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Innovation Blog

Birth and Death Among  Startups, and the Rise of Necessity Entrepreneurs

By Shlomo Maital

  There is controversy over whether the tendency of Israeli startup companies to ‘exit’, by being acquired by foreign companies, is good or bad for Israel.  in the past three years, there has been  a constant crop of such exits, about 85 a year, though their peak value  ($10 b. in 2006) has declined sharply by some 75 per cent.   Clearly, it would be better for Israel if those acquired companies could be scaled up to global size, creating jobs, income, wealth and exports for Israelis.  But even entrepreneurs who want to achieve such scale, rather than take home a very large check, face formidable obstacles, in manpower and finance. 

  I believe that a bigger problem than ‘exit’ is ‘death’.  There are many unobserved funerals.  Of Israel’s some 3,000 startups, many are quietly closed each year.  Perhaps the spotlight should be focused more on “what can be done to increase survival rates and reduce morbidity?” than on “what can be done to reduce exits?”.        

       What can be learned from American data?  According to a study by Moya K. Mason, “Research on Small Businesses”  [http://www.moyak.com/papers/small-business-statistics.html ],  U.S.  Census data show there were 5.7 m. US firms with employees, and 17.0 m. without employees (i.e. sole proprietor) in 2001.   Small firms with less than 500 employees account for 99.7 per cent of the 23.7 m. American businesses in total.  Hence, the small business sector in the U.S. is hugely important. 

    For businesses with employees (as noted, about 5.7 m.),  there were 572,900 new firms born in 2003, and 554,800 firms that closed that year.  The vast majority of those were ‘small’. So, each year, roughly 10 percent of small businesses die, and the same number are born.   This process is healthy and important.  It is part of what Joseph Schumpeter called ‘creative destruction’ and what Peter Drucker called “innovation and abandonment”. 

     Mason reports, “2/3 of new employer firms (i.e. firms with employees) survive at least two years, and half survive at least four”.  About a third of firms that closed said their firm was successful at closure.  That implies that the firm was likely acquired and merged into a larger firm.  [1]   

   In America, such ‘exits’ leave their IP, assets and added value in the U.S., since the vast majority of them are acquisitions by other US firms.  So an ‘exit’ in the US has different economic implications than an exit in Israel.    

    Worldwide, a massive study known as GEM Global Entrpreneurship Monitor finds “there are about 300 m. persons trying to start about 150 m. businesses” in the GEM countries, whose population totals 4 billion, roughly two thirds the total world population.  A third of the businesses people try to launch are actually launched, or 50 m., each year,  about 137,000 every single day.  About an equal number of active firms terminate (die)– 50 m. a year.  

    Massive medical research is underway to find cures for disease.  I wonder why similar research is not undertaken to discover why 50 m. businesses ‘die’ yearly, and to discover remedies.  Some may deserve to fold — but many may not. 

    The GEM study shows that one of the most basic motives for starting a business is “necessity entrepreneurs” — those who cannot find suitable work and start a business to survive.  Necessity entrepreneurship seems to be growing worldwide in the wake of the global economic crisis.  It is one of the few positive effects of the crisis.


[1]  Mason cites a study by Brian Headd, U.S. Bureau of the Census, Business Success: Factors Leading to Surviving and Closing Successfully,  working Paper #CES-WP-01-01, Jan. 2001). 

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Innovation Blog

Key Lessons From the Inventor of “Cranium”

By Shlomo Maital

    CRANIUM  

     If “Build a Business, Not  a Product” is our mantra (see previous blog):  Richard Tate is our Exhibit A. [1] 

      Richard Tate is a Scot.  The Scots are tough, proud, independent thinkers.  They invented penicillin, the steam engine, Sherlock Holmes, artificial diamonds, whiskey, radar, Encyclopedia Britannica.  Tate was born just outside Dundee.  As a child he dreamed of creating businesses.  His dissertation for Heriot Watts University (computer science) was a business case.  After graduating Tate went to study management at Dartmouth University, then sought employment. Apple turned him down (no ‘green card’).  Microsoft hired him.  He worked there from 1988, when MS had only 2,300 workers, until 1997.  In 1994 he was chosen Employee of the Year by MS, out of some 34,000 workers.  At MS Tate started 13 businesses, including * client-server computing (an operating system for this), * value added reseller channels (MS went after the huge market of IBM AS400 users),  * CD ROM publishing (Encarta, for instance, and 30 other titles), and * Internet ’94 (consumer online applications, like Expedia).  In 1997 he launched his own startup after leaving MS:  A board game called Cranium, fastest-selling game in history.  His firm became the 3rd largest game company in the world, before being acquired by Hasbro.  

      Here are a few lessons Tate conveys to other entrepreneurs:

1.   Speed! Urgency!  Get to market!  Tate used project management techniques learned and employed at Microsoft.  Cranium came to market in just 6 months.   He consulted with eight product development people from MS. Their advice saved him six months in time.

2.  Prototype and Observe!   Tate and his partner made prototype board games, and “hid behind sofas” watching people play, then asked for feedback. What they learned was invaluable.  It is hard to overemphasize the value of prototypes and pre-beta testing.

3.  A failure, a closed door, is always an opportunity!    Tate says that his opportunities always opened up after a door closed.   After leaving MS he pursued his dream to be a DJ.  A radio station in Seattle threw him out.  That closed door led him to try what eventually became a huge success. “Often, when I’m on the ropes, I’m strongest,” says Tate — spoken like a true Scot.

     Tate had 27,000 copies of Cranium produced, then learned he had missed the annual Toy Fair, where the year’s purchases are made.  What to do with such a huge stock of product?  Tate invented a new business design for board games — sell through Amazon, Barnes & Noble, and Starbucks.  This was crucial for his company’s success. 

4.  NETWORK, NETWORK!  While climbing Kilimanjaro, Tate met Dan Levitan, the investment banker who handled Starbuck’s IPO.  Tate leveraged his link to Levitan to meet with Starbucks founder Howard Schultz.  He suggested that Schultz sell Cranium in his coffee shop outlets.  Schultz, who brought music to become a major Starbucks cash cow, loved the idea.  Tate tried to sell the idea to Amazon. They never returned his calls. He persisted, used his network and ultimately became the first company to sell board games through Amazon.

5.  BOOTSTRAP!  Tate started Cranium with $100,000.   It is possible, often desirable, to launch your own business with only your own funds.  You retain control,  and no Board of Directors can fire you or tell you what to do. 

     Tate’s company went on to introduce 40 game products sold in 30 countries.  Five years out of six, Cranium games were named “Game of the Year”. 

6.  BELIEVE IN YOURSELF.   Tate has enormous self-doubt. And endless people told him: Tate, keep your day job, this will never work.  Despite everything, he persevered, in Scots fashion.  His business innovations (selling through Amazon and Starbucks) were as crucial as his innovative games.

     James Watt, inventor of the steam engine, suffered from depression and had a deeply tragic life.  He once said, “nothing is more foolish than being an inventor”.    Richard Tate provides a career path worth considering.   Work for a large company.  Be an intrapreneur, learn the best techniques for inventing businesses within the organization.  Then, retire at your peak.  And do the same thing you did before, only this time for yourself.  When you do, be sure you use as much creativity in your business design as you apply to your inventive product.

         For information about Cranium: See:

                     http://www.hasbro.com/cranium/en_US/


[1]  Based on Peter Day, “Global Business”, BBC World Service, March 8/2010.

Innovation Blog

Mantra for your Life?

By Shlomo Maital

 Great organizations have great mantras.  Mantras are 2-3 word slogans that capture the vision, mission and goals of the organization.  For example:  Walt Disney (“Make People Happy”), or Apple (“Think Different”).

  It occurs to me that people, too, need mantras.  Mantras help us zero in on what really matters to us, what our vision is, and why we are placed here on earth.  Whether or not we share the mantra with others, a strong mantra helps us focus our own energies and vision, at a time when it is exceedingly easy to scatter them.

   What is your mantra?

   Here is mine, one that came to me very late in the game.

   Build a creative business, not just a creative product.

  Too long.  How about:  BUILD BUSINESSES, NOT INVENTIONS.

   The basic idea:  Many of the managers, entrepreneurs and students I’ve worked with, during the past 43 years, especially, those trained in engineering and science,  think that innovation is primarily about inventing a better widget. 

    And I’ve seen many such ‘widgets’, embodying magical new technology, that fail, because they lack solid marketing, sales, operations, production, finance and HR management.

    Build a business.  Learn how.  Pour equal creativity into the business design as you pour into the product.  Innovate everywhere in your business, not just in the product. And create an innovation process, so that new ideas pour out constantly, and not only in the realm of your product.  Make Version 2.0 apply to your business designs, not just your software product. 

     This is my mantra.   This is what I now do in life, as an educator.[1]

     What is YOUR mantra?  


[1]  S. Maital, D.V.R. Seshadri, Innovation Management:  Strategies, Tools and Concepts for Growth and Profit (SAGE, 2007).   Forthcoming in Hebrew, April 2010.

Blog entries written by Prof. Shlomo Maital

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