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On Innovation and Optimism

The greatest risk for startup failure lies in not being optimistic enough...

Innovators are sometimes accused of being hopeless optimists, and some may even become so myopic about their inventions that they are rendered incapable of gauging reality. One reason this happens: Once you've tasted the "great aha!" of invention, it's like a drug - it's hard to resist the addictive endorphins released by the act of invention. On the other hand, optimism is a good thing, because many things can go wrong on the path to commercialization and will sorely test your resolve. In fact, so many things can go wrong that the greatest risk for failure isn't due to being overly optimistic... it lies in not being optimistic enough, not thinking big enough, and not committing deeply enough to your dreams. To succeed as an innovator, you must be indefatigably optimistic and demonstrate nearly superhuman resolve and a persistence of vision.

Consider Thomas Edison, who decided to invent a light bulb suitable for the home. To do so, he tested the carbonized filaments of every plant imaginable, including baywood, boxwood, hickory, cedar, flax, bamboo, and finally succeeded with a carbonized cotton thread filament. He even contacted biologists who sent him plant fibers from places in the tropics. Edison acknowledged that the work was tedious and demanding, especially for his workers helping with the experiments.

"Before I got through," Edison said, "I tested no fewer than 6,000 vegetable growths, and ransacked the world for the most suitable filament material. The electric light has caused me the greatest amount of study and has required the most elaborate experiments. I was never myself discouraged, or inclined to be hopeless of success. But I cannot say the same for my associates."

Innovation Nation

What's true for an entrepreneur applies to an entire nation as well; as a country, we simply aren't thinking optimistically enough. So instead of seeing the glass as half full and the job of recovery half done, the naysayer can only see a "lost decade" before us. This is the reason that bipartisan accommodations rarely have what it takes to solve the core issues we face. For example, the 2008-2009 policy efforts that were approved by a bipartisan congress, which successfully prevented financial collapse and averted a full-scale depression, have proven to be insufficient to completely restart the economy. The optimist begs for more stimulus, and the naysayer demands spending cuts.

What's odd is that traditionally the normally resilient American economy recovers robustly from recession as demand is able to rebound quite easily. Within a couple of years after the two deepest recessions of the post-World War II period - those of the mid 1970s and early 1980s - the economy was growing in the range of 6 percent or more. Why have we lost the ability to rebound so briskly? Look deeper. The most likely cause is the Federal Reserve's heavy-handed inflation control policies over the last 20 years.

So what can we, as a nation, do to spur true economic recovery? Economist Larry Summers has said, "The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending... it can only be resolved by increasing confidence, borrowing and lending, and spending." So the greatest threat to our nation is no longer terrorism, it's giving up and giving in to the muddled and fearful thinking that can only lead to a sustained period of slow growth that causes debt-GDP ratios to soar. Yes, yes, we want to restrain spending over the mid- to long-term, but we're still stuck in a middle of financial crisis, so near-term growth through innovation and stimulus needs to be our prime directive.

Bubbles vs Growth Spurts

Fortunately, we are now looking at the possibility of an organic economic upswing: this is what the naysayer derides as "the next dotbomb bubble." The signs are a successful initial public offering as demonstrated by LinkedIn's IPO, Facebook's and Groupon's stratospheric valuations, and the rapid rise of early-stage startup valuation for social technology ventures. As this tentative upswing begins, it is vital that the Fed not apply the usual sledgehammer and force itself to allow the process of exponential growth to continue. In fact, we should stop calling them "bubbles" and refer to them as "growth spurts" - a natural phenomenon that is part of the organic process of accelerated exponential economic growth.

Growth spurts are not new; we've had them for hundreds of years. A terrific example is the railroad bubble/spurt, from which we can learn a lot:

Between 1870 and 1890, investment in the railroad industry quadrupled and work began on four transcontinental lines. The result: Coast-to-coast travel time was reduced by more than an order of magnitude - from six months to six days. Cheap rail freight suddenly made it possible for customers to order products from distant retailers. Soon companies like Sears Roebuck blossomed, followed by the unimaginable new industries like "leisure travel," restaurants that offered exotic cuisines based on the transport of refrigerated food, and professional sports.

Of course, bubbles have their downsides, and by 1897, one-quarter of the industry was in receivership. But when the coal dust cleared, a transformational commercial infrastructure remained. By the end of the 19th century, a small handful of surviving railroad companies in the U.S., U.K., and Japan had become the most valued stocks in existence.

The lesson learned is that as long as a bubble is helping to build something useful - unlike the Tulip mania that was purely speculative - it's actually the way that infrastructure gets built without a lot of taxes. This is the nature of accelerated economic growth. Excessive regulation and heavy handed financial policies will dampen the positive feedback growth dynamics required for critical mass. What's more important than controlling inflation is the deployment of an embryonic transformational commercial infrastructure.

Therefore, the emerging social networking bubble will build out something useful - the third wave of the Internet. The first wave was based on TCP/IP to form the foundation of the Internet, the second wave was based on HTML that helped bring us the Web 2.0, and this third wave is a new kind of Internet, not for packets but for people... and could very well lead to the conclusion of the Information Revolution and the beginning of the Relationship Economy.

The emerging social web will enable commerce in all new and unimaginable ways - and the eventual economic impact of this socialcom growth spurt could be much greater than the dotcom growth spurt. Recall Edison's words when asked about the potential of the light bulb: "We are striking it big in the electric light, better than my vivid imagination first conceived. But where this thing is going to stop, Lord only knows."

And so, if a sustained IPO window opens later this year, regulatory agencies need to do everything possible to nurture the organic process of exponential growth, and hold back the urge to use terms like "irrational exuberance". If you want to use tax credits wisely, give them to the new social technology ventures to spur investment or to pass through to investors.

The New Venture Capitalist

Another transformational shift has to happen for the next growth spurt to be successful... the venture capital industry needs to change the way it invests in startups.

Dave McClure, venture advisor and blogger of 500 Startups, puts it eloquently, "Most consumer Internet investors (angels, seed funds, big VCs) have no clue what the f**k they're doing. Except for a few brand names, most large funds >$150-250M will die in the next 3-5 years... and that's a good thing. Most consumer Internet investors, large or small, have no goddamn clue what they are doing. They are getting killed on IRR, and most of them should be put down & put out of their misery... NOW. Their investment thesis is suspect, their domain-specific skills are limited or non-existent, and their desire & ability to innovate is minimal. They are simply collecting fees, waiting for the next tee time."

In fact, McClure likens most "too big too fail" VCs to dinosaurs, and the Web as the asteroid that hit the planet 15 years ago. In their place, the marsupials are slowly taking over and by 2015 there will be a lot more investors that look like Dave McClure, Steve Blank, Jeff Clavier, First Round Capital, Y-Combinator, TechStars, Betaworks, & Founder Collective.

One of the new breed is Dr. Po Chi Wu, who has managed large and small venture funds, and has recently been innovating new ways to mentor and guide startups. He notes, "In the past, when I worked with large venture firms, the typical process was based on mistrust and combative. Investors aimed to transfer as much equity as possible from the founders, especially as punishment when expectations weren't met. I just couldn't do that anymore, and have been looking for a new way to invest - a way that is a partnership, a collaboration, a mentorship - that can help founders grow teams that can build a large company successfully, instead of marginalizing them and replacing them as soon as possible."

Traditional investors - ie, the dinosaurs - simply do not understand the recent tsunami of technological and behavioral change that has resulted in stunning reductions in time and cost needed to distribute products and services. As a result, they're still trying to optimize their portfolios by squeezing entrepreneurs and delaying investment until after "product fit" - that mythical moment when it all comes together and you know with certainty what you're building. Also, many of these investors do not have the vision to see how social networks might be monetized, and as a result are not so good at picking the winners.

A new kind of venture capital investor needs to emerge to help lead the industry into the future. This brave new investor needs to understand that in an exponential market, it's better to invest a little at first and "pivot" with agility toward product and market fit. It's like what Dwight Eisenhower said about war, "In preparing for battle I have always found that plans are useless, but indispensable." In other words, venture investors need to expect to pull the trigger earlier in the investment cycle, and get their hands dirty with a bit less certainty about things, as the market heats up.

Also, this strategy would make it easier for cash strapped ventures to hire more local talent, instead of outsourcing from day one – and thus contribute toward turning around the American economy. Startups are the primary source of job production in America, and cash-strapped startups are forced to turn to outsourcing early, which sets the trend for hiring down the line.

Welcome to the Relationship Economy

The core competency of the truly innovative entrepreneur is the ability to see that we are not in the middle of a hopeless lost decade, but are actually now living in an age of potential - leveraging a forthcoming perfect storm of technological, economic and globalization forces. Once the growth spurt has started in earnest, we'll begin to see startups ramp to success in timeframes that will make your head spin. As Charles Darwin said, "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."

So get ready for a quantum leap to the next level of accelerated change that will require every drop of optimism and indefatigability we can muster. If you run into some devil's advocate who tells you that he thinks your idea will never fly, remember that if everyone liked your idea... you're not pushing the envelope hard enough. It is only after those stick-in-the-mud anti-innovation anti-bodies start to give you a hard time, that you can be sure that your innovation is actually disruptive enough.

Remember: The innovator's greatest reward is the bliss of proving the naysayer wrong. Your optimism isn't a form of shortsightedness; innovation is actually a spiritual discipline - one that requires exemplary positivity, perspective and perseverance. And any hope of turning our economy around requires that this positivity be shared by the majority of our citizens - people need to decide if they're going to help make the recovery happen, otherwise, they should get out of the way... because the emerging Relationship Economy is coming at us like a freight train.

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