SOPHISTICATED FINANCE

Design Thinking

My thinking on the new business concept development process has changed over time. I now believe that the process has two parts:

1. the design process
2. the business model development

The two parts are really an integrated whole, but the design process starts with understanding the customer and their need and produces the product or service. The business model is the plan to commercialize the product or service. All of which is a hypothesis until tested in the market.

Design process probably dates back to the Romans, but it became formalized beginning around 2000. The concept of this process, called "design thinking", is perhaps most easily understood by this simple graphic below from the Stanford Design School. A full explanation of these concepts from Stanford is here.

Coincident with the emergence of design thinking as a formal process was the recognition that such an approach could be applied not only to products (physical objects) but also services (e.g. customer service) and customer experiences (e.g. user manuals). In fact I think formalized design thinking emerged in response to the increased scope of applications for design, perhaps motivated by the designers' recognition that their expertise had much wider application.. if they could only find a way to explain it or show its application.

The question I have been pondering is why formalized design thinking emerged when it did, around 2000. At that time the first Internet bubble was quickly approaching. That bubble demonstrated for the first time the wide spread acceptance and traction of the Internet. One of the things that the Internet made possible was a much closer relationship between the customer and the provider of a product or service. As the capabilities of the Internet grew (Twitter, FB, etc.) the potential relationship grew even closer. While historically the relationship was with the physical product, now the relationship was much wider due to the greater availability of information and the ease with which one could communicate a review or critique. These closer relationships demanded that companies have a much more developed understanding of the customer, what might be called empathy. Design was one of the few workable disciplines that incorporated such thinking about empathy..early in their process (Step 1 above). Therefore, design had the toolkit to assist companies to take a comprehensive look at the customer relationship that now included products, services and customer experience. This quote from Nelson Kunkel at Deloitte Consulting makes the point eloquently:

 "The ultimate design is simple. It's the pursuit of transparency."  

(If you are going to have genuine and comprehensive relationships, transparency is a requirement.)

Design thinking is a useful process in part because it has such wide application. I encourage the reader to better understand design thinking. If you prefer videos to reading, the video below from Cooper Hewitt is short and entertaining. 

Note: After first publishing this post I found this article that shows even more explicitly how some people are thinking about the relationship between business model and design thinking, from Design Thinking Network.

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New Miami VC-Medina Capital

The number of professionally run venture capital firms in Miami can be counted on one hand with fingers left over. This is one of the major reasons that Miami is a city of SMEs and few high tech startups.

A new VC has emerged in Miami, Medina Capital, organized by local Manny Medina who sold his Terremark business to Verizon for $1.4 billion. The new firm will focus on disruptive technology principally in cyber security, cloud computing, big data and storage. The focus is on early stage software companies. Typical investment is $10-20 million over the life of the investment. The firm's focus is not surprising given Medina's background in data centers.

 I found the original story on PE Hub.

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The Future of Business School Education

This is a recent quote from Nicholas Negroponte in Spain at the IaaC Lecture Series:

"Design school is the future, business school is dead."

The point may be stated in the extreme, but the point to consider is the importance of design in the future of business.

I have heard Nicholas talk about design several times but my thinking on design began with some posts from Frog Design after reading Helmust Esslinger's "A Fine Line" (Esslinger founded Frog Design.) Frog helped me to see the parallels to entrepreneurship in design. I then found the Stanford Design School, which is heavily influenced by the thinking of the design firm IDEO, and began reading about their design processes. Lately I have been reading Karl Ulrich's writings on design. Ulrich is another alumni of MIT (Negroponte) who teaches a Coursera offering on design. He also advocates that design should be part of a general requirements university curriculum, like writing, calculus, etc.

All of this reading lead me to realize that design process is an excellent model for the first part of a two-part process approach to entrepreneurship, which I described in this post a few days ago. I think both Nicholas and Ulrich would agree with this concept that a formal design process is the foundation of entrepreneurship, or at least the foundation to develop the hypothesis to be tested in the market. (For the sake of completeness, let us assume that the design process is used for addressing documented large market opportunities.)

In this post, "How to Survive the End of the Industrial Age", I basically argued that the individual must control their economic destiny in the 21st century and that entrepreneurship is the best solution. Therefore, I believe that business schools, as one means to teach entrepreneurship, must change as follows:

1. Business school curriculum must be changed to use entrepreneurship as the principal theme of the curriculum, as opposed to the current focus on strategy, productivity and finance.
2. Design courses and the design process must be taught as a required course with several electives in the subject
3. Computer science must be taught such that every graduate has sufficient knowledge to program, understand the design of a computer or smart phone at the component level and recognize a business opportunity in big data and the technology required to commercialize it, to name a few courses to be offered
4. Every student needs to develop a new business with each course/semester helping the student to refine their concept and commercialize it. (Ideally the business school would provide the seed money.)
5. Adjunct professors with practical experience would teach a larger percentage of the courses

(All of my posts on design are here.)

Image credit: Systemtek

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My New Seminar-Entrepreneurship, Design and Thinking

In the fall I am going to teach a new undergraduate seminar at FIU--"Entrepreneurship, Design and Thinking". In many ways this course is the result of my thinking over the last three years on entrepreneurship. An important part of my thinking on entrepreneurship is that it is a process, a deliberate set of steps, that leads to better results. I now believe that this process has two parts:

1. The design process, in which the customer problem is defined and a solution is developed to fill the gap caused by the problem. An excellent book on the design process is Karl Ulrich's Design: Creation of Artifacts in Society, which is used in Ulrich's Coursera design course.
2. The business model process, wherein the five parts of a business model are systematically analyzed and the best choices are selected. (My book, Billion Dollar Company, deals with the business model process.)

However, neither of these processes individually or together explain the difference between great new business ideas and mediocre ones. What explains the difference is the quality and type of thinking that one brings to the development of the startup. Therefore, to provide a complete methodology on entrepreneurship, I have concluded that I need to teach about thinking, the alternative approaches to problem solving and other methodologies.

Fortunately, Marvin Minsky has written a lot on the subject of thinking about complex problems. One of Minsky's books that deals with thinking is "The Emotion Machine: Commonsense Thinking, Artificial Intelligence, and the Future of the Human Mind". (Ulrich studied with Minsky at the MIT Artificial Intelligence Lab, that Minsky co-founded.) The quote from Minsky that started me thinking about thinking is a remark he made at the 25th anniversary of the MIT Media Lab. 

As I more fully develop the curriculum for the seminar, I will be posting on the readings for the course. I will continue to teach my courses on entrepreneurship and social entrepreneurship.

 

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The Wisdom of Hayek

I really like this quote from Cafe Hayek. 

"The ultimate ends of the activities of reasonable beings are never economic.  Strictly speaking, there is no “economic motive” but only economic factors conditioning our striving for other ends.  What in ordinary language is misleadingly called the “economic motive” means merely the desire for general opportunity, the desire for power to achieve unspecified ends."  The Road to Serfdom F.A. Hayek

The beauty of this quote from Hayek is that it focuses on the social objective and makes the economic benefits secondary or more precisely a means to an end. This, of course, has been shown to be the pattern frequently in successful entrepreneurship at scale.

Like I always say, start with the theory!!

It is No Longer about Jobs

President Obama has been focused on short term job creation. While this has positive effects on the lives of the unemployed, it does little to correct structural problems in the system. The President should be focused on leading a national initiative to reform education for the 21st century so that people have the skills required to better manage their own economic well being. There are two powerful reasons for such an initiative:

1. The country badly needs a stated direction. Since the fall of communism the country has had no core focus, a set of beliefs and aspirations that unite us. The recent plague of congressional bi-partisanship is a symptom of such a lack of direction. 
2. There will be fewer and fewer traditional jobs that were so plentiful after WWII. Outsourcing, offshoring and increasing labor productivity all point to the erosion of the traditional notion of jobs.

As Thomas Friedman so eloquently states in this Sunday Review NYT's article, there are only:

"high-wage, high-skilled job[s]".. “because knowledge is available on every Internet-connected device, what you know matters far less than what you can do with what you know. The capacity to innovate — the ability to solve problems creatively or bring new possibilities to life — and skills like critical thinking, communication and collaboration are far more important than academic knowledge".

The job opportunities that remain will require the ability to add value rather than perform rote tasks. 

No less a commentator than Clayton Christensen, the HBS professor, shares Friedman's view. Christensen believes that the education system is so endangered that even the continued existence of HBS is in doubt. Christensen believes that education must become more practical to meet the requirements of the 21st century. 

Another group that shares the Friedman view is Education Futures, who advocates for Knowmads. "A Knowmad is a "creative, imaginative, and innovative person who can work with almost anybody, anytime, and anywhere."

My own views match very closely with Friedman, as shown in this post from January 2012 titled "How to Survive the End of the Industrial Age". For about the last two years in my entrepreneurship classes, I have been advocating that students study entrepreneurship as much for the skills required in a jobless 21st century as for learning how to identify opportunities and build large new companies. The skills required for entrepreneurs are detailed in this post and closely match Friedman's emphasis on critical thinking, collaboration and communication. These skills can, of course, be learned at a very young age. The original research on learning by Jean Piaget demonstrated this fact.

One may wish to point out that a dramatic change to the education system does not require federal government leadership. However, the private sector appears as disinterested as the governemnt in reforming education to produce 21st century skills. The non-profit sector lacks the resources to really take on the challenge. Most likely the U.S. will just muddle through to mediocrity by never vigorously considering the skills that children need for the 21st century. The Bush initiative for "no child left behind" would appear to support my view on the future of U.S. education.

To reform education requires four key parts:

1. Education must be focused on student centric learning to match the need in the 21st century for individual responsibility for economic well being; self-paced learning as opposed to grade-based classes is probably a natural outcome of such an approach
2. Education must be managed at the local level rather than by the federal government in order to encourage community support for the initiative; community/parental support greatly improves educational outcomes
3. Teaching of entrepreneurship needs to be started at the middle school level to  reorient the next generation of children to the concept that they must manage their economic well being
4. Online resources need to be meaningfully integrated into the curriculum to free up resources for the new educational environment, which means that teachers likely will need training to successfully work in the new environment

Do five year olds need to manage their own fate. Probably not, but they need to be raised in an environment that encourages individual initiative and not rote memorization of facts that are better explained by an online lecturer.

Addition: This post from Edudemics advocates four activities for students to foster learning. Number 3 is startups.

 Image credit: www.nche.gov.mt The irony is noted.

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Which Schools Produce the Most Entrepreneurs

Edudemic has a great post today on entrepreneurship by university, captured in this infographic. Maybe there is something to this studying entrepreneurship in universities. Note the information is only for six universities and overlooks all the other college educated entrepreneurs.

More on Disruptive Innovation

In a recent video interview with Mark Suster here, Clayton Christensen, the renowned HBS professor, presented some additional thinking on his theory of disruptive innovation. What was new for me was Christensen's position that disruptive innovation only applies in industries with a technology core. What Christensen means is that if an industry/product is using technology and that technology is critical to the customer experience and value creation (for the customer), then there is the possibility for disruption.

Certain industries lack such a technology core. Christensen sites the hotel industry as an example. The hotel industry cannot be disrupted. A hotel chain can only emulate a competitotr with a richer feature set for the customer. Disruption through technology is not possible. Other "old" industries such as restaurants and construction probably are in the same situation as hotels.

Another group of industries which lack a technology core are probably heavily regulated industries such as healthcare and education. Until very recently neither industry used technology for a better customer experience and only relied on technology for improved administration or staff productivity (doctors). 

Of course, the absence of a technology core does not prevent outsiders from introducing customer facing technology to "disrupt" the industry. Coursera, the online university, would be an example.

Christensen has a very gloomy outlook for the future of HBS and universities in general. He asks us to pray for HBS. If we are praying for HBS then we need constant prayer vigils for some other universities.

Christensen also believes that university education must be more focused on teaching the practical skills required by employers. For business and engineering schools I would agree. However, some of the best disciplines to develop critical thinking are philosophy, economics and history. Not sure that any of these disciplines would meet Christensen's standards for practical training.

One of many other posts referencing Christensen's thinking is here. The post references his theory of how to size a market.

Business Concept Development Workshop--Miami February 15

Through the Pino Entrepreneurship Center at FIU I will be doing a workshop on February 15. The workshop is a half-day program to develop a new business concept. The workshop focuses on understanding the customer need, developing a product and alternatives for business model. The workshop is equally well suited for for-profit and social entrepreneurs. Another workshop that I do covers the financial plan and capital raising.

Details on the workshop are here. Scroll down to register. Proceeds go to Pino.

 

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Thoughts on Creativity

For a variety of reasons lately I have been thinking about the concept of creativity. Quite a wide range of great thinkers all describe creativity as a process based on discovery. In other words, creativity is not creating but rather discovering something new. We all have perceptions and experiences which when put through an appropriate process foster the discoveries that produce the new ideas--creativity. Such luminaries as Plato, Cezanne, Van Gogh and Einstein, to name a few, all share this view of creativity as a process of discovery.

The question that you should now be asking yourself is "What prompts the discovery process?". The simple answer is curiosity--the most natural instinct of all and shared by all of us from a very young age. So if your schooling did not kill off your curiosity you are well on the road to being creative. (I will avoid the temptation to turn this post into another article on education.)

The other key ingredient for creativity is the process one uses to analyze their perceptions and experiences. Here again many genius level thinkers (Einstein, Hamming, Minsky to name a few) provide the answer. One can learn the process, especially by studying the great thinkers. Alternatively, or perhaps in parallel, one could develop the ability to think critically. Critical thinking is the foundation for creativity. Critical thinking is defined here in this article on training young entrepreneurs. (If you have read this far then the critical thinking process is probably/hopefully engaged.)

 In a post on Brain Pickings today there is an interesting article on creativity--Chuck Close on Creativity, Work Ethic, and Problem-Solving vs. Problem-Creating. The best quote from the renown photorealist is:

 “Inspiration is for amateurs — the rest of us just show up and get to work.”

The other good quote from Close is:

"And the belief that process, in a sense, is liberating and that you don’t have to reinvent the wheel every day. Today, you know what you’ll do, you could be doing what you were doing yesterday, and tomorrow you are gonna do what you did today, and at least for a certain period of time you can just work. If you hang in there, you will get somewhere."

Suffice it to say that Close recognizes the critical role that processing plays in creativity.  And....no more excuses about waiting for inspiration.

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It's the Market Not the Business Plan

I have posted many times on financial models and business plans. I have said repeatedly that VCs find it easier to look at the financial model rather than the business plan to understand the business concept. This quote from Tom Kleiner, a founder of renown VC firm Kleiner Perkins, makes the point nicely:

“I don’t know how to write a business plan. I can only tell you how we read them. We start at the back, and if the numbers are big, we look at the front to see what kind of business it is.”

 The quote is from a post on All Things D.

My first book, Billion Dollar Company: An entrepreneur's guide to business models for high growth companies, integrates business concept and financial model development.

 

Joi Ito's Trends in 2013

MIT Media Lab Logo

Joi Ito, the Director of the MIT Media Lab, did a piece on Google Think about the four trends he sees for 2013, which are listed below:

1. Hardware as the new software  "Supply chain provider companies are making the cost of manufacturing [hardware] and risk really, really small.." There is much new hardware being developed, much of it open source. I expect that this will produce many appcessories. Appcessories are peripherals attached physically or through wifi to tablets to capture data (sensors) or to create new experiences. Very big opportunity.
2. Gene Printing  "Bio-fabricating genes using something called a 'CMOS' chip, which basically allows him to print genes using machines instead of people". Biology is not my field but the idea of using CMOS chips is logical. CMOS chips are the special purpose chips that you find in your car for example.
3. Life Long Learning"It has always been my [Ito] opinion that 'education' is something people do to you, whereas 'learning' is something you do for yourself." My thoughts on life long learning are here. Lifelong learning is perhaps the most important lesson to learn from schooling.
4. Survival of the Quickest  "You want to have your peripherals wide open and adapt as quickly as you can. I think that will be an important survival trait of people and companies in the future." The abundance and speed of information has been a recurring theme here at SF.The implications for the management of organizations is an under appreciated point. A post I like on that theme is here. 

If I do a post for the future of 2013 I may write about this relationship:

perception--language--knowledge--understanding--learning

Actually ties together 3 out of 4 of Ito's themes.

 

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Carao Ventures--Central America VC

I met Adrian Garcia several years ago when he worked at MesoAmerica, perhaps the first venture capital firm in Central America. I would also point out that Adrian is a graduate of the MIT Sloan School, so we have some other shared interests.

Recently Adrian and a partner, Allan Boruchowitz, founded Carao Ventures, a venture capital firm that specializes in early stage tech companies targeting the Latin American market. What differentiates Carao from most VCs is their approach, which I quote below:

"Carao Ventures has an early stage startup program where one of our partners takes an active role in the startup through the next stage of company development, participating in relevant roles such as strategy, finance, marketing and others."

Carao is headquartered in San Jose, Costa Rica. 

Observations on Mary Meeker's Presentation

Forbes has a story today on Mary Meeker's annual report (link to slide deck) on trends in the Internet. Meeker is a former star equity analyst at Morgan Stanley and now at the renown venture capital firm Kleiner Perkins. Three slides prompted some thoughts.

The increase in student loans in the last ten years is staggering. The increase in loans is in part explained by increased costs for higher education and increased enrollment. However, the shear scale of this debt concerns me and a marked contraction in such borrowing would have significant negative consequences for institutions of higher learning.

The growth in digital information will accelerate which reinforces the point that curation of data is a huge, unheralded business opportunity. I have talked about this point many times but there is still little effort to exploit it. LinkedIn News is a simple example but this approach just scratches the surface of the opportunity.

Tablets have caught on very quickly with children, as shown below, but the key question remains. Will parents pay the iPad/mini-iPad prices, especially for younger children. A rugged tablet built for a child at a better price point still looks like an undeveloped market.

 

 

 

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Pipeline Brickell--Miami Accelerator Meets Shared Workspace

Jerry Haar, the Director of the Pino Entrepreneurship Center at FIU (where I am on the Board), introduced me to Todd Oretsky, the Founder of Pipeline Brickell. Pipeline Brickell is a somewhat unique concept which combines shared space with mentorship and access to capital for startups and early stage companies. What makes the concept different is that mature high tech companies, such as Google, and services providers, such as IP attornies, also use the space. Looking for an expert on an issue, the answer may be just down the hall. 

Pipeline Brickell has as well thought out office space as I have seen anywhere...in the world and beautifully done. Definitely designed for collaboration and creativity. Perhaps not surprising given that Oretsky came from the world class law firm of Skadden Arps. Oretsky plans to expand Pipeline to cities in Latin America and to link networking opportunities across multiple cities.

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FIU's AVCC announces presenting companies

NewME Accelerator Miami Nov 12-14

My friends at the Pino Entrepreneurship Center and Knight Foundation are sponsoring a NewMe Accelerator in Miami on November 12-14. An accelerator is an intensive, short period approach to concepting, demoing and pitching a new business idea to prospective investors. TechStars is perhaps the most well-known accelerator.

The NewME program focuses on helping women and minorities to start their own technology-based businesses. Registration is at NewMEMia.eventbrite.com (scroll down the link for more details).

Executives from Andreessen Horowitz and Base Ventures, two leading venture capital firms, will lead the event. 

A Better Approach to Design

Over the years I have been involved in several design projects for retail stores, shopping centers and merchandise. Mostly, I participated because skilled professionals were not available. I have no formal training in design or related disciplines.

Recently I joined a team of both design professionals and corporate executives to develop a new product. In three months this team produced a totally new product in the category and initial reactions are very positive. The team consisted of only 4-5 people who had a strong vision of what the product needed to be, relied on their experience rather than exhaustive research and aimed to produce a working concept rather than a completed design. Also, the product significantly evolved in terms of 1-3 key features throughout the design process.

What I find interesting about our approach is that it mirrors the advice of UX Magazine in an article yesterday-Lean Strategy for UX Design. UX Magazine advice:

1. Have a clear strategic vision for the product
2. Have a working theory of what the product should be
3. Target to deliver the product in its simplest form
4. Planning should be ongoing rather than carved in stone at the beginning of the project

The full article is worth a read.

The Next Silicon Valley

My friend Mariana (@Yaquesita) is one of the best sources of excellent articles and blog posts I don't find myself. She covers a wide range of subjects, including education, gadgets, tech, entrepreneurship and all things Mexico to name a few subjects. She is well worth a follow on Twitter. Today she sent me a post “Can our country be the next Silicon Valley?” from Tech Crunch.

The article lists six factors to duplicate Silicon Valley, which are:

1. Market
2. Capital
3. People
4. Culture
5. Infrastructure
6. Regulations

I think this list misses the point. To foster great entrepreneurship requires three factors:

1. Available capital to finance early stage companies
2. Great universities, such as Stanford and Cal Tech
3. A culture of business people (this is a difficult point to explain at the risk of being discriminatory, but certain groups have thousand year cultures of doing business)

You also need a regulatory environment sufficiently permissive to allow individual empowerment. Not a full fledged democracy, but a certain permissiveness that allows business formation.

In many countries the biggest challenge is the lack of great universities (Latin America). In an equally large number of countries there is no long standing culture involved in business (perhaps much of Africa). Everywhere access to early stage capital is an issue, even in Europe.

If we reduce the scope of the analysis to regions like Silicon Valley or cities, the possible centers of entrepreneurship are reduced further. For example, in Asia there may be only 5-6 cities that have a great university devoted to technology, but 4-5 of these lack multiple sources of organized capital for early stage companies.

Re-creating Silicon Valley is not impossible, but I would start by attracting a great technology oriented university to the area. Two would be better as Silicon Valley shows with Stanford and Cal Tech. Also, note that Boston has both MIT and Harvard.

My last article on this theme is here.

September Miami Workshop--Business Concept Development

On September 7 I will be giving a workshop for the Pino Entrepreneurship Center at FIU. The theme of the workshop is "business concept development". The workshop closely follows my book (link above) and details how to think through a business model.

The workshop is open to the community. Registration details are here . Proceeds from the 4 hour workshop go to Pino.

Americas Venture Capital Conference Call for Presenting Companies

The 3rd annual Americas Venture Capital Conference, hosted by FIU's Pino Entrepreneurship Center, is now requesting for presenting companies seeking funding to submit selection materials by September 4. Guidelines for prospective presenters are at http://avcc.fiu.edu/presenting_companies.htm.

Information for conference attendees is at http://www.avcc.fiu.edu/. This year's conference will be held in Miami on December 12-13.