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April 24 2010


Ditch the Biz Plan, Buy a Lottery Ticket

Hardly a day goes by when I don’t have a rookie entrepreneur ask for advice on raising money from VCs. They usually have a fancy-looking business plan with detailed spreadsheets showing how their company will be worth billions by capturing just 1% of a market. All they need is some financing, and they’ll take the world by storm. My advice is always the same: ditch the business plan, and buy a lottery ticket. Your odds are better, and you’ll suffer less stress.

Most of the young entrepreneurs I meet have grown up reading stories about how, during the dot-com days, all you needed was a PowerPoint and a geeky smile to get a venture capitalist to throw millions your way. True, some really dumb companies were funded during those days, but nearly all of these companies (and their investors) went down in flames. It was just the few, random, successes that reaped the fortunes. Investors have grown much wiser since then (and will probably stay this way until the next bubble).

The reality is that the vast majority of startups don’t receive any VC or angel funding. Ask any VC about how many business plans they receive every month; it is in the thousands. And how many of those companies do they fund? Maybe one or two. Not great odds, are they? My research team did a study of successful companies in a variety of high-growth industries (in which VCs like to invest): those that made it out of the garage and had real products and revenue. We found that only 10.8% of them raised venture capital at any stage of their growth. In other words, nine out of ten didn’t get venture financing. Similarly, only 9.2% received angel financing.  Here is another interesting statistic: according to the Venture Economics database, only 4.6% of venture capital went, over the last decade, to startup/seed-stage companies. So even the one in ten that received venture financing likely got this in later stages of its growth, not at the seed stage.

Where did successful companies’ founders get their financing from? Seventy percent used personal savings, 15% took bank loans (probably on their credit cards), and 14% relied on friends and family. (Note: they typically use more than one source for financing.)

The way the system works is that if you build something of value, the money will find you. Yes, there is a catch-22: you need seed financing, but no one will give you a cent until you have a marketable product and your company is producing revenue—which means that you don’t really need the money. But that’s the way it goes. Ironically, raising millions of dollars is usually easier than raising thousands.

I’ve founded two tech companies, and we raised close to $100 million in private and public financing over the years. I bootstrapped my second startup up to the point that I had VCs tripping over each other to fund it. My advice for entrepreneurs in industries with relatively low capital costs (like internet/software) is to bootstrap. Of course, you can start by trying raising venture or angel capital when you have just an idea (you never know, you might get lucky); but don’t waste too much time on it. And don’t get discouraged if they turn you down; you are in the majority. Instead, focus on validating your idea, building it, and selling for survival. You’ll have to raise the money to get started by begging and borrowing from family and friends. Be prepared to dip into your savings and credit cards, obtain second mortgages, and perhaps look for consulting work or customer advances.

There is no single recipe for bootstrapping a company, but there are some essential ingredients. Here are some pointers:

  • Share your ideas with those who have done it before. You can learn a lot from the experiences of seasoned entrepreneurs, and they are much more approachable than you would think.. If you can’t find anyone who is excited about your idea, the chances are it isn’t worth being excited about. It may be time to reflect deeply and come up with another.
  • Find a way to connect with your market. Speak to potential customers, analysts, business partners—anyone who can help you understand your target market. If you can sell customers on your concept, maybe they’ll help you fund it or agree to be a test site or a valuable reference. Customers don’t usually know what they want, but they always know what they don’t need. Make sure that there is a real market for your product.
  • Start small. Your idea may be grand and have the potential to change the world, but you are only going to do that one step at a time. Look for simple solutions, test them, and learn from the feedback. If you’re starting a restaurant, work for someone else first. If you’re creating a software product, learn by doing some consulting assignments or create some utilities. You don’t have to start with the ultimate product.
  • Focus on revenue and profitability from the start. Watch every penny. Find creative ways to earn cash by selling tactical products, prepaid licenses, or royalties. Pay employees partially in stock. And sweep the floors yourself. Look for free or leased hardware and lab facilities—from universities, government subsidized incubators, friends—any which way to avoid capital costs.
  • Remember the importance of cash flow. This means setting aside the big opportunities while you complete small deals with a short sales cycle and recurring revenue.
  • Think outside the box. There is always a better way to solve a problem. There is no point in following the path of others; you’ll find yourself battling established competitors on their turf.
  • Learn to sell. To succeed in life, you have to persuade people to give you what you want, and you achieve this by convincing them you’re offering something good for them. As an entrepreneur, you’re always selling—whether you are marketing your product, recruiting talent, or raising capital (read this).
  • Prepare for the worst. It’s going to take longer than you think. There will likely be product problems, unhappy customers, employee turnover, and lots of financial challenges. You may even fail a number of times before you achieve your goals. By learning from each success and failure alike, you increase the odds that you eventually make it.
  • Never forget the importance of ethics and integrity. Ethics need to be carefully sown into the fabric of any startup (read this). Once you sell your soul for short-term gain, you never get it back. Also, focus on customer success. The only way to reach long-term success is by achieving outstanding customer satisfaction.

You’ll find that it is much easier to raise capital after you’ve had success. In our research, the percentage of company founders who raised venture capital increased from 10.8% to 26.3% after they had started a few companies. This isn’t surprising: by this time, you have experience and, with luck, some savings; you’re street-savvy and have good industry contacts; and you don’t need venture capital—that’s when you become most attractive to VCs and they come knocking on your door.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

April 10 2010


How To Be Happy At Work…And To Deal With That Jerk Boss

In my last post, I wrote about how education can boost workforce productivity and lead to greater corporate success. But there is actually an even more potent ingredient for boosting productivity: happiness. According to author and business coach Alexander Kjerulf, the Danes have a word for happiness at work: arbejdsglæde (and if you want to stay happy, don’t try to pronounce that).  Kjerulf says that this concept is deeply ingrained in the Scandinavian work culture. It’s about enjoying what you do; feeling proud of your work; knowing that what you do is important and being recognized for it; having fun; and being energized.

When workers achieve arbejdsglæd, the business benefits from higher productivity, because happy people achieve better results; higher quality, because happy employees care about quality; lower absenteeism, because people actually want to go to work; and less stress and burnout, because happy people are less susceptible to stress. Not surprisingly, all of this leads to higher sales, better customer satisfaction, more creativity, and higher profits for the business.

Sounds like some kind of Nirvana or Disneyland, doesn’t it? After all, who doesn’t want to be happy? And how can one be happy at work when the boss is a jerk, the company doesn’t care for its employees, and the job simply sucks? One of my old friends, Professor Srikumar Rao—who is the best marketing person I know—just wrote a book on this. He has some very interesting remedies.

For example, what do you do about the jerk boss? Srikumar says that by allowing him to leave you a “quivering mess of indignation, resentment and frustration” you’re handing the keys to your happiness over to him.  Remember that he may have control over what you do at work. But he has no control over your emotional well-being unless you let him have it. Just look at your boss and see the mess of emotions that slosh through him: anger, insecurity, fear, and jealousy. Now consider this: You only have to deal with him a few hours a week. He has to live with himself for his whole life.

Did you smile as you considered this? Good. That is important, because in that smile is the seed of compassion. That is the start of seeing him as a human being, caught in his own predicament, and not solely as an impediment to your well-being. And when you learn to deal with him on that level rather than relating to him in his role as “boss”, the dynamics of the relationship change.  It sounds simple, but it is very powerful. Srikumar says that when people start thinking like this, they lift the once totally toxic interactions to the “I can survive this” level and even to the “He’s not bad at all” level.

It is easy to look at all the things that are wrong with your job. But instead of being despondent at work and focusing on the two or three things that you think are wrong with your job, try thinking about the twenty or so things that are good about it. Try making a list of all that’s good about your job, including the fact that you have one. Don’t think it; FEEL the gratitude. Let it well up and surround you and overflow. It takes some practice, but you can get there. Now from this space tackle the problems you are facing. They no longer seem so formidable, and the odds are great that you can tackle them more effectively.

You may feel as if you are kidding yourself when you try hard to focus on what is “good” about your job, but you are indulging in exactly the same mental gymnastics when you are preoccupied with what you “dislike” about it. So you may as well invest your emotional energy in ways that make you feel and function better.

Another important lesson: You always get to pick the way you see the world.

In the early stages of a start-up, an entrepreneur was irritated by employees who bothered him with “trivial” issues. He reacted with sarcasm and brusqueness and even by blowing up. His view was that his time was “important” and they should be able to take care of such issues themselves. After several of his key people departed, he woke up and changed his ways. He consciously trained himself to view each such interaction as an opportunity to forge a relationship with the employee and to reinforce his idea of company culture with emphasis on independence and innovation. Not only did turnover drop; some of those who left came back.

Srikumar’s advice strikes a chord with me. When I was preoccupied with the many problems that beset any growing company, I was sometimes far from ebullient, and this brought down the morale of the entire company. My own experience has taught me that those who choose to view life as a learning opportunity to take responsibility for their own actions are also the most confident and the happiest. They are the ones who build enduring companies.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

March 27 2010


Why America Needs To Start Educating Its Workforce Again

Ask any old-time IBMer, and you will hear stories of IBM’s legendary workforce-development practices. When a manager identified a manufacturing worker with promise, the company would teach him how to dress, how to speak to clients, and how to service products. These technicians would then be trained to be computer programmers, sales reps, or product managers. IBM president Thomas Watson, Sr., considered education so important that, in 1932, he started a mini-university for employees, the Endicott schoolhouse.

That was until the ’70s. IBM still provides good training, but try getting a job there today: unless you have just the right skills, you won’t even score an interview. New recruits don’t receive the year or so of training that was common; they get a few days of orientation, after which they’re expected to be productive. It’s the same at Microsoft, Google, Apple, and almost every tech company. Unless you have the alphabet soup of technologies on your resume, you’ll get nothing more than an auto-response to your job application. If you do get hired, it’s up to you to stay current or get booted out with the first dip in sales. American corporations consider their workforce to be disposable — like ball-point pens and cigarette lighters. Gone are the days when a company would train a factory worker to become a computer programmer or offer lifelong employment. It’s all about quarterly revenue and profits now.

Large corporations do offer some employee training programs, but managers often discourage their workers from participating in them. Why invest in workers when there is no clear payback? After all, training requires time off, and costs the department money. And bosses fear that once their subordinates gain new skills, they will be more likely to jump ship — to a better-paying competitor. That’s the common belief.

But as lessons from the unlikeliest of places show, these assumptions are wrong. Workforce education increases productivity, decreases turnover, and leads to greater corporate growth. I was myself surprised to see this correlation when I researched the secrets of the success of Indian industry.

Industry pundits often tout India’s engineering-graduation rates as India’s advantage. As far back as 2002, “experts” claimed that India graduates 350,000 engineers every year. The reality is that India has a weak education system and produces far fewer engineers than is commonly believed. In 2002, it graduated 102,000 engineers. By 2006, this number had increased to 222,000 (and will be double that again, by 2011). India does have some excellent engineering schools, but at best, only half of the output of India’s engineering colleges are employable upon graduation. Yet in 2007, India’s five largest IT services companies added 120,000 engineering jobs. IBM and Accenture added 14,000 engineers each in India in the same year. That’s only seven of the hundreds of companies that hired engineers that year. Where did these engineers come from, and how is it that India’s R&D industry is booming?

My team made several trips to India during 2007 and 2008 and met the executives of dozens of leading companies to solve this puzzle. We also interviewed workers in R&D labs and reviewed the types of work they were doing. We were astonished at what we learned. I’ll explain.

During the 1960s and 1970s, the Japanese achieved major advances in manufacturing management, which led to their rise as an economic power. The Japanese economic miracle and the country’s new manufacturing skills and methods surprised western firms; but the Japanese had done this by studying, adopting, and eventually perfecting the best practices of the West itself.

My research team (at Harvard and Duke) found that India is achieving similar feats in workforce development by learning from the best practices of the western companies that have outsourced their computer systems and call centers there. It has adopted these practices and perfected them. Faced with severe talent shortages; escalating salaries; and a lagging education system, Indian industry had to adapt and has built innovative and comprehensive approaches to workforce training and management. Their initial focus was on training new recruits and filling entry-level skill gaps. Now, they are investing in constantly improving the skills and management abilities of their workers and in providing incentives for them to stay and to grow with the company.

We published a report titled “How the Disciple Became the Guru”, which details the workforce-development practices of 24 leading companies in India (note: there are many bodyshops in India that don’t invest in their people, we looked at the biggest companies). I suggest you download and read this, but I’ll present some highlights here of what the best Indian companies are doing right.

Recruitment: When you’re looking for a job, what’s the first thing you do? Create a good résumé. What does a good résumé tell about a person?  Simply the ability to write a good résumé. The résumé doesn’t reflect skill, potential, or aptitude. Indian companies figured this out long ago. So they started putting applicants through batteries of psychometric tests and rigorous interviews. They hire for general ability and aptitude, rather than specialized domain and technical skills. Indian companies also learned to cast a wider net when looking for people with potential. Instead of hiring only from elite engineering colleges, technology companies such as Infosys, HCL, and TCS recruit from second- and third-tier colleges all across the country, and also in arts and science schools. India’s largest call-center operator, Genpact, has set up branded storefronts in 19 cities, where applicants can learn about the company and apply for a job; no resume required.

New-employee training: Companies in India assume that new recruits will have to be trained practically from scratch. So most large companies have built dedicated learning centers, and some employ hundreds of training staff. The Infosys Global Education Centre at Mysore can train 13,500 people at a time. New recruits attend a 16-week boot camp that strengthens their technical, communications, and management skills. For its arts and science recruits, TCS provides an additional three months of training. That’s right: fresh recruits get four to seven months of training before starting work.

Continuing training: Employees are typically required to participate in a wide range of education programs, including not only technical and domain training but also a wide range of soft skills and management skills encompassing training in quality processes; communication; and cultural, foreign-language and personal-effectiveness skills. It is common for companies to mandate one to four weeks of yearly training for employees. That is more than the vacation time that many Americans get. And these workers get rewarded for improving their skills: career advancement and salary increases are usually tied to the completion of training.

Companies don’t just offer online courses. They have programs of mentorship by senior executives; peer learning and knowledge sharing; and job-rotation programs. Take the example of Cadence India.  Its CEO, Jaswinder Ahuja, instituted a “leaders as teachers” program under which every manager is required to spend one to two weeks teaching internal classes. Not even the CEO is exempted from this rule. Training is considered so important that the most senior executives do their part. Trainers are often the most skilled and successful employees rather than those who couldn’t cut it in customer engagements.

Managerial development: Managers are typically groomed through fast-track programs that provide management training and mentorship to highly performing employees. Preference is usually given to internal staff to fill management openings. (Yes, many companies have a policy that insiders get first dibs at management jobs). The formal training curricula include project-management, team-building, people-management, communication, coaching, and other managerial skills. On-the-job learning is provided through a variety of structured developmental experiences: job rotations, early managerial responsibilities, cross-functional projects and experiences, and intrapreneurship initiatives.

There was a time when Indian companies were so desperate to hire western-trained and -educated managers that these people would command premium salaries. Today, companies find that they can hire better talent locally. Gone are the big salaries. Returnees to India with too much management experience from abroad can have a hard time even finding a job in India.

Performance management and appraisal: Companies use ERP-like systems to manage the human-development process. Employees usually get reviewed at the end of every project. They are prescribed training if found to have weakness. (Yes, the performance review is used to guide development, rather than to protect the company from lawsuits in case they need to fire you).

Mechanisms such as 360-degree reviews (wherein you review your bosses and peers) and balanced-scorecard reviews are widely used. Managers are evaluated on a variety of non-financial measures, including employee satisfaction, attrition rates, and mentoring.

Where is the proof that these policies work?

The myth is that Indian IT companies have high turnover that is and getting worse. As the graph below shows, at a time when the Indian IT industry’s growth rates averaged a dizzying 40%, attrition rates at top Indian companies fell, or stayed in the low-teen percentages. Compare this with Silicon Valley, where a typical recruit works for a new employer for three to five years at best — which translates to a 20–33% attrition rate. (Indian IT company rates dropped even further in 2009 — not reflected in the chart).

Most interestingly: Indian companies learned that with better education, employees became more productive so they could afford to pay  higher salaries without hurting corporate profit margins.

Additionally, the Indian R&D industry has been moving into the higher realms of innovation. In the aerospace industry, Indian companies are designing the interiors of luxury jets, in-flight entertainment systems, collision-control / navigation-control systems, fuel-inverting controls, and other key components of jetliners for American and European corporations. In pharmaceuticals, Indian scientists are discovering drugs and performing clinical research for nearly all of the largest multinational drug companies. In the automotive industry, Indian engineers are helping to design bodies, dashboards, and power trains for Detroit vehicle manufacturers — and creating their own innovations, such at the Tata Nano car. In telecommunications and computer networking, Indians are developing next-generation infrastructure for tomorrow’s intelligent cities. There are over a hundred thousand people in India doing this type of advanced R&D.

The Indian experience highlights what can be achieved by investing in upgrading the skills of the workforce. If workforce training can take the output of an education system as weak as India’s and turn its graduates into world-class engineers and scientists, imagine what could be done with a worker base that has received amongst the best education in the world, as is the case in the United States.

U.S. companies have long played the guru, developing and disseminating many widely adopted management and workforce practices. The time has come for the guru to learn from one of its disciples: India.

March 20 2010


Integrating Ethics Into The Core Of Your Startups: Why And How

When I came to the U.S. in 1980, I was young and naïve. I used to think that corruption and ethical lapses were just a third-world ill. Eventually, I became a tech CEO and learned the harsh realities of American business. Yes, standards are much higher, and breaches are punished, but the temptations are just the same here as they are in any other country. Ethical lapses (which are a form of corruption) are quite common.  You watch stories about these on TV every other day and read about them on TechCrunch.  It was the ethical lapses of our financial institutions that threw our economy into a tailspin, and for which we are paying the price, after all.

It is best to be aware of the temptations and to prevent the lapses from occurring. As Enron, Bernie Madoff, and Lehman Brothers have shown, it’s a slippery slope. Once you start compromising your values for short-term gains, there is no turning back. Business ethics are not something you need to start worrying about when your company reaches a certain size; they need to be sewn into the fabric of your startup from the get-go. The lessons are the same for tech businesses as they are for investment banks and for third-world economies.

Harvard Business School professor Michael Beer researched the difference between companies that perform at high levels for extended periods and those that implode when they reach a certain size. When analyzing the spectacular failures in the recent financial meltdown, he found that:

• Of the original Forbes 100 (named in 1917), 61 had ceased to exist by 1987.  Of the remaining 39, only 18 stayed in the top 100, and their return during the period 1917 to 1987 was 20% less than that of the overall market.

• Of companies in the original Standard & Poor’s 500-stock index of 1957, only 74 remained in 1997; of these, only 12 outperformed the S&P 500 in the period 1957 to 1998.

• The average CEO tenure in the U.S. is 4.2 years, less than half the 10.5-year average in 1990.

Beer posited three core reasons for the failure of so many Wall Street firms in the fall of 2008: the firms lacked a higher purpose (in other words, they were focused on short-term gains, profits, and bonuses); they lacked a clear strategy; and they mismanaged their risk. Companies like Charles Schwab and US Bancorp were able to avoid the fallout by having a laser-like focus on customer service and on honesty and transparency. Neither company touched the subprime mortgage securitization market, because they saw it as risky and simply not the kind of business that served the company’s long-term interests.

Even outside Wall Street, companies like Cisco Systems, Southwest Airlines, and Costco Wholesale, with the strongest sense of higher purpose, achieved the greatest success. Take Costco. Wall Street analysts have long chastised Costco’s management for paying high wages and keeping employees around for a long time, because this results in higher benefits costs. But the company’s CEO, Jim Sinegal, lives by his belief that keeping good employees is strategic for Costco’s long-term success and growth. The company’s per-employee sales are considerably higher than those of key rivals such as Target and Wal-Mart; customer service at the stores is phenomenal and fast; and Costco continues to expand, both in number of warehouses and in products and services for business and consumer customers. The culture of the company flows downward from Sinegal and his focus on employees and, by extension, to customers.

One of the problems that Beer found with the failed banks was that their employees lacked the ability to “speak truth to power”. Employees felt intimidated by superiors; the institutions’ internal voice of conscience and purpose was silenced by a maniacal focus on short-term profits and whatever scheme would bring them in. The silencing of employees who sought to challenge strategy and risk-management practices likely also undermined the banks’ moral authority and emboldened those who already felt inclined to do the wrong thing. With a muted internal voice, these organizations lacked a moral compass. As a result, they drove off a cliff with astonishing speed.

The same things happen in Silicon Valley companies.  I asked management guru — and head of the CEO Institute of Yale School of Management — Jeff Sonnenfeld for his advice on how startups can sow the seeds for building a Cisco or Costco. Here is Jeff’s advice:

1)  Create a culture of openness and welcome dissent – Internal constructive critics are your best friends — too often, founders are blinded by their own enthusiasm for their creative vision and then are surrounded by sycophants, kissing up. Founders who fall out of touch rapidly lose their ethical bearings. At Intel, founder Robert Noyce and Gordon Moore did not look for sycophantic followers in selecting the brilliant, contentious, but relentlessly honest Andy Grove as their colleague and successor. Similarly, Craig Barrett and Paul Otellini have consistently fought for different points of view internally — without undermining the enterprise, and always reinforcing Intel’s self-critical core ethic.

2)  Lead by example.  The authenticity of the leader’s character is essential — if colleagues don’t believe you, they will not take needed risks on your behalf — such as training subordinates to be able to do their own jobs.  Startups are often defined by the hip clichés of VC firms, adoring press, and HR consultants — but the startups don’t really practice what they preach.

3)  Learn from immediate peers or distant models. Too often, founders atrophy because they believe that the unique quality of their business or technological mission means that they too are truly unique in leadership values.  Steve Jobs has patterned himself after Polaroid founder Ed Land — and tried to learn from Land’s strengths and weaknesses.  Henry Ford regretfully once claimed “History is bunk” but in reality revered Thomas Edison.  Michael Dell put legendary tech entrepreneur (Teledyne) and educator Dr. George Kozmetsky on his board right from the start to learn from this brilliant then septuagenarian.

4)  Recognize your own fallibility as a leader, know your limits, and beware of the myth of immortality.  Entrepreneurs often are horrified at the thought of leadership succession. The founders of great firms such as Google, Cisco, Amgen, and Microsoft have known that they would need to prepare for a day when they no longer could be the lone day-to-day internal boss, primary external ambassador, and symbolic cultural icon. The founder of the original (pre-Starbucks) coffee house chain Chock-Full-o-Nuts started his first café on Broadway 43rd Street in 1923 and was a great national success.  Sadly, sixty years later, as a dying man who had been flat on his back for two years at Massachusetts General Hospital in Boston, he still clung to the job of leader of the enterprise, his full-time physician serving as acting president.

5)  Remember that institutional character — like a liquid cupped in your hand — is fragile; easily lost; and hard, if not impossible, to regain. Egomaniacal moves, personal grandiosity, greed, and deception create impressions that are hard to erase.  Whole Foods founder, John Mackey, sabotaged the integrity of his own exalted brand, damaging the company’s internal pride and customer admiration far more badly than any competitor could have, due to his self-inflating and his misleading “anonymous” blogging, hiding his identity through an anagram of his wife’s name, “rehodab.”

I’ll add another very important point: Establish an independent board. Venture firms often demand a majority of board seats as a condition for their investments. Conflicts invariably arise. The board begins to serve the needs of VCs and management, rather than of the company itself, which loses the independent voice to warn it not to do the wrong things. The inconvenient truth is that all board members have a fiduciary duty to act in the interests of the company, and not in their own interests. Board members must not engage in transactions in which they or their partners stand to gain. They are legally required to avoid these conflicts of interest.

Finally, remember that in business, you have to make tough choices at every juncture. Though business decisions usually have clear consequences and outcomes, ethical decisions are always hard. Making the right choice doesn’t always bring success, but ethical lapses almost always lead to failure. No matter what the consequence, doing what’s ethical and right is always the better long-term strategy.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

March 06 2010


Replicators, Innovators, and Bill Gates

My last post triggered some interesting debates in the blogosphere about whether entrepreneurs were a product of nature or could be nurtured. It’s not black or white. People are a product of their upbringing and education. Average humans can achieve extraordinary feats when they really try. I’ll concede that, like some great athletes, some great entrepreneurs may have something different about them that gives them a special advantage (this is a topic that I am presently researching). But not every entrepreneur needs to reap the same fortune as Bill Gates or Mark Zuckerberg to qualify as a success. You can build a good lifestyle business that pays the bills, or that does good for the world, and be considered a successful entrepreneur. (And you’ll probably be happier and gain more respect than most billionaires do.) Entrepreneurship isn’t all about the IPO.

I hold steadfast to my belief — based on my experience in building two great technology companies and in mentoring around 200 entrepreneurs over some years and on what I’ve learned from my academic research into the background and motivations of entrepreneurs — that entrepreneurs can be made. People born into entrepreneurial families may have the advantage of knowing the ups and downs of business, and, all else being equal, people from entrepreneurial families are certainly more likely to become entrepreneurs than others are. But the skills required to build, manage, and grow a business can be learned, and this education can level the playing field. VCs who judge entrepreneurs based on age, sex, ethnicity, or family background are doing their limited partners, and society, a great disservice.

There was one criticism of my last post that caused me to do serious introspection.  The question: was Bill Gates’s dad an entrepreneur? I cited Gates Jr. as an example of an entrepreneur who didn’t come from an entrepreneurial family. A number of readers, including Jason Calacanis, pointed, out that Gates Sr. was a partner in a law firm, and so an entrepreneur, arguing that my citation was therefore faulty.

I’ve debated and written about this issue before. The broader question is whether anyone who starts a business, whether it is a law practice, a computer consulting firm, or a dry-cleaning store, is an entrepreneur. Management guru Peter Drucker would have answered with a definitive No. He wrote, “Not every new small business is entrepreneurial or represents entrepreneurship… entrepreneurs innovate. Innovation is the specific instrument of entrepreneurship.” Drucker didn’t mince words.

When I told this to some of my friends, I heard loud protests. Murali Bashyam, who started an immigration-law practice, insisted he was as much an entrepreneur as Bill Gates and his dad. Murali threatened, “if you decide that I’m not an entrepreneur, I might decide that the daily stress of growing and running a business, financial risks involved, and all the other headaches that come with creating something out of nothing is just not worth it. Maybe I’ll close up and go work for someone, where I can earn a steady and high salary and go home at 5 pm”.

Similarly, Sue Drakeford, who was Miss Nebraska 2001, had started a production company to host its own pageants and teach other African American women like her to gain the confidence and skills to compete in the real world. She wanted to provide a wholesome alternative to what she called the “cold-blooded cutthroat world of modeling and beauty pageants”.  But Sue was working full-time at a bank and ran this business on the side. Was she an entrepreneur?  Sue insisted she was.

After agonizing over this for weeks, I went to my friends at the Kauffman Foundation, and they referred me to their book titled “Good Capitalism, Bad Capitalism”. Carl Schramm and Bob Litan wrote that all who take the risk are entrepreneurs, but that there are two types of entrepreneurs: “Replicative entrepreneurs”, who constitute the vast majority of small businesses (such as restaurants and dry cleaners), and “innovative entrepreneurs” — the rare few who bring new products/services to market or who pioneer new production methods (such as Walmart, eBay, and Dell).

Under the Kauffman definition, Sue would qualify as an “innovative entrepreneur”, because she is developing new services and pioneering new methods. In contrast, Murali would be a “replicative entrepreneur”, because he delivers a standardized service in a field that charges primarily by the hour for its time. Murali could well end up running a huge law firm and be worth many millions, but that doesn’t make him particularly innovative in his business model.

So Bill Gates Sr. was a “replicative entrepreneur”, and Gates Jr. was an “innovative entrepreneur” — whom Silicon Valley calls an “entrepreneur”. TechCrunch founder, Mike Arrington, who used to be a lawyer for Wilson Sonsini Goodrich & Rosati, would qualify as an “innovative entrepreneur”, because he created a new product (a blogging site) and was a pioneer in the new-media world.

You can bring innovation to “replicative” fields as Arrington did. Take the example of SunRun. The company installs solar cells — which is as mundane or “replicative” a business as you can get. But its CEO, Edward Fenster, developed a new business model under which his company installs solar panels on a customer’s house for little to no upfront cost and only charges for the power that customers use.  SunRun also insures, maintains, repairs, and monitors the system, and provides a money-back guarantee on the system’s energy production. This has made solar power available to the masses at an affordable cost and the company has become largest residential solar company in the country, operating in five states, and growing at more than 400% per year.

Another great example I’ve seen of an entrepreneur who has innovated in a replicative industry is Nand Kishore Chaudhary. He brought automation, supply-chain management, and professional business practices to the mundane process of carpet weaving and distribution in the desert state of Rajasthan, India.  By implementing modern production practices and ERP technology, he was able to grow a small business, Jaipur Rugs, that he’d run from his home into a world-class production and distribution company, which employed 40,000 workers and generated $21 million in revenue in 2008. This is in a land where PCs were, until recently, as scarce as rainwater.

What’s the moral of the story? Don’t listen to the naysayers who are simply defending their informed views and biases by telling you that it’s nature or some special DNA that makes entrepreneurs or leads to entrepreneurial success. Don’t even be discouraged if you’re in a mundane, replicative industry. You can learn the skills needed to become a successful entrepreneur, and you can innovate.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

February 27 2010


Can Entrepreneurs Be Made?

Silicon Valley investors often have a picture in their heads of the type of person who is worthy of funding: young, brash, stubborn, and arrogant. They believe that successful entrepreneurs come from entrepreneurial families and that they start their entrepreneurial journey by selling lemonade while in grade school. Angel investor and entrepreneur, Jason Calacanis said as much in his recent talk to Penn State students. And after meeting Wharton students, VC Fred Wilson expressed shock when a professor told him that you could teach people to be entrepreneurs. Wilson wrote, “I’ve been working with entrepreneurs for almost 25 years now and it is ingrained in my mind that someone is either born an entrepreneur or is not.”

Jason, Fred, and Silicon Valley VCs, I’ve got news for you: you’ve got it all wrong. Entrepreneurs aren’t born, they’re made. And they aren’t anything like you think they are. My team surveyed 549 successful entrepreneurs. We found that the majority didn’t have entrepreneurial parents. They didn’t even have entrepreneurial aspirations while going to school. They simply got tired of working for others, had a great idea they wanted to commercialize, or woke up one day with an urgent desire to build wealth before they retired. So they took the big leap.

We found that 52% of the successful entrepreneurs were the first in their immediate families to start a business — just like Bill Gates, Jeff Bezos, Larry Page, Sergei Brin, and Russell Simons (Def Jam founder). Their parents were academics, lawyers, factory workers, priests, bureaucrats, etc. About 39% had an entrepreneurial father, and 7% had an entrepreneurial mother. (Some had both.)

Only a quarter caught the entrepreneurial bug when in college. Half didn’t even think about entrepreneurship, and they had little interest in it when in school.

There was no significant difference between the success factors or hurdles faced by entrepreneurs who were extremely interested in entrepreneurship in school (and who likely set up the lemonade stands) and the ones who lacked interest. But entrepreneurs with extreme interest started more companies and did it sooner. Of the 24.5% who indicated that they were “extremely interested” in becoming entrepreneurs during college, 47.1% went on to start more than two companies (as compared with 32.9% of the overall sample). Sixty-nine percent started their companies within 10 years of working for someone else (as compared to 46.8% of the rest of the sample population).

What did affect their successes?  Education — but not the college they graduate from. In a different study of the 652 CEOs and CTOs of 502 tech companies, we researched the correlation between education and the sales and headcount of companies founded. We learned that the there was a significant difference between companies started by founders with just high-school diplomas and the rest. Education provided a huge advantage. But there wasn’t a big difference between firms founded by Ivy-league graduates and the graduates of other universities.

The education and training of entrepreneurs is something that the Kauffman Foundation has been researching extensively. Over the last six years, it has invested around $50 million on academic research to understand what makes entrepreneurs tick and what policies are most conducive to entrepreneurship and to construct data bases to permit analyses of these subjects. (Kauffman has also funded some of my research at Duke, UC-Berkeley, and Harvard.) Its VP of Research, Bob Litan, says that Kauffman has learnt conclusively that entrepreneurship can be taught. The key is to provide education at “teachable moments” — when the entrepreneur is thinking about starting a venture or ready to scale it. What entrepreneurs need isn’t the type of abstract course they teach in business schools, but practical, relevant knowledge.  That’s why Kauffman created a program called Fast Trac, which has trained 300,000 entrepreneurs so far.

One of the findings of Kauffman research is that of the appx. 600,000 businesses that are started every year, less than a fraction of 1% become high-growth “scale” businesses. These new firms, especially the “scale” firms, have added all of the net incremental jobs to U.S. economy since 1980 (about 40 million), and probably account for about 1/3 of GDP growth since then. So the key to boosting economic growth is to increase the number of successful high-growth startups.  After all, the growth rate of our economy is nothing more than the aggregation of the growth of our firms.

That is why Kauffman (which has a $2 billion endowment) is investing heavily in an ambitious new program called Kauffman Labs.  This aims to dramatically increase the ability of small businesses to become big businesses. The Labs program is built around a novel idea: that highly motivated individuals with “scalable ideas” can be recruited to be entrepreneurs and to be made successful, by surrounding them with a network of other experienced entrepreneurs; sources of money; and mentors. The goal is to educate entrepreneurs and surround them with a powerful network. This is like a Y Combinator on steroids.

Anecdotal evidence also shows that there are many more factors at play than that of genes. Note this BusinessWeek article about waves of spinoffs from Google. I doubt that all of these Google employees who are starting successful businesses were born with entrepreneurial genes. VC and former entrepreneur Brad Feld also blogged about how many of his frat buddies at MIT had become successful entrepreneurs. Were all of these people born to be entrepreneurs as well? I don’t think so. It is probably education, exposure to entrepreneurship, and networks that led these people to pursue the entrepreneurial path — which means that Kauffman Foundation may have hit on the right idea with Kauffman Labs.

The reason this topic is really important is that, as Wilson writes, “Venture Capital is a lot about pattern recognition”. The reality is that VCs like him make quick judgments about people based on the stereotypes in their minds. So, like the women that I wrote about in my previous posts, we may be disadvantaging another important segment of our population – a segment that is older, more humble, more sensible, and more realistic than the population that is getting all the attention (and the money).

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

February 21 2010


A Fix for Discrimination: Follow the Indian Trails

Women, Hispanics and blacks have always been underrepresented in the ranks of the Valley’s tech companies.  A new analysis by the Mercury News shows that from 2000 to 2008, the proportion of women tech workers in Silicon Valley dropped from 25.3% to 23.8%, and that the national numbers dropped from 30% to 27.4%.  In 2008, blacks and Hispanics constituted only 1.5% and 4.7% respectively of the Valley’s tech population — well below national tech-population averages of 7.1% and 5.3%. It seems that the problem I highlighted in my last post on the dearth of tech women is actually getting worse, particularly in Silicon Valley.  And it’s not just the women who are being left out, but also important minority groups.

Is the Valley deliberately keeping these groups out?  I don’t think so.  Silicon Valley is, without doubt, a meritocracy.  In this land, only the fittest survive.  That is exactly the way it should be.  For the Valley’s innovation system to achieve peak performance, new technologies need to constantly obsolete the old, and the world’s best techies need to keep making the Valley’s top guns compete for their jobs.  There is no room for government mandated affirmative action, and our tech companies shouldn’t have to apologize for hiring the people they need.  But at the same time, without realizing it, the Valley may be excluding a significant part of the American population that could be making it even more competitive.  False stereotypes may be getting in the way of greater innovation and prosperity.

Consider the data that I highlighted in my earlier post.  It wasn’t always like this, but girls are now matching boys in mathematical achievement.  In the U.S., 140 women enroll in higher education for every 100 men.  Women earn more than 50% of all bachelor’s and master’s degrees, and nearly 50% of all doctorates.  The companies they start are more capital-efficient, produce higher revenue, and have lower failure rates than those led by men.  Yet women are still a rare commodity in the ranks of tech CEOs and CTOs.

How do we fix the “hidden biases” and discrimination?  The experts I’ve spoken to have many great ideas.  They suggest we create role models, provide mentorship and financing, and teach entrepreneurship. Foundry group’s Brad Feld says that simple acts of encouragement from parents, teachers, and peers would make a big difference.  Cindy Padnos, of Illuminate Ventures suggested a solution that particularly resonated with me.  She says that women should follow the trail mapped by Indian entrepreneurs (no, not the American natives, but my kind: the immigrants).

Thirty years ago, there were hardly any Silicon Valley firms with Indian-born founders.  UC-Berkeley’s AnnaLee Saxenian documented that 7% of tech companies started in 1980–1998 had an Indian founder.  A survey conducted by my research team at Duke University found that this proportion had increased to 15.5% from 1995 to 2005. My team also determined that in this period, Indians started 6.7% of the nation’s tech and engineering firms.  These are pretty astonishing numbers considering that according to the U.S. census, in 2000 less than 0.7% of the U.S. population and only 6% of the Silicon Valley high-tech workforce was born in India.

I know from personal experience that Indian immigrants didn’t have it easy.  They suffered from the same types of stereotypes as women, blacks, and Hispanics.  Despite having co-founded a software company that we took from startup to $120m in revenue; profitability; and IPO in a record five years, I couldn’t get Research Triangle Park (RTP) VCs to even return my phone calls when I was ready to start my second venture.  I later found out why: “my people” were great at mathematics and made great engineers, but didn’t make great CEOs — “we” didn’t have the necessary management skills, didn’t like diluting our equity ownership by raising venture capital, and couldn’t “fit” into the rough-and-tough American business-management culture.  That’s what one RTP VC told me over lunch, to explain why his firm wasn’t inviting me to pitch my business plan.  They were very busy and had to be selective in who they met.

So how did “my people” rise above ignorance and bigotry?  When the first generation of Indians in Silicon Valley succeeded in shattering the glass ceiling, they decided to help others follow their path.  They realized that they had all surmounted the same obstacles.  And they could reduce the barriers to entry for others behind them by sharing their experiences and opening some doors.

In 1992, a number of highly successful Indian business executives formed a group called The Indus Entrepreneurs (which is now called TiE). Their mission was to give back to the community by fostering entrepreneurship.  They would hold monthly events, teach entrepreneurship, and provide mentoring and support.  And they would facilitate Indian-style matchmaking between entrepreneurs themselves and with investors and corporate partners.  They created two categories of members: a charter member, who took the role of guru, and a regular member, who would be a disciple.  The Guru had to donate time and money (minimum $1500/year) and was not allowed to gain any personal financial benefit.  When disciples achieved success, they would be expected to pass it forward by becoming charter members and helping others behind them.

One of my current research projects is to document and quantify the accomplishments of TiE. But I already know the impact TiE has made. After my lunch with the RTP VC, I cold-called TiE co-founder, Kanwal Rekhi. He told me that my experience was no different from what he and others in Silicon Valley had endured.  Rekhi advised me to look outside the region and to recruit a white male as president of my company.  TiE Charter Member Vinod Khosla advised me to contact VCs in Boston and gave me several introductions. After I followed Rehki’s and Khosla’s advice, it didn’t take long for me to get a term sheet from Greylock Partners (of Boston).  When the word of this got out, the RTP VCs came begging that I take their money.  (I didn’t take their money and after I achieved success, I became founding President of TiE-Carolinas and would usually spend five to seven hours weekly — even when I was really busy — mentoring fledgling entrepreneurs.)

Telle Whitney, President of the Anita Borg Institute for Women and Technology, says that TiE has done an amazing job and that its work is a great example of a mobilizing, formidable force in making change through networks.  But all networks are not created equal.  To achieve systemic change and have more women and minority-group members as entrepreneurs, we need to involve corporate leaders.  They need to personally be mentoring, proselytizing, and demonstrating by example a different model of investing in women and minority-group entrepreneurs.  There is nothing more powerful within an organization than having its own CTO talk about the importance of, for example, promoting women.

I agree with Telle. Neither Rekhi nor Khosla knew me from Adam, but both readily gave me invaluable advice.  That is the type of mentoring that women, blacks and Hispanics need. In addition to establishing stronger networks for these groups, we need to have the CEOs and CTOs of all of our top companies volunteer their own time to help others follow in their footsteps. They need to do this because this is the best path to diversity and this diversity will enrich their organizations. And we need to have VCs mentor the women and minorities they typically ignore. They need to do this not only for social good, but also for their own survival.


Here are some links to women and minority networking groups which readers may find useful (If you know of others, please detail these in your comments).

Anita Borg Institute for Women and Technology


Forum for Women Entrepreneurs and Executives

National Center for Women & Information Technology

Silicon Valley Black Professionals

Silicon Valley Hispanic Professionals

Society of Hispanic Professional Engineers

Springboard Enterprises

The African Network

Women 2.0

Young Women Social Entrepreneurs


Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

February 13 2010


What’s Better: Saving the World or Building Another Facebook app?

Running on just sugar and caffeine, 32 teams of students worked non-stop for 18 hours to develop applications that they hoped would blow the judges’ socks off. This was at the UC-Berkeley Hackathon, last weekend. Indeed, many teams succeeded in their mission. They built some amazing software: to provide server-side rendering of games, convert website mockups to HTML/CSS, create sophisticated playlists for Youtube videos, and to analyze Twitter streams. One team even built a gaming interface for a neural headset.

There were so many cool tools that the seven judges, who included representatives from Zynga, Facebook, Y-Combinator (and me), had a hard time picking a winner in each category. The exception was the “social good” category. There was only one team worthy of receiving this prize. The team built a system to enable villagers in developing countries to send SMSs to volunteers across the globe who provide emergency medical advice. But the Silicon Valley judges couldn’t see the value of this technology. One commented, “If the villager has a cell-phone, why doesn’t he just call 911? This is really dumb”. (Most of the judges didn’t understand that 911 services don’t exist in most places in the world, and that SMSs have become the internet of the developing world). Instead, the panel awarded the prize to a team that developed a polling technology for university classrooms and for conferences. The rationale for this decision? “Helping universities is a social good.”

This brings me to the point of this post. What if we challenged these students and Silicon Valley to build businesses that do good for the planet and make a healthy profit doing so? Today, the world faces more problems than perhaps at any point in recent history. The economy is on the brink. Greenhouse gases threaten to turn Earth into a giant steam room. Scarce resources such as food, water, and oil have already become international flashpoints as the developing and developed worlds jockey for position to sustain or improve their standards of living. Drug-resistant bacteria threaten us with doomsday plagues. Yet we have the greatest minds and the deepest pool of investment capital in the world focused on building Facebook and Twitter apps.

Yes, I know that some in Silicon Valley are solving important problems. But these are the tiny minority.  Out of 32 teams at UC-Berkeley, only one was focused on a social cause. That’s probably the same proportion of do-gooders as in the Valley. I’ll bet that most Berkeley students would do anything to better the world if they knew how.  But like the Hackathon judges, they don’t know what problems need to be solved and what they can do to solve them.

There is a way. In 2008, Charles Vest, the president of the National Academy of Engineering brought together a group of prominent deans of engineering schools from around the country to create a list of Grand Challenges that can be solved by engineers, in our lifetime. These were in several broad realms of human concern — sustainability, health, vulnerability, and joy of living. Dr. Vest believed that “the world’s cadre of engineers will seek ways to put knowledge into practice to meet these grand challenges. Applying the rules of reason, the findings of science, the aesthetics of art, and the spark of creative imagination, engineers will continue the tradition of forging a better future”.

Here is the list of the 14 Grand Challenges the deans created:
Make solar energy economical
Provide energy from fusion
Develop carbon sequestration methods
Manage the nitrogen cycle
Provide access to clean water
Restore and improve urban infrastructure
Advance health informatics
Engineer better medicines
Reverse-engineer the brain
Prevent nuclear terror
Secure cyberspace
Enhance virtual reality
Advance personalized learning
Engineer the tools of scientific discovery

Some of these may sound far afield for typical Silicon Valley TechCrunch readers and Berkeley students, but they are not.  I asked Duke University’s dean of engineering, Tom Katsouleas, to help me translate some of these into tangible business ideas. Here are three examples:

1.  Engineer better medicines. You might think this is the purview of the medical researcher or biomedical engineer, and it is, but it is also an electrical-engineering (EE), computer-science and information-technology challenge.  For example, one of the big drivers here is the need to predict and prevent future pandemics of highly resistant diseases.  So a concrete grand challenge is to provide early detection of diseases from a saliva swab.  It turns out that the human body when exposed to diseases such as H1N1 responds with elevated gene expressions almost immediately.  Picking out the protein signal from such an event and distinguishing it from the noise of normal metabolism turns out to be amenable to the same techniques EE’s develop to pick out a weak cell-phone signal.  Duke Professor of EE, Larry Carin, has teamed up with genomicist Geoff Ginsburg and shown that this approach allows disease prediction up to 5 days in advance of symptoms.  Photonics researchers are busy trying to develop rapid on-chip diagnostics that are optical or based on electrical resistance rather than on lab chemistry and that work on saliva instead of blood.  This information can then be fed into dynamically steered computer models of disease propagation and guide both vaccine developers and public-health officials.

2.  Make solar energy economical.  It is that one extra word at the end of the sentence that changes everything.  Without the word economical, this is a physics challenge that we know how to meet: to convert energy from photons to a flow of electrons.   But with the extra word, the challenge cannot be solved without addressing business, policy, human behavior, and of course a spectrum of technologies far beyond the basic physics.  For example, nano-scale plasmonic structures could be critical to making solar cells as “cheap as paint” as well as coating roofs that are as reflective as white paint but still aesthetic.   Wireless technology could assist the adoption of electric vehicles.   Imagine using metamaterial lenses to make wireless chargers in the floor of garages highly efficient.  The leapfrog from EVs’ being less convenient vehicles that have to be plugged in to never having to stop to refuel turns one key obstacle to adoption into an incentive to make a better product.

3.  Reverse-engineer the brain. As brain researcher and Palm inventor, Jeff Hawkins, at Numenta pointed out, there was a time when computer scientists thought they could create artificial intelligence algorithmically.  That hubris is giving way to a recognition that understanding the structure and function of biological neural networks may be essential to achieving applications as mundane as navigating a car down the freeway to as grand as helping individuals optimize their own learning.

If you review the list of challenges, you may be able to develop some great business ideas of your own. Olin College and the Kauffman Foundation have created a competition for students who have completed science and engineering projects that tie directly to the 14 Grand Challenges. Several universities, including North Carolina State University and Duke University, are also holding a series of summits to bring thinkers together to solve problems. I encourage you to participate. My hope is that rather than run business-plan contests and hackathons, our universities will start competing to solve the Grand Challenges. Maybe the excitement and sense of purpose will seep through to my fellow judges and others in Silicon Valley… and maybe we’ll even help save the world.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

February 07 2010


Silicon Valley: You and Some of Your VC’s have a Gender Problem

“People in technology businesses are drawn to places known for diversity of thought and open-mindedness”, is what Professor Richard Florida concluded after studying the growth and success of 50 metropolitan areas in the U.S. The most successful regions were those with the most gays, bohemians, and immigrants. These groups flourish in Silicon Valley, and its diversity has undoubtedly provided it with great advantage. But after attending the recent Crunchies Awards, I realized that something important is still missing — women entrepreneurs.  I was shocked that the only woman CEO on stage during the entire event was TechCrunch’s own Heather Harde. Nearly all the companies that competed in the event (other than the PR firms) had males at the helm. This dearth may be one of the reasons for which the Venture Capital community is in such sharp decline, and why the Valley isn’t achieving even more success.

An analysis of Dunn and Bradstreet data shows that of the 237,843 firms founded in 2004, only 19% had women as primary owners. And only 3% of tech firms and 1% of high-tech firms (as in Silicon Valley) were founded by women. Look at the executive teams of any of the Valley’s tech firms – minus a couple of exceptions like Padmasree Warrior of Cisco, you won’t find any women CTOs. Look at the management teams of companies like Apple – not even one woman. It’s the same with the VC firms – male dominated. You’ll find some CFOs and HR heads, but women VCs are a rare commodity in venture capital. And with the recent venture bloodbath, the proportion of women in the VC numbers is declining further. It’s no coincidence that only one of the 84 VCs on the 2009 TheFunded list of top VCs was a woman.

Is the background or motivation of women that prevents them from becoming entrepreneurs? I just completed a project with National Center for Women & Information Technology (NCWIT) to find out (Kauffman Foundation will be releasing our research paper this spring). Our analysis of 549 successful startups showed there was virtually no difference in motivation between men and women entrepreneurs.  Just like men, women started companies because they wanted to build wealth, capitalize on business ideas they had, liked the startup company culture, and were tired of working for others and wanted to be their own boss.

Women entrepreneurs were as highly educated as their male counterparts, had the same early interest in starting their own business, and learned the same valuable lessons from their work experience and from prior successes and failures. The only real difference was that women put a higher value on their business partners and on their personal and professional networks.

Is it that women are less competent than men? Quite to the contrary. An analysis performed by Cindy Padnos, managing director of Illuminate Ventures, showed that women are more capital-efficient than the norm and that venture-backed companies run by a woman had annual revenues that were 12 percent higher and used an average of one-third less committed capital. Women-led high-tech startups have lower failure rates than those led by men. And organizations that are the most inclusive of women in top management achieve 35% higher return on equity and 34% better total return to shareholders than do their peers.

Padnos points out that the tide is turning in favor of women in education. Girls are now matching boys in mathematical achievement.  In the U.S., 140 women enroll in higher education for every 100 men.  Women earn more than 50 percent of all bachelor’s and master’s degrees, and nearly 50 percent of all doctorates. Women’s participation in business and MBA programs has grown more than five-fold since the 1970s, and the increase in the number of engineering degrees granted to women grew almost 10-fold.

So what holds women back from starting companies? Shaherose Charania, of Women 2.0, thinks it is because women have had few role models and mentors. Additionally, it is harder for women to obtain funding than for men. She notes that historically, women-led companies have received less than 9% of venture capital investments; in 2007, the proportion of funded female CEOs dropped to 3%. And there is another problem which her group works hard to overcome: some old-time VCs won’t give women the time of day. Her group members recount examples of VCs and angel investors interrupting pitches to ask questions and make comments like:

  • When are you planning to have kids?
  • Why isn’t “he” the CEO?
  • So you moved here because your husband lives here? What if he has to move for work one day? Will you go with him?
  • You should cut your hair, dress a bit more manly if you want to be CEO.

Sharon Vosmek, CEO of venture accelerator Astia doesn’t think that VCs have an overt bias against women. Instead, it’s the way the venture-capital industry operates.  Vosmek says that these “systematic or hidden biases” include:

  1. that VCs hold clear stereotypes of successful CEOs (they call it pattern recognition, but in other industries they call it profiling or stereotyping.)  John Doerr publicly stated that his most successful investments – and the no-brainer pattern for future investments – were in founders who were white, male, under 30, nerds, with no social life who dropped out of Harvard or Stanford (2009 NVCA conference).
  2. VCs invest in people they know. If women aren’t in their natural networks, they won’t get through the door.  We know that still today, men and women network in separate business networks.
  3. VCs want to invest in serial entrepreneurs. (This further reduces the chance for woman entrepreneurs.)
  4. The VC community is obviously male dominated, and it just got worse…after the cold freeze VCs experienced over the past 24 months, many women partners exited the industry. As the Diana Project research shows, a firm with women General Partners is more likely to invest in women entrepreneurs.

So, it is clear we have a problem here: we’re holding back the most productive half of our population. What can we do to fix this problem? NCWIT’s CEO, Lucinda Sanders, Shaherose Charania, Cindy Padnos, and Sharon Vosmek have all given me their suggestions. I also have some ideas of my own. I plan to write a follow-up post that details some of these, but I’d like to get your input first. After my recent BusinessWeek column on the dearth of women entrepreneurs, I was deluged with angry emails from men who disagreed with my conclusion that the problem isn’t a failure on the part of women but rather a societal failure. Some were really angry about my comparison of Wall Street firms to their counterparts in India. I’ve heard from the angry men, now I’d like to hear from the women. Please post your comments below.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

January 16 2010


How The EFF Lost Its Way By Defending Hate Mongers And Tunnel Rats

Freedom of SpeechFree speech is a basic human right and is essential to creativity and innovation.  But every society places limits on this, particularly when it transgresses into “hate speech” – which disparages someone or some group on the basis of race, gender, age, ethnicity, nationality, religion, sexual orientation, and so on.  Calls to violence are tolerated even less.  These often lead to jail terms.

The Electronic Frontier Foundation (EFF) has been the tech world’s champion of free speech since its inception in 1990.  I have always admired this group for defending the oppressed.  But when organizations achieve too much success, they often develop a sense of confidence and arrogance that, when unchecked, leads to their downfall.  They begin to believe they can “do no evil”.  A recent statement by the EFF makes me wonder whether it has reached this stage and needs to have its “Google China” moment. Michael Arrington wrote in 2007 that the “EFF may be getting a tad overzealous in its desire to defend our right to violate copyright and other intellectual property laws, and needs to take a step back and consider if the oppressed are now becoming the oppressor”.  I’m beginning to believe that Michael was right.

Let me explain the background of a case which the EFF has just passed judgment on so that you can decide for yourself whether this is indeed the situation.

The anti-immigrant groups and xenophobes I’ve written a lot about see the H-1B visa issue as the beachhead in their battle against skilled immigrants.  Nearly all foreign skilled professionals (such as engineers, scientists, and doctors) need this visa to work in the U.S.  As with the tax system, Medicare, and the big bailout, the H-1B visa program has its flaws and is occasionally abused.  You don’t see much visa fraud in Silicon Valley, because skills and competence are the only things that matter.  But for grunt-type IT work, cost is a bigger factor.  Most large service companies are highly ethical and go by the book. There are, however, a few shoddy body shops that bring in low-skilled workers and pay them below market wages.  These are a small minority.  Nevertheless, they make an easy target.

One of the most vocal members of the anti-immigration alliance is a computer programmer who calls himself “Tunnel Rat” (he doesn’t have the courage to reveal his real name).  He maintains several websites (,, and that focus on attacking Indians, Hindus, and H-1B workers, whom he calls “curry-scented slumdogs”.  His websites are laced with racial slurs and profanity in English and Hindi and openly advocate hatred and violence.

Here are some examples from these websites.

Immediately after the massacre at the Fort Hood military base in Texas last November, which left 13 people dead and 29 wounded, Tunnel Rat put up a blog post that tried to link the killings to the H-1B program.  It said:

“American tech professionals have been forced to cower to the Indu-Invaders in I.T. because if they stood up for themselves, they would be labeled racists.  And thus, like the Feds, they said nothing, even as they were training their slumdog replacements and packing their boxes”.

A few days later, a gunman shot six people in Orlando, Florida.  According to CNN, Jason Rodriguez had worked for a year at RS&H, a facilities and infrastructure consulting firm, as an entry-level engineer before he was put on several months of probation and fired for “performance issues”.  Then he worked at Subway for two years before losing his sanity.  Kim Berry, President of a group called the Programmer’s Guild (which claims to represent the technical and professional workers of America, and which, according to Wikipedia, had 400 members at what was presumably its peak in 1999), posted on a blog suggesting that the murders might not have happened if RS&H (which has 800 employees) had not applied for six H-1B visa slots in 2007 and 11 in 2008.


Tunnel Rat piled on:

“It is my belief that Rodriquez was pushed aside to make room for an H-1B…  I predict that this is just the beginning of a massive wave of violence as middle-aged American men reach their breaking point and start to settle scores.  … H-1B program is now a national security issue.  We can’t have an invasion of curry-scented pod-people displacing millions of Americans”.

All of this is bizarre, despicable and disgusting, but other than the racial slurs, may not cross any lines. It is still free speech. Here is a posting from Tunnel Rat that does cross the line:

Now that the slumdogs have taken over Google, I can no longer trust them to protect my anonymity…  That is why I am protecting myself and my family by stockpiling weapons and ammo…  My greatest hope is that some techie goes crazy and acts out violently against his slumdog replacement and the collaborators that hired the feral jackal.  That techie in Pittsburgh was way off the mark by going after women at a gym.  If he was going to kill himself anyway, he should of stopped off at the nearby law offices of Cohen & Grigsby.

[Cohen & Grigsby has been in the news for a talk one of its lawyers gave on how to work the H-1B system].


In another post he responds to an Indian concerned about his racist remarks: “You should be concerned about THIS [link to article about violent attacks against Indians in Australia].” Tunnel Rat also gloated about having emailed the person “pictures of dead Indians and other nasty things” and said:

Here’s a deal, SLUMDOGS.  Get rid of Vineet Nayar, “the highly respected CEO of HCL Technologies” and I will stop blogging.  Here’s a picture, so you can identify the FAT FUCK…  Go ahead, eliminate that fucker.  I promise I WILL STOP BLOGGING…  The ball is in your court.

I can cite many more examples of threats of violence and “retribution”, but I am sure you get the idea.

One of the companies maligned, Apex Technology Group, filed suit against these sites.  In late December, a New Jersey court ruled in favor of Apex and ordered the sites to shut down, although allowing them enough time to file an appeal.

After the decision, the EFF put up a blog post criticizing the takedown order and claiming that the “… order dangerously overreaches.  By restricting access to entire websites, it places a prior restraint on all of the speech on the websites, even if that speech is unrelated to Apex”. EFF argued that this would be like “a court shutting or because of a disparaging review of a single product”.  I’m not sure whether this is a good analogy.  In my mind, those sites clearly cross the line from protected speech into terroristic threats or harassment.  A better analogy would be a Jihadi site posting hateful propaganda and calls to violence.  These sites use the same techniques: posting misleading information and hateful rants and suggesting that readers do something to right the alleged wrongs.

So I e-mailed the author of the EFF blog post, Kurt Opsdahl, a senior staff attorney at EFF, to ask him what gives.  I asked what if the site EFF had been defending were attacking African-Americans or Jews: would EFF be taking the same stand?  What if the site had been advocating a holocaust or calling people “niggers” instead of “slumdogs”: would this cross the line?  I also told him that I had received death threats traced back to the domain names in question via email and in the reader feedback section of BusinessWeek in articles I had written about immigration.

Kurt would not respond to the substance of what I asked.  The jist of his response: “A court order should not shut down any website unless the entirety was not protected speech.  While a ‘true threat’ is not protected speech, there are many views which are protected, even if repugnant”.

What shocked me about Kurt’s response was this comment: “I have not read the sites, since they were offline before this matter came to our attention”.  I find this absolutely unbelievable. Doesn’t the EFF know how to search the Google cache?  Doesn’t it have a responsibility to ensure that it is using its power effectively and wisely?

What sort of “power” does the EFF have exactly?  Right after its blog post, ComputerWorld’s Patrick Thibodeau wrote this article condemning the judge’s decision, which, like the EFF statement, didn’t even mention the nature of the speech on the site ordered to be shut down. (Patrick has been a vocal opponent of H-1B visas, something else he does not disclose in his coverage).  Likewise, the San Francisco Chronicle and The Oakland Journal posted articles holding up the EFF blog post as a shining beacon of justice.  The favorable media coverage became a major victory not only for opponents of H-1B visas but also for the general white supremacist, neo-Nazi, “kill all dark foreigners” crowd.  Nice company, EFF.  I’m sure you’ll get invited to the David Duke annual Christmas party soon.

You can debate the merits of the EFF stance from a legal standpoint.  But the EFF cannot function in a contextual vacuum.  I am certain its employees feel overworked and underpaid like those of many other non-profits.  But, by siding unwaveringly with some of the most hateful sites on the Internet and not even mentioning the nature of those sites, the EFF betrayed its charter of upholding justice.  A simple Google cache search would have easily shown Kurt and his colleagues that the sites in question were vitriolic.  By giving Tunnel Rat a free pass, the EFF encouraged several major media outlets to echo its one-sided defense of the ability to talk about killing and hurting Indians and H-1B holders.  If people want to have a debate about whether H-1B visas are good for America, let’s have it.  But if the most spirited response they can muster is to threaten the lives of their opponents, they’ve already lost the debate.

The only silver lining on this dark cloud is that it has brought this sort of xenophobia and racism out in the open. The anti-immigrant groups have claimed to be fighting a righteous battle for American workers.  Now it is clear what lies beneath the surface.  They can only fight with hate because logic escapes them.

Editor’s note: Guest writer Vivek Wadhwa is an entrepreneur turned academic. He is a Visiting Scholar at UC-Berkeley, Senior Research Associate at Harvard Law School and Director of Research at the Center for Entrepreneurship and Research Commercialization at Duke University. Follow him on Twitter at @vwadhwa.

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