Winning by Failing, the new Entrepreneurial Paradigm Shift

Why is it that startup companies that fail never make headline news? A likely reason is that few readers are interested, and yet, over one-half of new startups fail during their first year of operations. To make matters worse, their unfortunate founders are often subjected to heavy losses, fines, foreclosures, and humiliation, just for trying to fulfill their dreams. Why then, do societies worldwide come down so hard on these well-intended individuals, especially when they represent a potential source for job creation? Are entrepreneurs who fail, outcasts or overlooked assets? 

Successful startups or inventions do not just surface out of thin air. Thomas Edison, one of the greatest inventors of modern times, once claimed that he never invented the light bulb but rather confirmed 2,000 ways of how not to make a light bulb. Edison knew that his inventions hinged on repeated experiments, the vast majority of which would fail. Why then did he consider his failed attempts more valuable than his inventions? Was it because he viewed his successes and breakthroughs as an afterthought? In a new world order where inventors have had to become entrepreneurs and entrepreneurs, inventors, could Edison’s approach to ‘inventing/winning by failing’ offer us some new insights?

Imagine if…
Imagine if, instead of shunning entrepreneurs who failed, societies embraced their expertise (such as the many ways not to make something work) by efficiently reintegrating their experiences/experiments into an ongoing process of discovery and invention? Take this idea one step further. Imagine if, these entrepreneurs were motivated to work together by co-owning shares of an organization that was partially funded by the profits of the companies whose ideas/inventions did succeed.

While most entrepreneurs would support this type of arrangement, the traditional establishment of venture capitalists, private equity investors, politicians, and large established companies may not. But, as technology advancements continue to enable entrepreneurs to accomplish more with lower funding requirements, investors and their cohorts may, at some point, be wise to reconsider their old business models.

Evidence of Edison: A Five Country Review
To see, if indeed, entrepreneurship is trending toward an inventor’s model, I met with key leaders from 5 different countries including an academic institution, (Ecuador, Chile, Kenya, Mexico, and MIT) and compared their respective entrepreneurial initiatives. My choice of countries coincided with a slew of conferences and meetings that I attended between the months of August and September of 2012.

With each person I met, I inquired what policies, if any, they or their respective governments/institutions were actively pursuing to promote local entrepreneurship. If they were entrepreneurs, I asked about their experiences and expectations. Over time their collective comments developed into an interesting mosaic, which reflected their wide range of experiences promoting entrepreneurship. Less experienced countries sought lofty goals and often highlighted successful models elsewhere. Assuming this trend, one might conclude that the country/institution with the most experience could thus be considered the industry trendsetter.

Least Experienced – Ecuador, Chile, Kenya
A countries with the least experience promoting entrepreneurship such as Ecuador are usually held back by their own overburdening bureaucracy and an economy largely operated by a handful of family-owned businesses. Chile partially addressed these issues by legislating laws that designated a protected area (legally and physically) for its new startups. Their plan also included shared support systems (i.e. office space, Internet connection, etc.), and funding for an aggressive international mentorship program. Kenya’s government built out an Internet infrastructure that today connects over 40 million Kenyan users. They also approved the use of a mobile phone digital currency called M-Pesa that together has mobilized local entrepreneurs and investors.

Mid-Way – Mexico
At mid-way, Mexican thought-leaders are grappling with more sophisticated issues such as integrating venture capital funding. Key to their strategy is a coordinated effort among Mexican government officials, local venture funds, and public universities (i.e. Tecnológico de Monterrey) to identify the next ‘Steve Jobs-like’ entrepreneurs (or, in their words, ‘super entrepreneurs’’) who are capable of building the next ‘Apple-like’ industry on Mexican soil. To attract greater investor interest, the Mexican government recently approved a USD$120 million ‘fund of funds’ to encourage more venture fund managers to work with their most promising startups.

Most Experienced – MIT Media Labs
The highest level of experience also tagged as the industry’s potential trendsetter in my sample was MIT’s Media Lab (Massachusetts Institute of Technology). Under the direction of Joicho Ito, an accomplished investor and colorful visionary, MIT’s Media Lab operates about 350 concurrent student-related startups.  Ito explains that his primary focus is to develop a team’s collective agility rather than the prowess of one exceptional individual. Startup founders find each other, are free to innovate together as they see fit, and, when ready, present their ideas for funding by conducting a proof-of-concept such as a small pilot or survey. Funding is limited to no more than $100,000 per team. Teams that succeed may pitch for more funding (with a formal business plan), while those that fail are encouraged to join another team.

Teams are expected to conduct many small pilots and leverage their data analytics to identify timely opportunities. Ito’s unwritten rule of denying a second round of financing has forced team members to become more agile with their decisions.  As expected, however, failures do happen and are not only common at the Media Lab, but most importantly, revered. According to Ito, students who learn to fail several times, actually win by learning the art of risk taking. Given several chances to take risks within a short period of time has proven to render more ‘breakthrough ideas’ as well as develop a more seasoned crop of team leaders/entrepreneurs.

Conclusion
This brief five country evaluation simplifies the entrepreneurial process into three distinct levels and suggests that sequential levels place the most experienced country/institution as the potential trendsetter, in this case MIT’s Media Labs.

Assuming my analysis is true and MIT’s Media Lab succeeds at creating companies responsible for new industries in the coming years, then one might guess what advice Thomas Edison would have given to governments and institutions if he were alive today.  According to Edison, future entrepreneurial programs would do better if they focused more on efficiently recycling lessons from failed attempts than on sifting through hay stacks of candidates in search of a few needles of success.

Hopefully Edison’s likely advice will turn on a few more light bulbs in the minds of our global leaders!

###

Appendix

I have included an Appendix for those of you interested in more details and interesting tidbits from my interviews with each country/institution for this article.

———————————————–
Ecuador, Chile, Kenya, Mexico, MIT
———————————————–

Guayaquil, Ecuador
Considered a hidden city by investors in-the-know, Guayaquil recently conducted a national roadshow, http://www.nationroadshow.com/guayaquil/en, that began in New York City. In my brief interview with their mayor, Jaime Nebot, he expressed his views on entrepreneurship for his city in two words. ‘Not now!” Ecuador, like other Latin American countries are controlled by a handful of influential family groups who operate the country’s key businesses. For young Ecuadorian entrepreneurs, the chance of succeeding is both intimidating and inhibiting, not to mention, the 8 month lead time needed just to register a company and fulfill all of the public sector requirements. Venture funding exists primarily for launching new businesses within already established ones. Most new businesses are proven concepts transferred from other countries rather than breakthrough technologies that could offer spectacular returns. For now, Mayor Nebot is focused on attracting established international firms to Guayaquil that have the wherewithall to weather his country’s stifling bureaucracy.

Santiago, Chile
At a recent conference on M&A activities in Latin America held at the offices of Baker & McKenzie – (www.bakermckenzie.com) in New York, a cadre of legal experts described Chile’s financial economy as brisk. Unlike Ecuador with its family-owned monopolies, Chile’s formerly family-owned firms have been institutionalized and therefore easier to merge and acquire. Despite these advances, entrepreneurialism in Chile has had its challenges. Young Chilean students who might have taken to entrepreneurialism sooner prefer careers in finance, medicine, or law.

About two years ago, the government of Chile approved funds for a revolutionary program called Startup Chile (www.startupchile.org). Hoping to change the mindset of its youth, Chile’s government is offering entrepreneurs from around the world a USD$40,000 grant to spend 6 months launching their startups in one of two buildings located in downtown Santiago. The program attracted seasoned global entrepreneurs who served as mentors to Chile’s young hopefuls.  Chilean entrepreneurs today account for over half of the startups in the program. One of the participants I interviewed at a local meeting in New York, described the environment at the incubator in Santiago as serious-yet-fun, inspiring, rewarding, and very international. Founders often work with one partner on premise and form virtual teams-on-demand using shared referred resources sometimes located in other countries.

Nairobi, Kenya
A banking phenomena called the M-Pesa has emerged in the unlikely city of Nairobi, Kenya. M-Pesa is a cell phone currency operated by Safaricom (www.safaricom.co.ke) that has transformed local economies in a manner that few could have imagined possible and that other countries have had difficulty emulating. Similar to PayPal’s online capabilities (www.paypal.com), M-Pesa funds appear as a balance on a cell phone account that can be drawn and transferred at the time of purchase from one cell phone to another. Its resounding success has created fertile ground for Kenyan entrepreneurs and has attracted investor groups including a local bank. As expected, Kenyan entrepreneurs have formed their own version of an incubator/consulting operation called iHub, (www.ihub.co.ke) where local techies and investors can congregate. Despite having many fundamental issues to resolve, Kenya’s success in lubricating its economy with a digitized currency is truly noteworthy. Credit is largely due to the Kenyan government who played a crucial role in building out the infrastructure needed to connect over 40 million cell/Internet users.

Mexico City, Mexico
At a recent conference held in New York by the Mexican-American Chamber of Commerce – Northeast Chapter, (www.usmcocne.org) on Mexican innovation, entrepreneurship, and venture capital financing, two panels of key influencers shared their views.

There I learned that 99.8% of the firms in Mexico produce just over half of the country’s annual GDP (52%).  Most revealing was that the remaining 0.2% of Mexican firms are in the hands of the ‘super-rich’ who collectively account for the other half of the country’s annual GDP. With half of the country’s GDP in so few hands, venture capitalists and similar funding sources have seized the opportunity to disrupt the status quo with a new crop of technology-based firms that could deliver ‘Apple-like’ growth and a similar eco-system of supporting companies.  Their ‘plan of attack’ as expressed at the conference, was principally focused on identifying ‘Steve Job-like’ candidates who would agree to work tirelessly, communicate effectively, innovate constantly, and function amenably with their venture capital support teams. They referred to these individuals as ‘super entrepreneurs’.

To fill the pipeline with potential candidates, one of Mexico’s largest academic institutions, Tecnológico de Monterrey, operates a Technology Center for Entrepreneurs (www.itesm.mx). The center currently manages a total of 1,500 startups per year. Startups that show exceptional promise graduate to the university’s accelerator program and may eventually compete for venture capital funding. This step also includes assistance from internationally recognized non-profit organizations such as Endeavor Global (www.endeavor.org), also present at the conference. Graduates from the exclusive Endeavor Global program work with leader/mentors along with their peers to gain additional market access and intel.

Mexico’s Venture Capital (VC) industry is small in comparison to the US but is making meaningful strides.  They have approved legislation granting VC’s with limited access to its hefty pensions. In addition, the government has recently approved a $120 million fund called the Entrepreneur’s Fund or ‘fund of funds’ to encourage more local money managers to address the needs of their up and coming squadron of ‘super entrepreneurs’. The government’s support is crucial and timely for Mexico, since its crop of qualified candidates are more global in scope than their predecessors and  could easily decide to move their businesses to another country for support and funding.

Cambridge, MA (MIT)
At MIT’s student incubator known as the Media Lab in Cambridge, MA (www.media.mit.edu), Joicho Ito, an accomplished investor and colorful visionary, oversees over 350 concurrent student-related startups.  On the surface, the incubator program appeared similar to the incubator/accelerator initiative at the Tecnológico de Monterrey in Mexico. However, a closer inspection showed that  their similarities ended at the front door.  At the Tecnológico de Monterrey, startup instruction is centered around the rigors of writing and rewriting a comprehensive business plan that might, one day, be used for funding consideration at a venture capital firm. In contrast, MIT’s Media Lab postpones the business plan writing exercises until funding has been approved.  Heretical in his approach, Ito explains that his primary focus is a team’s collective agility rather than the prowess of one exceptional individual or a business plan subjected to the rigidity of an outline and presentation. Startup founders find each other, are free to innovate together as they see fit, and, when ready, present their ideas for funding by conducting some form of proof-of-concept such as a small pilot or survey. Funding is limited to no more than $100,000 per team. Teams that succeed may pitch for more funding (with a formal business plan), while those that fail are encouraged to join another team.

Teams are expected to conduct many small pilots and leverage their data analytics to identify timely opportunities. Ito’s unwritten rule of denying a second round of financing has forced team members to become more agile with their decisions.  As expected, however, failures do happen and are not only common at the Media Lab, but most importantly, revered. According to Ito, students who learn to fail several times, actually win by learning the art of risk taking. Given several chances to take risks within a short period of time has proven to render more ‘breakthrough ideas’ as well as develop a more seasoned crop of team leaders/entrepreneurs.

Implications for ‘On-Demand’ Manufacturing

When asked if they were considering pulling their manufacturing facilities out of China, 45% of US-based CEO’s interviewed in a recent Boston Consulting Group survey, said the idea was under serious consideration. Has manufacturing in China become too expensive for American companies or has new tooling technologies and processes eliminated the need for China’s cheap labor? If the trend for US companies is to return to the US or ‘reshore’, what will the new industrial landscape look like in the next few years?  How should CEO’s, government officials and job seekers prepare? 

With more machines replacing workers, China’s appeal as a global manufacturing base is wearing thin. According to an MIT Forum on Supply Chain Innovation (supplychain.mit.edu) held on July 25, US firms are taking a closer look at the Total Cost of Ownership (TCO) and have discovered a slew of hidden costs that ‘cheap labor’ has been masking all along. For instance, US firms that outsource their manufacturing to China are often forced to absorb 100% of a product’s liabilities, since China’s legal system is virtually unenforceable. ‘Made in USA’ also translates into increased quality control, which in turn can keep a tighter lid on counterfeits, a chronic issue with Chinese producers.

The US government along with non-profit organizations are pushing awareness-campaign web sites along with evaluation tools to encourage more US CEOs to consider ‘reshoring’ sooner, (reshorenow.org).  Congress believes that ‘reshored’ manufacturing plants in the US will help create sustainable jobs in economically depressed regions, while providing much needed positive news for unemployed voters.

Contrasting policies: US vs China
While the US is ‘reshoring’ its operations to setup state-of-the-art manufacturing facilities back home, China is aggressively retooling its existing facilities to replace many of their low-wage workers. Foxconn Technology Group (foxconn.com), also assemblers for Apple products, recently announced plans to replace two-thirds of its work force with one million robots by 2013. These robots will be made in China, courtesy of the many US-trained Chinese engineers who have been forced by the US government to return immediately after graduation. US firms such as Boeing, iRobotics, and IBM have lobbied heavily in Congress to prevent this unnecessary ‘brain drain’ by requesting the issuance of work permits and extended visas with fewer restrictions to encourage qualified foreign students to remain in the US longer.

A glimpse at the future…
The implications of the US’s ‘reshoring’ and China’s retooling is starting to lay down the foundations for ‘on demand’ manufacturing where products are produced not only on an as-needed basis but also to a buyer’s specification at the time the order is placed.  Shipments would arrive either immediately (i.e. at a retail outlet) or on the same day.  A glimpse into the future shows how this phenomenon could be achieved using clusters of networked mini-plants and warehouse facilities.  A possible rendition of this concept follows:

In the not so distant future, tooling companies will eventually perfect the design of a fully automated manufacturing facility that can fit and operate inside a 20 or 40 foot container for easy transport and installation anywhere in the world. These modular containers would be networked together, stacked to meet seasonal demand, and monitored remotely. They would be as mobile as laptops are to professionals today offering unprecedented agility and optimal efficiencies based on a multitude of input and output variables.  Hence, if the price of raw material were to suddenly drop below a certain level in one part of the world or a market preference demand spike in another, mini-plants would be moved accordingly to take advantage of the opportunity arbitrage.

Mini-plants moved from one location to another would plug in the same way a voip phone (VOice of IP) operates today.  Once plugged into the network, the plant would operate as though it were located in the same office as the employees hired to operate it.  A comprehensive network of plant modules would optimize order flow by producing products closest to the buyer, hence, reducing or eliminating both inventory and transportation costs. Plant capacity would vary from as little as one unit using 3-D printing technology, for example, to multiple custom units using a network of local machines. (3Dsystems.com). Eventually smaller, faster, and safer machines will enable new industries such as urban factories that would locate mini-plants adjacent to designated retail outlets.

If evaluated in pieces, this futuristic vision is already in play today. Beginning with the recent landing of Curiosity on the planet Mars, one can be certain that remote operations of large machinery is on course to improve with time. The ‘on-demand’ manufacturing idea is currently being tested at a large grocery chain in New Jersey where vegetable produce is grown indoors, one floor above the retail space using hydroponic farms, (city-hydroponics.com).  The mini-plant/warehouse combination is a soon-to-be reality at Amazon as it responds to a recent sales tax levy.  Amazon plans to setup smaller warehouse operations in all 50 States to offer same day delivery for their most popular items.  It would be only a matter of time before they decide to manufacture some of these items under their own brand at these same sites.

Implications…
Consumers may love the idea of some day ordering exactly what they want, when they want it and to receive all of this exceptional service at an affordable price, since supply chain cost would have been significantly reduced. However, these technological advancements have a darker side.  They come at a steep social cost because they eliminate more jobs than they create, an issue that can no longer be ignored as unemployment continues to rise globally.  This serious dilemma leads to the second part of this article by asking the following question.

If technology advancements, which continue to grow at an exponential pace, are eliminating more jobs than they can create, what, then, can CEOs, government leaders, and job seekers do to rebalance this trend?  

There really is no one answer or silver bullet that will solve this problem.  Part of the reason is that the benefits from adapting new technology today can easily reach a global population at exponential rates.  As greater numbers demand more for less (and in a shorter time period than ever before), technology continues to advance at an unstoppable pace stripping our planet of its precious resources, while also eliminating jobs.

Has the pursuit for new technology become a runaway train?  If so, the only antidote to counter its job loss effects would be to integrate innovative thinking at every level of society and at a global scale.  With this new initiative, every breathing individual would partake in some form of innovation group exercises regularly, to build upon experiences, new ideas, and ultimately unveil breakthrough solutions.

A few ideas so far…
Chile’s government has taken a bold move. They have been offering a no-questions-asked stipend of forty thousand dollars to any young, unproven web entrepreneurs with a good idea, if the approved candidate agrees to spend six months working on their new startup in a newly established innovation incubator located in Santiago, (startupchile.org). This initiative has inspired Chile’s young adult population to start their own companies, while being mentored by some of the best entrepreneurs and developers on the planet. A simple but powerful idea, Chile has created a valuable global supply chain for its own innovation needs.

Chile is not alone.  Many countries have developed innovation centers too and support regular networking events for techies and entrepreneurs.  For example, New York City has Gary’s Guide (garysguide.com), a weekly calendar of informal discussions and gatherings.  There anyone who may be testing the waters can share ideas, look for partners, and attract funding. Many of the gatherings listed are free or cost less than $25 to attend. Also, Boston offers Mass Innovation Nights (innovationnights.com) where startups compete and vote for funding among their peers.

At the corporate level, Facebook offers a good example for CEOs with their ‘hackathons’. Each week, a group of programmers spend an evening, developing new application ideas that are later presented and voted upon the following day. Ideas are implemented, tested and ranked.  Those ideas that come out on top can usually point to a long trail of previous ‘hackathon’ events and results that led them to an optimal solution.

Job seekers should seek ways to update their skills by taking advantage of some of the many free online courses being offered this Fall through various top universities including Harvard/MIT (edx.org). These are not accredited courses, yet, but do an excellent job of teaching current and relevant materials.  Another good source to brush up on high school and college basics is Khan Academy (KhanAcademy.org). If learning a new computer language such as Java or HTML5 is on your to-do list, consider signing up for a free trial at Safari Books Online (safaribooksonline.com) where they offer access to current libraries of technology books. Many more options are available through your favorite search engine.

A Call-to-Action!
To maintain our economic drivers going forward, the balance between new technology and job creation will require the efforts and contributions of every living person including YOU. That is because no one person or company has the answer.

Regardless if you are a CEO, a politician, or a job seeker, sitting on the sidelines with the hopes that this economic storm will soon blow over may not be your best choice. Instead, consider moving away from the receiving end of innovation and partake in its creation. You can start by participating in any one of the rapidly evolving community-based initiatives located near you. As you learn more, keep in mind that this new era of ‘on-demand’ manufacturing is as much about producing products more efficiently as it is about stimulating innovative thinking. One cannot survive without the other.

If you are looking for ideas to integrate an innovation culture among your staff or team, please contact me directly at tom@researchpays.net