MIT Sloan Management Review

There was lots of entepreneurial energy in the room at MIT’s Kresge Auditorium today — as a sizable crowd gathered in the morning for a free daylong “Startup Bootcamp” full of lessons from technology entrepreneurs.  Here are some insights from just a few of the day’s speakers:

• MIT’s Ken Zolot offered a set of questions to ask about an invention when you’re thinking about starting a business around it:

1. Does it work yet?
2. Is it special?
3. Who cares?
4. What do I have and who do I know?
5. Who can help?

• When you’re in those early stages of developing your idea, Robin Chase, founder of the car-sharing company Zipcar, advised entrepreneurs to think of every person you meet as a free consultant — and pay attention to the questions they ask you about your idea when you explain it to them. “When people ask you things, they aren’t asking dumb questions,” she explained. “You should hone your idea and the way you express it and move forward.”
• Adam Smith, founder of Xobni, mentioned the importance of staying small until you achieve product market fit — i.e., you have a product that people want. When you achieve that, you can scale up, according to Smith — and then it’s more about execution.
• Daniel Theobald, founder and CTO of Vecna, recommended avoiding taking “other people’s money” as investments if you can — particularly if you have a socially responsible business model as a vision. Vecna, he said, allows employees to spend up to 10% of their work time on community service projects — and the company’s model wouldn’t have worked if the company had taken outside investors’ money. Instead, he said, the company used IT consulting to bootstrap its startup stage — structuring its consulting agreements so that Vecna retained the intellectual property.
• More than one speaker alluded to the need for start-up entrepreneurs to experiment and iterate quickly until they get to a successful business model. But that process isn’t necessarily easy for entrepreneurs — as Kyle Vogt, one of the founders of Justin.TV, vividly described.  Vogt spoke of stages Web start-ups go through – including the “Trough of Sorrow” that occurs after the initial product has launched but before the company has reached a stage Vogt calls “Acquisition of Loyalty.”  While in the “Trough of Sorrow,” Vogt said, entrepreneurs may face tough questions from family, friends — and from themselves. However, according to Vogt, if you stick to it long enough and try enough times, you’ll probably find something people will like. Justin.TV, which began by providing live video coverage from the life of a guy named Justin, now includes a wide range of live video, such as coverage from the Startup Bootcamp — including this excerpt from Robin Chase’s presentation:

Watch video from Startup Bootcamp on Justin.tv          

A new working paper tackles an interesting topic: the relationship between tolerance for failure and innovation. In particular, authors Xuan Tian and Tracy Y. Wang looked at venture capitalists’ tolerance for failure  — and its effect on the innovativeness of the young companies they invested in.

One of Tian and Wang’s interesting findings: Venture-backed companies that eventually conducted IPOs (initial public offerings) and were backed by more failure-tolerant venture capitalists were significantly more innovative than other venture-backed IPO companies. 

What’s more, the researchers’ analysis suggests that what particularly matters is investment at an early stage by a failure-tolerant investor.   Venture capitalists, Tian and Wang conclude, appear to influence the culture of the early-stage start-ups they invest in — and failure-tolerant early investors result in IPO companies that are more innovative. 

Tian and Wang measured VCs’ failure tolerance by looking at how long the VCs continued to invest in prior companies that they eventually wrote off.  The authors’ measured innovativeness by looking at a company’s patents and the impact of those patents.

In the U.S., venture capital (VC) firms are disproportionately concentrated in a few geographic areas. Ever wonder why? Well, a new study explores the relationship between venture capitalists’ location and their investments  – and finds some intriguing results.

Henry Chen, Paul Gompers, Anna Kovner and Josh Lerner examined the location of U.S. venture capital firms’ headquarters, branch offices, and investments — as well as their investment success rates. Here are highlights of a few of their findings:

• First, no surprsies: U.S. venture capital is heavily clustered in just three areas of the country – San Francisco/San Jose, New York, and Boston. More than half of all venture capital offices in the U.S. are located in those three metropolitan areas. Just under half of all companies financed by venture capital are located in those areas, too.
• And, it turns out, there are reasons for that. Venture capital firms are disproportionately concentrated in regions where VC investments have been successful in the past — and those regions are in states with higher than average levels of economic output per person. VC-intensive regions are also areas with high numbers of patents per capita. What’s more, venture capital firms headquartered in the three regions that the researchers call “venture capital centers” have a higher average success rate than VC firms based elsewhere.
• Now, here’s a surprising finding. Even though VC firms headquartered in venture capital centers like San Francisco and Boston perform better overall — and even though VC firms disproportionately invest in local start-ups – the VC firms, on average, get better results from their investments in locations outside their headquarters region.

Why would that be? The researchers suggest one possible explanation: Because venture capitalists prefer to invest close to their offices – so they can more easily monitor performance — they may only invest farther afield when start-ups are particularly promising. Conversely, the investors may have slightly lower standards for start-ups that are closer to home, since such start-ups are less costly to keep tabs on.

In other words, start-ups outside the hubs of venture capital may have to overcome higher hurdles to gain VC investors – and then are more likely to perform well.

This week was a big one for innovation here at MIT — in that the winner of the 20th annual MIT $100K Entrepreneurship Competition was announced Wednesday. Ksplice, the winning company from a record 260 entries, has developed technology that enables users to install software updates without rebooting their computers. The start-up was founded by five MIT engineers.

From an innovation point of view, the story of Ksplice’s founding illustrates an important theme: an idea born from a frustration with the status quo. According to an article by Ksplice COO Waseem Daher, Jeff Arnold, one of the company’s founders, was managing servers at MIT. A security update arrived in the middle of the week. Arnold decided not to install it until a more quiet weekend period – only to see the system compromised before then, so that all the software had to be reinstalled.

Arnold’s response, according to Daher? After expressing frustration, Arnold went on to write “an award-winning master’s thesis” addressing ways to update software without system reboots. And that’s the technology behind KSplice.

You can read Daher’s fascinating account of the company’s journey to the $100K finals at Xconomy.com.

Andrea Ordanini takes an interesting look at “crowd funding” in the latest edition of Business Insight. What’s crowd funding? It’s the emerging practice of consumers investing small amounts of money (as little as $1) in products they fancy by musicians or fashion designers. It’s yet another form of community activity facilitated by the Internet.

However, don’t expect an explosion of consumer-funded start-up businesses. Ordanini notes that the “crowd funding” process “works best with products for which customers feel a strong personal attachment — products like music and designer goods. Without that bond, customers are unlikely to support a product beyond simply buying it.”

As the downturn continues, some technology start-up companies are closing or being acquired at low prices, The Wall Street Journal reports. That, along with a reported decrease in angel investing, raise questions about the environment for innovation.

But the news isn’t all bad. The San Jose Mercury News recently highlighted entrepreneurial companies that are growing despite the economy, in sectors such as online video, software as a service (SaaS) and open source software. One key to getting venture capital now? Offering a business model that will save money for customers, according to The New York Times ”Bits”  blog. And there’s always the possibility of eschewing venture capital entirely:

• Xconomy.com reports on a biotech start-up that has launched without outside investors – in a sector where that’s tough to do. (The entrepreneur instead obtained research contracts from established companies.)
• Start-up expert Guy Kawasaki offers ten bootstrapping tips for self-financing your start-up.

Follow all of MIT Sloan Management Review’s coverage of TED.

Someone doing a study of collaborative innovation could start with a look at the TED Prize, three of which were awarded here last night. The winners this year were extraterrestrial life searcher Jill Tarter, ocean researcher Sylvia Earle, and economist, musician, and advocate Jose Antonio Abreu. The idea is that the prize winners announce their dream. TED kicks in $100,000 to start funding that dream. More important, the prize winner now has access to the people in the TED community. Immediately after the acceptance speeches and into today, I’ve seen dozens of TED luminaries pledge in-kind support to the dream of one winner or another.

This stone soup approach isn’t uncommon, but it’s particularly impressive because all these people are at the center of other communities and have much to offer: that’s how they wound up at TED. Indeed, previous winners of the TED prize have had their dreams fulfilled because of intervention and assistance from (that word again) TEDsters. The most high-profile example of that is photojournalist Jim Nachtwey, a 2007 prize winner, who had to surmount multiple political and technical hurdles to tell his story of a deadly disease that’s hidden to most people in the developed world. Contacts at TED helped him do that.

The TED Prize ceremony capped a day in which it was definitely technology, the “T” in TED, held sway. Some of it was about robots. We learned about medical robots that permit minimally invasive surgery and biologist Robert Full revealed what he learned about how tails work while building robots that mimic geckos.

The first day there was plenty of talk about robots, too, and some of the breakthroughs demonstrated on the TED stage have been placed in the lobby so attendees can get a closer look. You can, for example, interact with a realistic Albert Einstein head that changes its facial expression based on yours:

Yesterday’s talk from Shai Agassi, who, like so many other TED speakers, began his talk with a provocative question — “How would you run a country without oil?” — and told the story of his journey to build an electric car. He noted that “electric cars have to be more convenient and more affordable than what they’re replacing” and maintained that the way to do this is to “separate ownership of the car and ownership of the battery” and replace it with a business model in which people and companies “own the car but subscribe to miles.” When explaining why he decided on an all-electric car rather than a hybrid, he got off the line of the day when he quoted Renault CEO Carlos Ghosn, who’s one of many funding Agassi’s international effort:

Hybrids are like mermaids. When you want a fish, you have a woman. When you want a woman, you have a fish.

You can learn more about Agassi’s company, Better Place, which he’s using to develop — you guessed right — a community around his endeavor.

And, finally, there was a big storm yesterday in Long Beach, as you can see:

How do you ensure that your product stays relevant in the future? Reach out to the next generation of innovators. In what sounds like a smart marketing tactic, several large companies are seeking to encourage software start-ups to use their products and services  – through initiatives that range from free software development tools to a contest.

Microsoft in November launched a program  called BizSpark that offers eligible software start-ups around the globe free access to various Microsoft products — as long as the start-ups are privately held, less than three years old, have annual revenue of less than $1 million  and are referred by partners such as venture capitalists. (The start-ups do pay a $100 fee when they leave the program.) Meanwhile, Sun Microsystems has a program for start-ups called Sun Startup Essentials that includes discounted servers and open source software. And Amazon Web Services (AWS) recently announced this year’s winner of a contest it sponsors for start-ups that use its cloud computing platform.

Microsoft is also reaching out to those who may become future  innovators: High-school and college students in a number of countries can participate in its DreamSpark program to download a number of Microsoft software development tools for free.