not be ideal, but it has proven serviceable for over a century. However, the reason that QWERTY has remained the standard for so long differs from the forces that have kept the steering wheel and brakes in place.

Numerous studies have shown that various keyboard designs are slightly more effective than the QWERTY standard. However, the switching costs (i.e., the time and lost productivity associated with learning to use a new keyboard) that are required to become proficient on a better keyboard have outweighed the perceived benefits of switching. Typing slightly faster is not an adequate incentive to invest the required time to relearn basic keyboarding skills.

Another initiative that delivered a similar negligible User ROI was the United States government’s “go metric” campaign of the 1970s. After spending hundreds of millions of tax dollars cajoling, educating and ridiculing the public to “think” in metric terms, the U.S. government finally gave up, but not until long after it was apparent that the less-than-optimal legacy system of inches, pounds and ounces was “good enough” to deter most people from making the Learning Curve Investment required to master the metric system. One legacy of the government’s wasteful spending is National Metric Day, which is celebrated each October 10th by no one.

Location Cubed

Where you reinvent the wheel is of immense importance. For instance, if you attempt to introduce your new wheel in a market with powerful incumbents, they may aggressively marshal their resources to thwart your efforts. This has been the case in Europe with respect to genetically re-engineered food stocks. The entrenched agricultural chemical companies have subtly encouraged the “green” movement’s resistance to the introduction of genetically re-engineered foods.

When deciding where to reinvent the wheel, you should also seek markets with a high concentration of Uninitiated Users, as they will be less influenced by the incumbents’ attempts to prevent the entrance of your new wheel.

In addition to the four product-oriented factors, the following environmental issues must be considered when evaluating where to reinvent the wheel.

• Strength of incumbents
• Relative concentration of Uninitiated Users

The interaction of the four product factors and two environmental issues are shown below.

When And Where Should You Reinvent The Wheel?

The relative impacts of each of these product and environmental factors must be considered in concert. For instance, enhanced performance might be adequate to offset increased costs and/or low ease of use, especially in a market with few incumbents and a large concentration of Uninitiated Users. The key is to consider each characteristic on a continuum and in tandem with the others.

A new keyboard would fall in the upper left quadrant of the Product Factors box in the preceding diagram, which is indicative of a product that does not deliver enough value to justify the user’s Learning Curve Investment. Hence the QWERTY keyboard remains the standard. However, if you can locate a market that also corresponds with the upper left corner of the Environmental Issues box, you might successfully launch an improved keyboard.

Judgmental Dispassion

Before deciding to launch a product in a particular market, you must first assess its relative ease of use. This variable should be determined by a statistically relevant number of dispassionate users. You and members of your team are not appropriate judges of this attribute, as your passion for your adVenture’s solution will make it difficult for you to accurately assess the User’s ROI.

Objectivity is also paramount in your assessment of the product factors. For instance, most Mac users believe it is relatively “easy” to convert from a PC to a Mac, whereas the typical PC user views such a conversion as more challenging. As this instance illustrates, Uninitiated Users, who were not forced to forego a legacy solution, are generally not the best judges of an Initiated User’s ROI.

Inertia Is Not Inert

Inertia is a standard’s best friend. Educating and encouraging users to adopt new solutions can be time-consuming and expensive. This certainly was the case at Computer Motion, where we not only created new products, but simultaneously pioneered the medical robotics industry. Before we could discuss our products’ benefits, we were forced to have long conversations regarding the efficacy of introducing robots in the operating room.

The Learning Curve Investment for surgeons was tremendous. However, as the Users’ ROI was overwhelming (shorter patient hospital stays, lower overall costs, fewer risks of complications, etc.), surgeons eventually either retired or made the investment to learn the new robotic methodology.

Don’t Trust Anyone Over 30

Entrepreneurs should not trust any standard or method that is over 30 months old, let alone 30 years old. By consistently challenging old-world conventions, entrepreneurs can identify wheels whose reinvention is not only worthwhile, but immensely lucrative. Even if a wheel is not wholly replaced, the simple act of exploring alternatives can lead to valuable innovations. Thus, leverage the fact that no customers, no sales and no legacy investments provide you with the freedom to deploy the ideal solution, not one that largely relies on the legacy approach that has gone before you.

As Harold Evans points out in the conclusion of his insightful and comprehensive review of entrepreneurship entitled, They Made America, “Time and again in this study we find that breakthroughs come from the discarding of assumptions. Ignorance that ignites curiosity is a better starting point than half-knowledge.”

A startup’s ignorance of the status quo can be a powerful ally when it attempts to devise a new solution to an old problem. Who knows? You may just come up with a revolutionary new wheel, just like Revolution Motors.

Note: Some of the examples cited in this article were drawn from an inspiring talk given by Mr. Calestous Juma, Ph.D., Professor of the Practice of International Development at Harvard’s Kennedy School of Government.

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Copyright © 2008 by J. Meredith Publishing. All rights reserved.

*Andonian, Rauch & Bhise, Driving Steering Performance Using Joystick vs. Steering Wheel Controls, SAE Technical Paper Series, 2003.

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Philo was an inventor, not an innovator. He was primarily motivated by the educational potential of his invention, not the wealth it might generate.

He freely shared is ideas and technology with others in the hopes that such openness would advance the science that he loved. No one, except for Philo, was surprised when the innovators with whom he had shared his invention capitalized upon it and created dozens of multi-billion-dollar, self-sustaining enterprises.

Entrepreneur Defined

I define an entrepreneur as, “Anyone who identifies an opportunity and exploits it.” Nearly everyone meets the standard outlined in the first half of this definition. Nearly every clear-thinking human identifies opportunities, often dozens each day, without even realizing it. Whenever you think or say, “Why don’t they…”, “Why can’t someone…” or, “I wish someone would…”, you are identifying “ideas” that might be exploitable by an entrepreneur.

Ideas are important, and adVentures based on novel, compelling ideas clearly have a significant advantage over those based on mediocre, “me too” ideas. As noted in Spilling The Beans, an idea, in isolation, if often worthless. A good team that knows how to execute can salvage a win from a mediocre idea, whereas a mediocre team can make a small fortune out of a very large fortune.

However, a moderately intelligent person can think of more ideas in a few days than could be successfully carried out by thousands of people over their lifetimes. A great idea and five bucks might get you a small, non-fat, mocha, soy latte and nothing more. Long-term value lies in the refinement of an invention to the point that it addresses an opportunity broadly enough to support a self-sustaining business.

It is the second half of my definition of an entrepreneur that differentiates inventors and innovators from most other people. Nearly everyone can identify opportunities, but only a small percentage of people ever attempt to exploit them. Inventors and innovators are both entrepreneurs. I have been involved in a number of successful adVentures, none of which were based on one of my ideas. Like me, most entrepreneurs are innovators, not inventors.

Inventors are analogous to parents who enjoy “making babies” but abandon their children once they begin to cry. In contrast, innovators are akin to parents who spend decades raising their children and ultimately experience a lifetime of rewards as their years of nurturing result in mature, self-sustaining adults. Innovators seek the establishment of a value proposition that can be profitably delivered to customers. The ability to innovate on the path already taken by others is the key to successful innovation.

Inventors, scientists, explorers and academics seek to be first. Competitive, driven entrepreneurs have a natural inclination to want to be first. Few people remember the second man on the moon, the second person to fly an airplane or the second person to reach the North Pole.

However, sometimes in businesses, being first is disadvantageous. Inventors will often sacrifice financial success in exchange for being first. Innovators seek to be first when it represents a defensible, sustainable, competitive position. As discussed in Competing From The Fringe, a fast-follower drafting strategy requires patience and ego containment, two traits that are in short supply at some startups.

Harold Evans, author of the seminal account of American entrepreneurship entitled, They Made America, notes that, “An innovator’s essential contribution may be to realize the promise of the known.” A logical extension of Mr. Evans’s supposition is that, “Inventors seek the promise of the unknown, while innovators realize the promise of the known.”

“Realizing the promise” is usually more financially rewarding than “seeking the promise.” We do not fly “Wright Brother’s Airlines,” or listen to the “Marconi Radio Network” because these men were inventors, not innovators capable of building profitable ventures based upon marketable products.

In the following chart, the names in bold type achieved a moderate level of fame and financial success. However, for many inventors who were not also innovators, including Philo Farnsworth, being first resulted in little fortune and no fame.

A Small Fortune

“There have been many fine scientists desperately trying to become poor businessmen.”

– General Georges Doriot, Pioneer Venture Capitalist

Inventors often make a small fortune out of a big one, as they focus on discovering breakthroughs without regard for their ultimate financial return. In addition, due to their personalities, they often do not have the proper skills or desires to turn novel ideas into self-sustaining enterprises. They often seek to design and build the best products, without regard to the myriad of customer-centric, non-product-oriented issues that contribute to a product’s ultimate success or failure. Clearly they best products often do not win. If you do not believe me, take a look at Microsoft’s product portfolio.

If you are an inventor, your choices include: (i) sell your inventions early, which will net you nominal value, (ii) partner with someone who has innovator skills, or (iii) risk losing it all by attempting to play the roles of both inventor and innovator. Few people are successful at both roles because each requires distinct skills, aptitudes and proclivities. There are notable exceptions – people who are simultaneously successful inventors and innovators. Their rarity is the reason most school-age child can name Thomas Edison, Eli Whitney, the Wright Brothers and Alexander Graham Bell. The list of such gifted entrepreneurs is very short, which is why creating a balanced Core Team is vital, as further described in The Tribe.

Are You An Inventor Or An Innovator?

In addition to the characteristics noted in the preceding chart, Are You An Entrepreneur? further explores the traits, environmental factors and other issues common to inventive and innovative entrepreneurs.

What Did Philo Invent?

Philo hoped that by transmitting news and global events into peoples’ homes, the world would become one large community, thereby reducing man’s desire to wage war. Philo essentially foresaw CNN seventy years before it existed.

Philo, after a long bout with alcoholism, was understandably bitter in his twilight years. However, after silently watching America’s astronauts land on the moon on his small black-and-white television, he turned to his wife and said, “This has made it all worthwhile.”

An inventor to the end, Philo ultimately gained satisfaction by seeing his invention, the television, grow up and become a self-sufficient adult.

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Copyright © 2008 by J. Meredith Publishing. All rights reserved.

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From the outset of their adVenture, John and Kyle had no illusions that their startup would generate tremendous wealth. Rather, they founded their company with the explicit goal of learning what it means to be an entrepreneur. Often in life, “experience” is what you get when you do not get what you want. However, in John and Kyle’s case, experience is what they wanted and what they got from their adVenture. They certainly believed in their product, but unlike most entrepreneurs, their startup’s journey was more important to them than its ultimate destination.

Something else distinctive about their adVenture is the travelogue they created along the way. In contrast with most business books, John and Kyle did not attempt to recreate conversations, states of mind or actions years after the fact. Instead, they contemporaneously documented their experiences, which they shared with their friends and families via sporadic “diary” emails. As the email list continued to grow, they formalized their updates in a newsletter entitled The MouseDriver Insider, which eventually evolved into the outstanding book The MouseDriver Chronicles (MouseDriver).

Designed in a bar, on the back of a napkin, John and Kyle created a computer mouse which emulated the head of a golf driver. They based their entire company upon this one, humble product.

I have used MouseDriver in my entrepreneurial University courses for the past several years. Each quarter, the students give it rave reviews for its accessibility and applicability.

Unlike books which recount exceptionally rare successes, such as The Google Story or The Perfect Store: Inside eBay, MouseDriver tells a story that is relevant to the large majority of most startups. In contrast to high-profile Silicon Valley ventures, MouseDriver did not raise the financial resources to quickly hire a large team. Their chronic lack of cash required John and Kyle to become involved in every aspect of their business. Although this approach was exhausting, it afforded them ideal insight into all facets of their startup’s operations.

Sixteen of the real-world lessons chronicled by John and Kyle are summarized below. Although there are some spoilers in the following text, in most cases I try to describe the lesson learned in simple terms and leave it to the reader to learn for themselves how John and Kyle addressed each particular issue.

1. Find a Motivated, Value-Add Mentor

As described in Advice Worth The Price, John and Kyle were forced to deal with a superficially “interested” Advisor.

2. Good Is Good Enough – Do Not Over-Design

John and Kyle are required to address the dilemma encountered by all entrepreneurs who create tangible products – when to stop tweaking and start shipping.

3. Stick To Business Principles

John and Kyle are pitched an infomercial as a way to sell their product. They struggle with this proposition, because their gut tells them that infomercials are better suited to sell fake jewelry but the sales pitch is delivered by a forceful and seemingly legitimate industry insider.

4. Determine Distribution Early

Neither Founder had experience developing or managing distribution channels, nor were they initially motivated to learn about this important aspect of their company’s value chain.

5. “Brian Was Wrong”  

The MouseDriver team learns that just because a salesperson excels at selling themselves during the interview process does not mean they can sell your product. They also must confront the veracity of an aggressive salesperson’s forecast.

6. Don’t Trade Money For Words

In one critical instance, John and Kyle agree to pay money in exchange for an unenforceable verbal promise. When subsequently faced with similar “promises,” they devise creative ways to avoid repeating their initial mistake.

7. Exclusivity Is Alluring

As noted in Excludesivity, entrepreneurs cannot afford to relinquish control of their destiny by entering into exclusive relationships. John and Kyle eventually pique the interest of several distributors, each of whom demands exclusivity. The manner in which the team navigates these rocky shoals is enlightening.

8. Once You Take Some Risks, Taking More Is Easy

As noted in The MBA Education And Other Oxymorons, starting an adVenture is akin to BASE jumping. Making the leap is daunting, but it often seems insignificant once you are forced to focus on surviving the freefall.

9. Ignore The Mood Meter

As described in Great Expectations, the highs are higher and the lows are lower at a startup. Entrepreneurs are well-served to modulate their mood swings, while still relishing each victory.

10. Having Office Space Doesn’t Suck

Knowing when to move from your bedroom and into a real office is another highly relevant message for first-time entrepreneurs.

11. Don’t “Think,” “Sell” – Sales Solve Most Problems

John and Kyle realize what every successful startup has experienced. Cash papers over mistakes, which is one reason why successful companies often appear to be “smarter” than they really are.

12. Stay Close To Customers

Out of necessity, the MouseDriver team is required to handle sales and customer service inquiries. This experience has a significant impact on the team’s subsequent decisions and the manner in which they “view” their business.

13. “Rule of Four”

John and Kyle learned the hard way that everything takes longer, costs more and yields less than initially expected.

14. Bartering Be Good

Although they start tentatively, the team eventually becomes comfortable negotiating everything, even to the point of cleverly trading excess inventory for a variety of goods and services.

15. The Beauty Of “Low Finance”

John and Kyle extract cash from the same “VC” that many entrepreneurs first call upon – their Visa Cards.

16. Four “P”s Of Entrepreneurship

John and Kyle learn first-hand that Passion, Persistence, Purpose and Patience are vital to every startup’s success.

Pressure Valve

Although MouseDriver provides a highly relevant look into the startup world that is applicable to most adVentures, it is deficient in one significant regard. Unlike most adVentures, neither John nor Kyle felt the “do or die” pressure which exists at most startups. In addition to the de facto two-year time limit they placed on their adVenture at the outset, they also significantly limited the funds invested in the company. In addition, other than “Brian the sales guy,” they did not hire any employees.

By essentially not accepting outside capital nor hiring employees, the MouseDriver Founders significantly limited the pressure associated with their adVenture. As noted in Pressure – The Mother Of An Entrepreneur’s Motivation, the need to meet payroll and provide investors with a return on their investment often motivates entrepreneurs to accomplish otherwise impossible feats.

In John and Kyle’s case, this mitigated pressure impacted the manner in which they addressed certain issues. This fact does not diminish the importance of their travelogue. However, a would-be voyager should be aware of the adVenture’s modulated pressure as they read John and Kyle’s exploits.

How does the book end? Do John and Kyle go bankrupt? Do they sell the company and retire? Are they still slogging it out nearly a decade later? Read The MouseDriver Chronicles to find out.

The book’s subtitle says it all: “The True-Life Adventures of Two First-Time Entrepreneurs.” This is one adVenture that is both entertaining and enlightening. Read it and you too can learn what it means to be a first-time entrepreneur, without having to go on a Cheetos and Mountain Dew diet.

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Copyright © 2008 by J. Meredith Publishing. All rights reserved.

Ask any venture investor. They would love to slather their startup investments with Nair. Why? Because every deal has unwanted hair – one or more significant flaws which make the deal imperfect. Savvy entrepreneurs also understand this reality. As a result, they do everything within reason to reduce the hair on their adVenture before they seek investment capital.

Startup hair is often related to two key issues, (i) the experience and maturity level of the Core Team and (ii) the adVenture’s stage of maturation. These two factors can counteract each other. For instance, if a Core Team is relatively inexperienced, but the adVenture is generating revenue, has a cadre of satisfied customers and a reasonable path to sustainability, then the operational risk associated with the Team’s limited experience is significantly mitigated.

Conversely, if the adVenture is in the product development, pre-revenue stage, the operational risk is reduced if the Core Team has a relevant track record of success. These two criteria are obviously not exhaustive of the factors investors consider when evaluating a venture investment. However, when these two risk factors are evaluated in tandem, the results can be enlightening, as depicted in the following four-by-four.

Who Loves Ya?
A Kojak deal is one with virtually no hair. In the above example, it represents a deal in which the management team has applicable experience and the adVenture’s business opportunity has been validated. Much like the fanciful storylines of the 1970s Kojak TV show, such deals are largely fictional.

Kojak deals command hefty valuations, which are advantageous for the operators, but ironically represent a form of hair to potential investors. As such, no matter how perfect a deal may seem, there are usually countervailing factors which will make the deal less attractive to a subset of potential investors. To quote the lollipop-sucking star of Kojak, the fundraising process is a painful way to determine, “Who loves ya baby?”

They’re Creepy and They’re Kooky

At the other extreme, Cousin It deals are covered with hair. Just as you cannot see Cousin It’s face in the 1960s TV show The Addams Family, Cousin It deals are so inundated with hair that it is often impossible to see the opportunity that might lie beneath. In the above example, management may lack relevant experience and the business opportunity is unproven. Such deals are best funded by customer dollars until the opportunity is adequately proven and/or management accrues an acceptable level of experience. Even if you soak these creepy, kooky deals in metaphorical Nair, it will likely only result in unsightly burns and itching, making the deal no less difficult to fund.

Despite the Kojak and Cousin It extremes, most deals that qualify for serious evaluation by institutional investors are Nair deals. These deals comprised both attractive and troubling attributes. No matter how attractive the opportunity, there are always risk factors that detract from a deal’s desirability. Entrepreneurs must proactively identify such concerns and either Nair them away or devise a reasonable story which acknowledges the problematic issues and explains why they will not materially impact the adVenture’s chances of success.

Throw Hubby Under the Bus

After many months of discussions with a promising software company, our venture fund declined to invest in the company, as the Founders were not willing to address the hair on their deal. In this instance, the Founders were married. The wife was the CEO and her husband was heading up sales, product development and customer service. Rather than proactively address the concerns that such a familial relationship raised at their startup, the Founders denied that it was “an issue.” As a result, we decided to not invest in the company.

My favorite counsel to someone who has a poor rapport with his or her boss: “If you have a problem with your boss, then you have a problem.” This same sage advice can be applied to a Nair deal. If your investors have a problem with your deal, then you have a problem. Denying an issue or trying to convince an investor that he or she is “wrong” are generally not viable strategies.

In the case of the software company, Nair could have been applied in the form of hiring other senior, strong-willed executives who could counterbalance the input of the married Founders. Although this would not have eliminated the issue, it would have mitigated potential investors’ concerns that the company might become a myopic dictatorship run by two very closely aligned people. Augmenting the management team with senior talent would also reduce the risk that deterioration in either the Founder’s marriage or the job performance of one of the Founders would fatally impact the organization.

Shining, Gleaming, Steaming, Flaxen, Waxen

Deal hair, just like the real thing, comes in a variety of colors and styles. Some of the most common types of deal hair include:

Junky Capitalization Table – A hodgepodge of small investors that could cause potential headaches for management and/or institutional investors.

• Nair Solution – Repurchase as much stock as is practical and convert any remaining preferred stockholders to common stock status.

Untenable Bridge Terms – Convertible debt terms that are prohibitive to an institutional investment, such as large discounts and/or warrant coverage that dilutes the intuitional investor’s investment.

• Nair Solution – Marginalize the relative dilutive impact of these terms. For instance, a discount of less than twenty percent is usually deemed reasonable. In addition, converting warrant coverage to non-participating status will also enhance your adVenture’s fundability.

Band of Brothers – Friends, family, former roommates and other unqualified people occupy senior management positions.

• Nair Solution – Replace such mis-hires with strong-willed, independent executives who have relevant, successful track records.

IP Confusion – Questionable ownership of key intellectual property, including non-exclusive licenses, potential infringement of a third party’s technology and/or inappropriate use of open-source tools.

• Nair Solution – In most failed adVentures, the only asset of value upon dissolution is the underlying intellectual property. As such, it is paramount that investors can unequivocally evaluate its veracity.

Legal Landmines – No matter how frivolous, lawsuits will seriously chill investors’ interest.

• Nair Solution – As noted in Roping In The Legal Eagles, it is generally advantageous to fight nuisance lawsuits to avoid becoming known as easy mark for unscrupulous lawyers. However, when fundraising, it is more appropriate to expeditiously resolve any litigation (potential or otherwise), rather than expend energy convincing a skeptical investor that your legal issues are without merit.

Geographic Dispersion – Significant physical separation of Core Team.

• Nair Solution – During an adVenture’s early days, virtual teams are often viable. However, as a company accelerates its growth by deploying its institutional funding, the Core Team cannot afford to be handicapped by disparate locales. As such, the Core Team should be prepared to relocate to a central location within a reasonable period after obtaining funding.

Way Outsourcing – Outsourcing core competencies.

• Nair Solution – Identify the areas of your adVenture that are critical to its success and internally develop the necessary levels of core competency. For instance, technology startups should maintain key development resources in-house, rather than relying exclusively on third-party, contract labor. If your business model is predicated on superior online marketing expertise, do not utilize consultants to craft and execute your online marketing initiatives.

Double Agent – Problematic agency issues, such as high salaries, non-entrepreneurial perks (car allowances, exorbitant travel expenditures, etc.), side businesses and/or cross-ownership of related businesses.

• Nair Solution – The addition of disciplined, experienced investors to your adVenture team will require you to run your business with a focus on creating long-term value. As such, eliminate any unconventional forms of compensation or other potential areas of Agency conflict before you are forced to do so by a prospective investor.

Before you seek investment capital, do what you can to make your adVenture smooth and shiny, with no nicks or cuts. Although judicious use of metaphorical Nair on your adVenture will help your fundraising efforts, it is often also necessary to unequivocally acknowledge the remaining deal hair. It should be shampooed, conditioned and styled in the most attractive manner possible. Trying to cover up deal hair with a cap and deny its existence is not a viable strategy. If you remove and groom the hair on your deal, there will be no doubt as to “Who loves ya baby?”

***************************

Special thanks to Jim Andelman, Founder and General Partner of Rincon Venture Partners (www.rinconvp.com) for his hairy suggestions.

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Copyright © 2008 by J. Meredith Publishing. All rights reserved.