Though entrepreneurship has become increasingly prevalent throughout tech hubs such as Silicon Valley and Los Angeles, the creation of new companies remains hindered by high barriers to entry within the market for innovation. Coming up with a life-changing idea feels nearly impossible, and finding your co-founder as well as new hires is incredibly difficult. To further exacerbate the problem, introductions to venture capitalists are hard to come by, given that investors predominantly focus on companies brought to them by trusted sources. These early connections and decisions could impact the longevity of one’s business, and in turn, the innovation we see in our world. If we can create a network of entrepreneurs who are ready to collaborate and build the companies of the future, the market for innovation would become more efficient, in turn driving more value creation in our world.
Entrepreneurship is inherently uncertain, and with uncertainty comes many unknowns. The common view is that as new founders, entrepreneurs need to be incredibly self aware. They need to figure out their “known knowns,” “known unknowns” as well as their “unknown unknowns.” Known knowns are things we are aware of and understand, like our personal strengths and weaknesses. On the other side, known unknowns are things the entrepreneur knows they do not understand, things for which they need answers. The issue gets complicated when we introduce the idea of “unknown unknowns” — things we don’t know we don’t know. A good entrepreneur must be a trailblazer who can navigate the unknown market landscape without fear of the things he does not yet understand. These founders must have a forward looking mindset while understanding current customer needs, creating an interesting dichotomy: entrepreneurs must think critically about all time periods in which the business will operate, unlike corporate incumbents who focus predominantly on what should happen now. With the uncertainty surrounding starting a company, specific issues arise for both founders and potential employees of startups.
On the founder side, entrepreneurs struggle to figure out how to generate good ideas, build their founding team, and monetize and scale their ideas. In coming up with an idea, entrepreneurs typically look to solve a problem or satisfy a need customers face: if current market offerings cannot fulfill the needs of consumers, the market in question seems as though it would be fit for a new startup to disrupt the status quo. Take Uber for example. With the rising price of taxi medallions in New York City, Uber co-founders Travis Kalanick and Garrett Camp noticed a surplus of drivers, but a shortage of medallions. This meant that many people who would have worked in the taxi market were shut out, left with no job. Uber was created to fulfill drivers’ needs, allowing people to essentially run their own taxi service using their own car. Though this probably makes many people wonder, “why didn’t I think of that,” we suffer from hindsight bias; though the idea in and of itself seems simple in theory, we likely overlooked the actual utility of the business that soon was formed around it. That’s not to say that someone else didn’t think of the idea before Kalanick and Camp, but it takes a certain mindset to see the importance of that “simple” idea and what it could become in the future, creating a barrier to entry for prospective founders who do not yet have this ability.
Once the idea is flushed out, more difficulty arises in choosing partners and early hires. According to the founder of Y Combinator, one of Silicon Valley’s most prestigious accelerators, Sam Altman, the first hires for startups are the most important. In a lecture at Stanford University he says, “mediocre people at huge companies will cause some problems, but it won’t kill the company. A single mediocre hire within the first five will often in fact kill a startup.” Furthermore, on how founders should evaluate candidates, Altman claims, “There are three things I look for in a hire. Are they smart? Do they get things done? Do I want to spend a lot of time around them? And if I get an answer, if I can say yes to all three of these, I never regret it, it's almost always worked out.” With a great amount of people risk inherent in choosing the founding team, as well as the overwhelmingly large probability of failure for the venture itself, a new founder’s best bet is to focus on soft strengths rather than specific experiences. A founder of a new company needs teammates with go-getter attitudes, people ready to take on whatever challenge is thrown their way. Since it’s quite difficult to gauge this immediately, founders generally default to their professional network; however, if this person does not come from a U.S. technology hub (ie. Silicon Valley, New York, Los Angeles, etc.), the creation of a tech-focused network may not be easy, posing another barrier to entry for some founders.
Employees face similar challenges. From not knowing where to look for startup jobs to the employment instability they may experience if they do, in fact, join one, a startup employee’s career trajectory is almost as uncertain as the founder’s assumptions about his own business. Startups typically hire on an as-needed basis, unlike their corporate counterparts who normally have a “recruiting season” during which they proactively and opportunistically search for prospective hires. This means when a startup has a job opening, it will likely not be open for long, as the founder becomes heavily reliant on both his own and his investors’ networks to fill the position as quickly as possible. Prospective employees may not know where to look for these opportunities, thus resulting in a possible mismatch of talent and business needs. Given the rapid growth and expansion startups typically experience, hiring quickly is almost a necessity, though it contradicts Altman’s sentiments of choosing a candidate based on personal and cultural attributes. Again we see a dichotomy between what a founder wants/needs in his recruits, and how he could get the best people available. If their focus shifts from quality of candidate to speed of hiring, founders’ current processes for choosing early team members become inefficient.
Worse than not knowing where to look, though, is the issue of job instability for employees. By committing to working at a startup, employees face a risk and reward tradeoff. They accept a lower salary in exchange for equity ownership in the business — a decision that has incredible potential upside, but also scary downside risk. If the company continues to grow and eventually pursues an IPO (Initial Public Offering: the first time a company issues stock to the public on an open market), an employee’s small equity percentage could appreciate in value to quite a large sum of money. The opposite is also true — if the business goes bankrupt, the employee’s equity share becomes virtually worthless, and they face both the material loss of cash as well as the intangible opportunity cost of the time they could have spent elsewhere (a corporate job) earning a higher salary. To be frank, no one really knows whether a startup company will still be in operation a year from the employee’s sign-on date. We don’t necessarily even know if the company will survive the next several months. Based on the staged financing model under which most startups operate, growth is measured by milestones and financing is contingent on meeting the milestones set by the founder and the investors. If the company fails to hit a revenue, number of users, or brand partnership milestone, for example, the next round of financing may not be as easy to raise, leading to potential financial troubles for a newly incorporated business.
Outside of recruitment, broader issues plague the market for innovation — namely the lack of creativity taught and demanded in our education system and the inability to “teach” the mindset necessary to be an entrepreneur. In the U.S. liberal arts education system we are taught material from a textbook, which is often outdated, and expected to regurgitate the same information on an exam. Classes are often lecture-based, meaning there is not much time for students to collaborate and learn from one another. In this model there is essentially no room for creative thought or expression, let alone innovation. Generally “thinking outside the box” is not encouraged in school, whereas in the job market it is a necessity. School teaches us to memorize, whereas the “real world” forces us to put our skills to the test and actually produce results. School gives you a grade on a scale, whereas life is zero to one — you either produce or you do not. The difference in structure between school and employment forces us to think in such a way that does not necessarily prepare us to create anything new; once we become employees we essentially have to relearn our position in our new environment and adapt to fit the needs of our new organization.
While some universities have begun offering “entrepreneurial studies” in their curriculums, there is only so much one can teach. From personal experience at USC, most entrepreneurship courses focus on quantifiable lessons on which students can be graded. From customer discovery (the process of finding your target customer) to marketing to financial analysis, the only real way for professors to grade students is through write-ups and presentations on work they have done outside of class. Since these classes rarely have consistent “homework,” per se, students may begin to develop a false sense that entrepreneurship is easy, when in reality it is one of the hardest occupations in which you can be successful. Though I commend USC on its ability to cater to student desires, it is quite difficult to teach an entrepreneurial mindset. The forward looking, almost psychic ability to predict what the market will want months or years from now is something only certain people have, not something you can necessarily cultivate in this type of classroom setting. Entrepreneurship is about tacit knowledge; true entrepreneurs go out into the world and test their assumptions time and time again, often failing many times before their idea sticks in the minds of consumers. It is this failure that is the best teacher of entrepreneurship. Rather than learning through lectures, prospective entrepreneurs must learn by doing it themselves, often falling flat on their faces only to pick themselves up to try again. Due to this heavy reliance on intrinsic motivation, our current education system seems ill-equipped to produce the entrepreneurs of the future. We must look to outside sources for inspiration, ones that can bridge the gap between some form of teaching and some form of doing.
Perhaps this takes the form of some kind of mentorship; however, current services such as LinkedIn and AngelList, that claim to help build connections to individuals in your industry, in reality are far too broad for the entrepreneur who needs a focused search. LinkedIn has a terrible user experience to begin with: the navigation of the website and mobile app are far from intuitive, and the search results offered rarely meet the criteria set by the searcher. Furthermore, LinkedIn’s network is way too large; though using the advanced search feature can help narrow things down, we often waste precious time sifting through numerous profiles only to learn we could not find who we were looking for. Finally, LinkedIn lacks a focus on small businesses, the cohort of companies entrepreneurs would likely want to connect with. On the other hand, AngelList, a company founded by entrepreneurs for entrepreneurs, has the focus on startups LinkedIn lacks. The issue is their focus is on connecting founders with investors to make fundraising easier. To me, it does not seem like fundraising is necessarily easier as a result of connections made through AngelList, but faster, an attribute not necessarily in the best interest of the parties involved. If our goal is to find a mentor, this might not be the best place to look either, given the connections may not be true, strong connections we want. Mark Suster, general partner of Upfront Ventures, one of the most highly regarded venture capital firms in Los Angeles, echoed the same sentiment: “As a VC, I value proprietary deal flow and long term relationships. If AngelList becomes too hot I worry that each deal gets over-hyped and doesn’t give investors and entrepreneurs the time to really get to know each other and decide whether to work together. I worry about that.” Whether we’re looking for a mentor or an investor to back a prospective venture, the message is clear — we are not making valuable connections through these networks. With overly general resources in which users need to dig deep to find what they are looking for, innovation remains impeded. We waste time talking to people who do not meet our standards, and VCs waste precious money on companies that are similar to previous incumbents. If both sides of the equation are hurt by current market offerings, there has to be a better way to match entrepreneurs, mentors, and investors to set up all parties for success as well as ensure ideas for new businesses are original. We need an environment where friction can be reduced in order to get people on track faster, pushing toward a positive result.
Picture this: If we had a space, safe from idea theft, where entrepreneurs could express their ideas and get feedback from other entrepreneurs, professional investors, and skill based experts (i.e. engineers, User Interface experts, sales and marketing people, etc), then the original creator of an entrepreneurial idea could determine if (1) their idea is plausible in its current form, (2) there are competitors already operating in the same space, and (3) if the idea is technically and/or financially feasible. This would not only expose potential founders to potential investors, partners, and employees, but also allow potential founders to advance their ideas to reality more quickly and with greater reliability, something online social networks like LinkedIn and AngelList currently lack. Some time after its inception, this space could eventually turn into an idea hub to not only help fully flush out business concepts, but also bring a physical product into the world through other people’s intellectual input and hands-on work. With the growth of the community, the group would eventually be able to take advantage of “network effects,” a term often used by venture capitalists and startup founders to mean the increase in value of a network as more people join. With this voluntary opt-in, each new member brings value to all other members and vice versa. Now, the bigger the network gets the stronger the connections become and the better the companies produced will be.
If we truly want to drive innovation forward in our country and in our world, we must also be innovative in the way we do so. We need to constantly think like an entrepreneur: What are the problems/needs? How can we fix them? Who can help us and where can we find them? Over time, the answers to these questions will change, but our mindset and motivation should remain strong. Though the current market for innovation has high barriers to entry, it is up to us to find a way to break down those barriers and collectively and collaboratively build the world of tomorrow.
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