Time to outsource your R&D to entrepreneurs!

I was at an interesting panel discussion last week where I first heard a very radical idea: your business needs to outsource its research and development department, and the best place to do so is with your local startup community. The person saying this was the chief operating officer of his company. I will tell you who in just a moment.

The notion makes a lot of sense. Spending on R&D isn’t cheap: Google spends $8 million a year, and Microsoft about $10 billion, both a little bit more than 10% of their revenues. Car and drug companies are also big spenders. These companies, along with IBM and Intel, generate a lot of intellectual property from this R&D, and a lot of innovative products and services. But not everyone can be an IBM or a Microsoft and have the funds to pay for original research. That is where your local startup ecosystem can come in handy.

Almost every city in the world has some sort of startup incubator, a co-working space, a shared lab or some other facility that is a gathering place for entrepreneurs. In St. Louis, we are blessed with many of these outfits, in fact so many that I still haven’t visited all of them yet. That is a Good Thing.

We are also blessed in St. Louis with a lot of laid-off talent, particularly in bioscience and IT. That sounds odd saying it like that, but when you have a big company like a Pfizer or Anheuser Busch that lets go of several hundred folks, it can be the best thing for your startup community. These people don’t necessarily want to leave town and move their families across country. If they have an idea for a startup, they tend to bring together more folks and create more jobs. So it isn’t just the real estate, but having the talent pool too.

Okay, back to my COO that I quoted above. His name is Kevin Demoff and he works for the St. Louis Rams football team. Yes, football. Not the kind of cutting-edge business that comes to mind when we are talking about R&D. One of our startup communities here in St. Louis is called Stadia Ventures, a sports-related accelerator that leverages our city’s sports-crazy universe. Demoff was quite candid about how little the Rams have spent in past years on R&D, and how the NFL is more of a follower than a leader when it comes to implementing new ideas. “It is more likely that the league is going to copy something that we or some other team does than to actually help with innovation,” he said at a Stadia panel session last week. “That is why we have to support the local entrepreneurs and be a part of the startup culture.” It was a very insightful thing to say.

So go visit your local startup offices. Talk to a couple of entrepreneurs, and buy them a few lunches. Better yet, become a corporate sponsor of efforts like Stadia or other startup accelerators. Volunteer as a judge at one of their demo day or pitch competitions. Help mentor one of the young companies. The more you put into these efforts, the more you will be able to outsource your R&D and pick up some new idea that your company can run with and make a few touchdowns. (You just knew a sports metaphor was coming.)

What are the warning signs your startup is about to fail

There have been plenty of articles written about how to form a startup company, but not as much as been written about when you need to ask for help for an ailing startup, when it might be near the end of its life.

The average startup doesn’t tend to live very long: many expire after a year or two, succumbing to a variety of diseases. Certainly, the biggest reason is running out of money. This is why most startups fail, because they are under-funded, or over-estimate their market size, or under-estimate the time it will take them to go to market, or they spend money in the wrong places. But there are a lot of other warning signs before you get to the end of the line and I will offer a few ways that you can cure these illnesses.

  • When a founder takes a “real” job to bring in money to support his/her family. I have mentored many startups where this sadly happens. It usually means the beginning of a death spiral, because the founder has to take his or her eye off the startup and devote less time to its growth and operations. Cure: Make sure you have enough savings and early revenues to sustain your business for an extra six to nine months beyond where you initially estimate.
  • When a venture has to cancel its outsourcing programming project because of one reason or another. Maybe the programmers didn’t deliver the goods, or maybe there was a lack of communication between the founder and the tech team. Or maybe the outsourcer got a better offer, or is just incompetent. Whatever the reason, having bad tech is often a fatal disease. Cure: vet your programming team carefully, and set up specific milestones that they need to meet.
  • When founders are paying themselves too much in salary. Most founders shouldn’t be working for a startup for the money: they should be pumping as much of their revenues back into the business. If they are too comfortable, the startup is likely to fail. Cure: don’t be tempted, keep your own salary lower than anyone else on staff.
  • Pivots can be good, but too many pivots are not. The trendy term refers to a radical change in direction, whether that is product design, market focus, or some other major decision. Certainly, one great aspect about startups is that they should change their focus when they learn more about the market they intend to serve. Cure: too many pivots can waste a lot of resources, time, and energy. Choose a pivot when you have exhausted all other options.
  • Likewise, having mentors and advisors are good, but not listening to them can often prove fatal. Many times I have been in a mentoring session where the founder isn’t paying attention, or getting advice that she or he doesn’t really want to hear. Cure: founders need to develop their listening skills, and understand when they are going down the wrong path.
  • Developing more than one business concurrently. Oftentimes I have seen startups that are really entering more than one business. And while it is great to have lots of ideas and be innovative, you really only have time to work on one business at a time. Cure: stick to your knitting!
  • Moving back home to save on office expenses. Just like boomerang twenty-somethings that have to return home, this move is often an indication of a larger problem. And while it is great that you can drop the office expense, having to meet around your kitchen table or a local coffee shop can make it difficult to get any actual work done. Cure: this is a last-ditch effort, and often there isn’t any cure.
  • The opposite is also a sign, when a founder has to leave town to live in Silicon Valley or some other major metro area. While the amount of venture capital available on the coasts is important, it can take the founder out of running the day-to-day business too. The balance is important.

CIO.com: How to raise a tech entrepreneur

Imagine you are the father and major breadwinner of a family of eight children, half of whom are teenagers. Your startup is about to go into the weeds and you aren’t sure if you are going to be able to pay your staff of several dozen people, let alone figure out how to feed and clothe your family.

boblThat is the situation faced by Bob Lozano (at left) 17 years ago during one of the most stressful periods of his life. I interviewed Bob and several others  who are part of multi-generational startup families and what their experiences were raising their kids who are starting their own companies. You can read the rest of my story in CIO here.

Dealing with hypergrowth

Many people will think that handling hyperfast growth is a nice problem to have in their business. Yes and no. While it is great to have a business that is growing in revenue and customers, in these days of Software as a Service and virtualized servers keeping up can be a challenge. [tweetherder]It isn’t always obvious how to build an infrastructure that can scale up quickly.[/tweetherder] A recent article about the career of Aditya Agarwal in First Round is worth taking a closer look. Agarwal went to Oracle right out of college, and has been with Facebook when it had just a few employees, and has worked at Dropbox and other Internet companies.

If you are trying to build an engineering team that can handle growth, here are some of the highlights from the article that resonated with me.

1. Be flexible. You might have to move to a different team, or take a different approach, because of the increased scale. Or realize that your code was built for a smaller customer base. Don’t dwell on it.
2. See the bigger picture. They wanted people “who can think about the product all the way down to the infrastructure.” That means understanding how your code fits in to the overall project and how what you work on can influence someone else’s code too.
3. Be a polyglot programmer. Don’t use a hammer for every job, and learn new programming languages when it is appropriate for a particular project. Spend some time to develop your skills so you can work on multiple platforms, OSs etc.
4. Fight complacency or depression. Try to work each day on a more even keel. This is going to be hard work, and don’t get discouraged. Accept failure as part of the learning process. Be on the outlook for what needs to be done and set your sights accordingly.
5. Develop your leadership skills. Know when you can’t fix something by yourself and how to find someone who can help you. Leading a team isn’t just about telling someone to do something, but also about understanding what your team’s strengths and weaknesses are and how to code around these problems. It is also about providing the right motivation, resolving conflicts quickly, and making sure communication and collaboration is flowing in a positive direction. Be transparent about your decision process and communicate often and clearly about what you are doing and why.
6. Know the trade offs between producing quality or quantity. There are times to focus on one or the other, and just be able to deal with that. There is no right or wrong or absolute way. Agrawal mentioned that when he went to Oracle for his first job, he wasn’t expected to deliver any code for the first month. Facebook was another story: there he was expected to contribute code on his first day.
7. How much chaos can you tolerate? How much can your customers tolerate? These are important questions to ask and get answers to that define your daily work habits.
8. Know the corporate values and cherish them. Learn from your new hires that have worked at established software companies and how they have built their cultures over the years.

The next supercomputer may be your cellphone

What if you could have access to a cheap supercomputer in the cloud, and one that automatically upgrades itself every couple of years? One that taps into existing unused processing power that doesn’t require a new ginormous datacenter to be constructed? This is the idea behind Devin Elliot’s startup called Unoceros.com.

I was skeptical when I first heard him talking about it. This is because he borrows processing time on millions of cellphones at night. Think this through for a moment: these phones are charging, often connected to your home Wifi network, and they are sitting completely idle next to your bed. Why not put them to a good purpose? Think of SETI@Home only instead of searching for intelligent life in space, it is being used for running intelligent apps here on planet Earth.

I mean, the puny cellphone? Can’t we find a better collection of processors? Turns out that while we were sleeping, all that CPU power can add up to quite a few petaflops of processing. If you have a couple million cellphones, you can construct a distributed supercomputer that can rival some of those that are on the top500.org list. Today’s modern phone has the processing equivalent of a medium Amazon Web Services instance. That is far from puny.

I have been fascinated with this topic for some time ever since I participated in a rather unique “flash mob” computing experiment about ten years ago in San Francisco. This was the idea behind a course offered at University of San Francisco and taught by scientist Pat Miller, who works full-time at the Lawrence Livermore Labs. Call it Bring Your Own Laptop. One of the participants was Gordon Bell, who was the father of the VAX while he worked at DEC and now at Microsoft. I was one of hundreds of volunteers and left two laptops of my own for the weekend while the class tried to knit them all together to run the usual benchmarks to prove we had created a supercomputer.

While this flash mob failed at assembling a top supercomputer, they were able to get several hundred machines to work together. But that was ten years ago. Now we have the cloud and efforts like CycleComputing,com to build more powerful distributed processors.

Anyway, back to Unoceros. They have developed some software that can be included inside a regular cellphone app that, with your permission, makes use of your idle time to become a distributed compute engine for those developers that are looking for spare cycles. They are working out the kinks now, figuring out how to distribute the load and make sure that bad actors don’t harness their network for evil purposes.There is also the not-so-small issue about who pays whom and how that aren’t trivial either.

Could it work? Perhaps. It isn’t as crazy as having hundreds of people carrying their gear into a university gym one weekend.

Time to create a minimally awesome product

If you hang around entrepreneurs long enough, you’ll hear them start talking about MVPs. The first time I heard the acronym, I was thinking baseball: most valuable player, thinking here we go again with the sports metaphors. (Put the wood behind one arrow, have our product hit a home run, etc.) But it turns out that the term means minimally viable product, or for a new company to create something that is just good enough to gain traction and customers.

It has become an abused term however. I came across a post from a VC friend of mine from Pittsburgh, Sean Ammirati. Sean and I worked together at the misbegotten ReadWriteWeb a few years ago and he ran their business operations. Now he works with a lot of startups and you can tell from his post where he explores five myths about MVPs.

His first suggestion is that minimal doesn’t mean that it is crappy. A lot of startups interpret viable to mean that you slap something together quickly. But your interface matters. “I’ve met with too many entrepreneurs over the years who mistakenly interpreted a lack of demand around a concept when it really was at least partially due to an ugly or unnecessarily complicated interface,“ Ammirati says. The cruder the product, the harder it will be to understand how people will react to it, and an entrepreneur could be getting lots of wrong information because users are responding to the crude pieces, rather than the overall vision and what the product will ultimately supposed to be doing.

Next, the MVP is not a destination, and entrepreneurs have to remember that any product or service is more about the process of refinement. What is viable today may be obsolete tomorrow. Ideally, he says, “you end up having multiple iterations that test different core assumptions about your business based on different customer interactions” and refine and adjust dynamically to this feedback.

Don’t be afraid to take the actual “product” out of the equation, and look more closely at an actual idea. Ammirati suggests a simple sketch can do wonders here – remember the famous Compaq napkin idea for a luggable PC?

Don’t always swing for the fences (sorry) and try to come up with an idea that will appeal to millions of users. Far better is to examine the overall user experience, responsiveness and what you can learn and how you can validate your initial hypotheses.

Finally, built lots of landing pages to test various hypotheses and see what is gaining traction. “ If you aren’t a designer and don’t have a designer on your team, you are crazy not to spend the $300 with DesignPax or a similar service to ensure the landing page isn’t so ugly that it affects the conversion rate,” he says. Startup guru Eric Ries calls this the “Adwords Smoke Test” and it is a good concept.

Ammirati has come up with “minimally awesome product” as a replacement for the MVP acronym, and I think it is a dandy term.

Are you paying yourself too much?

As we get into the holidays, I want to ask all of your startup CEOs this question. Could you be paying yourself too much, and risk losing your business eventually? No, this isn’t coming from my Scrooge side, but some practical thinking.

Last week, a Sili Valley startup (Yet Another Social Media Posting Tool) posted, in the name of complete transparency, their entire staff salary schedule, from the lowliest workers on up to the CEO, who is getting nearly $160k. While people weighed in on whether or not this is Yet Another GenY Oversharing, what got me going on this particular screed was what the CEO was paying himself. It should be about a third of his current draw.

CEOs should be working for peanuts. Yes, they have bills to pay, but if they are in the startup scene to make money, they should stick with a salaried position at a more established company. When you go into startup mode, you want to be building a company, and you do that with offering equity and a longer-term payouts. Offer more money, and chances are good that your venture will fail because you will be burning through your cash pile. I asked a friend of mine, a tech startup CEO, for his opinion, and he told me: “I personally don’t believe in the CEO of a startup having the highest cash salary. If CEOs believe the story that they are telling investors then should be taking as much as they can in stock. If they are concerned about the cash portion of their paycheck they should be seeking employment elsewhere.” Take a look a this poll taken last year of startup CEO salaries.

And lest you think this is just for startups, the CEOs of Facebook, Oracle, Google, Yelp and HP all had $1 salaries in the past year — granted, they all made megamillions on bonuses and other incentives, but still something to think about.

And while it is admirable that this one startup wants to be so transparent, they could be hurting themselves in the long run. Again from my friend the tech startup CEO: “I would never publicly disclose my company’s compensation model. Doing so provides your competition better insight into how you think and how to compete against you. It also gives potential employees a baseline by which to start negotiations” when they start thinking about going elsewhere.” He and I both think that experience is a poor metric to be used in setting higher salaries. What should matter is results, and what each staffer produces, or how the market will respond to having a rockstar on your team.

Happy holidays and hope you all have a great break and a wonderful new year’s.

Every entrepreneur should see this movie

In my work with startups and young entrepreneurs, one thing that I have noticed is tenacity is not always a valued skill or even well understood. I got to see a screening of a new movie produced by Penn and Teller (yes, those guys again) a few weeks ago and it got me thinking about this.

300px-Jan_Vermeer_van_Delft_014The movie is “Tim’s Vermeer” and documents the many years that Tim Jenison spent trying to learn to paint Vermeer’s The Music Lesson, an oil painting that sits in Buckingham Palace. Tim is an interesting guy: he has made tons of money in the tech biz, so he can afford to take these excursions into odd places and learn new skills.

Now, why would anyone want to spend years of his life to do this? We see Tim learn how to do basic oil painting c. 2010, then learn how Vermeer mixed his pigments using materials from the 1660’s when it was painted. But wait, there is more: Tim also constructs an optical device that he uses to reproduce the painting, and by constructs I mean he also learns how to grind and polish his own glass lenses using materials available from that era. He then puts together a replica of Vermeer’s studio, getting objects that appear in the painting, including wallpaper and floor tiles, as precisely as possible.

Along the way, he teaches himself Dutch, visits Delft where Vermeer worked, and gets an audience with the actual painting itself after convincing the British monarchy. Clearly, this is a guy who is driven.

You would think that watching someone go through all this is as exciting as, well, watching paint dry, but you would be wrong. Tim is tenacious beyond belief. It takes him years to complete his version of The Music Lesson, but when he does you can see that he has done a credible job. He takes the painting to David Hockney for vetting, who gives his approval.

Apart from being a very entertaining movie, why should entrepreneurs see it? Mainly because it shows what lengths Tim goes through to get to his ultimate goal, and how he is just a dog with a bone about it. I don’t think many people would have stuck with the project as long as he did. The movie offers a message of hope here, although highlighting how insanely difficult the challenge is. Startups need to hear this message often.

Second, because it shows, probably to a fault, how entrepreneurs have to create their infrastructure from scratch sometimes because they are breaking ground so new. Many of the firms that I mentor find this out the hard way, and get into a detour (as Tim did with his pigments, mirrors, and so forth) that consumes valuable time. Tim didn’t actually start the actual painting part of his project for many years, while he worked out the other details. Many startups have trouble with putting together their servers, or setting up the right cloud configurations, or understanding their data security models, or knowing how to setup payment processing. These details aren’t things that you necessarily know going into a project until you get into the weeds and see them first-hand.

Finally, it gives another lesson to startups: how to disassemble a project into more bite-sized chunks and tackle them one at a time until you can make some small victories with each task. Sometimes a startup can try to move on several fronts all at once, rather than managing a more sequential workflow.

Go see the movie if you can.

ITworld: How post-industrial St. Louis made itself into a startup hotbed

St. Louis has become a startup mecca, and a good place for recent college graduates to find work, or even follow their dream and create their own venture. There are tons of support resources, a favorable business climate, lots of shared spaces to choose from, and a positive vibe from many quarters. Having been a resident of the city for the last seven years, I have personally seen this evolution and am indeed part of the action myself.

So why St. Louis and why now? You can read the full story in ITWorld this week here.

A Letter from Budapest

IMG_0963I spent this last week in Budapest, thanks to Balabit, a Hungarian security software company, and fell in love with the city and its people. (Here are more of the photos that I took of the town.)

Budapest has an interesting mix of old world charm and new age coding: a vibrant startup scene that is just taking hold. While I estimate that it is four years or so behind where I see things in St. Louis. That isn’t a knock on their innovation or spirit, just more a comment on their available support infrastructure. Hungary isn’t completely in tune with the notion of startups as economic development: there are crazy laws on the books that don’t encourage new businesses and seem to date back to the Soviet era when full lifetime employment was the goal. But that just means their startups are more determined to succeed. Call it Silicon Goulash, perhaps?

Hungary has a fascinating and long history of innovation. Many of its citizens were prominent mathematicians and physicists, including the Intel founder Andy Grove and the grandfather of computing himself John Von Neumann. The carburetor, the transformer, parts of the first telephone exchange, the first synthetic vitamin, the modern CRT, Rubik’s cube and the ballpoint pen all came from the minds of Hungarians.

IMG_1018Speaking of the Soviet era, Hungary was also ahead of its time in offering long-term asylum to political refugees. Cardinal József Mindszenty was the leader of the Catholic Church who was imprisioned and then lived in the US Embassy in Hungary for 15 years before being allowed to flee in 1971. Does this sound familiar?

I found Budapest a very walkable and livable city. It has hundreds of outdoor cafes packing dozens of pedestrian streets; something that we so desperately lack in the States. It has a terrific riverfront on the Danube with bikeways galore and an island park in the middle of the river that has my favorite water park ever. And speaking of water, there are dozens if not hundreds of thermal baths that span centuries. You can see why I enjoyed my time there so much.

Ostensibly, I was there on behalf of Balabit to meet with their executives and see their products and story. The company is behind the open source log aggregator syslog-NG and other security products, and has been in business for more than a decade. But while I was there I also met with other IT firms, including Electool.com, Graphisoft and Metta.io, and also visited with Prezi.com.

Prezi, the alternative SaaS-based presentation delivery tool is one of three software companies to have become an international success, along with LogMeIn and UStream. The three of them originated in Budapest and still have decent-sized development offices there.

Of the three, LogMeIn is a public company, while Prezi and UStream are private. All three have attracted tens of millions of dollars in A-list Silicon Valley venture funding. UStream and LogMeIn both have several offices around the globe in addition to the ones in Budapest and America.

The three firms got together to recently produce the well-attended RAMP conference about how to scale up your software architecture, bringing in experts from around the globe to Budapest.

And founders of the three firms have also put together their own nonprofit called Bridge Budapest to offer fellowships and internships at major software companies to Hungarians, and for the rest of us to come to Budapest and intern at one of their companies.

IMG_1057While I have tried Prezi several times over the years it has been around I never have been able to gain much traction with the tool. Maybe it is just the way I work or my speaking style. But their offices are an interesting twist on the typical tech startup playground: they have recently moved into a Beaux-Arts building with the top floor a former telephone equipment room. It is a fitting place for a modern tech startup.

Tech isn’t the only thing happening in Budapest. I met an agribusiness manager one night. He just moved his family from the Midwest to Budapest. His company does a lot of business in Eastern Europe and Russia, and wanted a stable place to have an office. “To Western Europe, we don’t look all that stable a country,” said another entrepreneur to me. “But to the east, we look rock solid. It is a nice position to be in.” Hungary is in the EU but doesn’t use the Euro: its currency is the Forint which sounds very Princess Bride-like charming to me.

Budapest is also home to the Soros-backed Central European University. It was the first on the continent to offer an American-style MBA several years ago and now has a budding entrepreneurship program, a business incubator and courses that seem quite current with promoting startups and what one could find in the States.

Speaking of schools, if you know someone who is a CS/EE student and is looking to study abroad, take a gander at this program that is offered by the Aquincum Institute of Technology (and where Rubik himself teaches).

I asked several people about the tax situation in Hungary and got a range of responses. One source told me, “our tax and legal system is so wonky,” and complained that half of one’s salary is taken in taxes. Another source said while this is true, the tax rate is less than it has been in recent years, so things are improving.

If you have a chance to visit, I think you will be as excited as I was. And if you would like an introduction to the companies that I mentioned, let me know.