Tag: entrepreneur

Why Golden Parachutes are Better Than Tenure

People argue for tenure as a way to allow risk taking, bold explorations into controversial ideas, and new frontiers in academia.  Without knowing their job can never be lost, how would professors have the incentive to take risks?  And after all, even if many don’t pay off, the most important advances come from big risks.

Any time you’re in a non-market or highly distorted market, it’s hard to know what really works and what doesn’t since genuine signals are absent.  Higher education is not even close to a functioning free market industry, so in order to assess the merit of claims about the value of tenure we ought to look elsewhere.

If tenure is really effective we should see it in other areas where risk taking and controversial advocacy are necessary.

It turns out we don’t really see it anywhere.  In a genuine market, it’s not used as a mechanism for incentivizing risk-taking behavior, even where such behavior is arguably far more valuable even than it is an academia.

Entrepreneurs do not have tenure.  Their risk has no subsidy or backstop except the safety net of their own skill and ability to earn a living elsewhere if the venture fails.  Raising capital from an investor is one way to create the space necessary to experiment with bold ideas, but investors fight to ensure the opposite of tenure.  They want seats on the board and the freedom to vote the founder out.

Inventors and artists need to explore wild, crazy, unthinkable ideas.  Yet tenure is not common in any private sector research labs or the entertainment industry and certainly not in the garages and basements of individual creators.  Intellectual property laws can provide a kind of hedge against risk for the tiny percentage of creators with the means to gain and defend IP, but on net IP actually increases the risk to inventors and artists (when other people gain patents and sue).  Even if IP is gained, it protects the creation, which still has to sell to consumers, it doesn’t ensure an income for the creator.

What about CEOs?  Especially in large publicly traded companies, CEOs need to be free to take major risks.  They need to alter the brand, company culture, product lines, production processes, and anything else that might be inhibiting growth.  CEOs need to advocate crazy ideas and bring bold new visions to fruition, with no guarantee whatsoever they will work or be well received by customers, employees, or investors.  Billions of dollars and thousands of careers are on the line.  Do boards offer them tenure as a way to ensure they are properly incentivized to make unpopular decisions or advance bold ideas?

Never.

But the need for such protection is real.  An incentive structure too hard on failed risk-taking would be hugely detrimental.  Instead of the beloved tenure, something else has emerged in the market.  The despised “Golden Parachute”.

CEOs of large companies get really nice compensation packages, even if they get fired or the company tanks.  This is a hugely valuable tool.  Without it, the CEO role would be undesirable, and bold changes would almost never occur.  If they know they won’t be left out in the cold after a risky idea fails, they’re more likely to try it.  Additionally, if the previous CEO wasn’t impoverished for failure it will make the search for a high-quality new CEO far easier.  No one wants to work for a place that might destroy them if things don’t work out.

The huge advantage the golden parachute has over tenure is that it protects the individual risk taker without letting them bring down the quality of the institution.  Tenure for CEOs would be a disaster.  Boards would be stuck with bad CEOs for life, embarrassing the company and making everyone suffer.  Golden Parachutes, in contrast, allow for a speedy dismissal of a bad executive before they bring down the firm, but still create an incentive structure for risk-taking on the part of CEOs.

While some level of protection from catastrophic failure or public opinion is valuable for encouraging risk-taking and innovation in some fields, tenure seems an inferior method than what emerges in the market.

Investors, Gamblers, and Rules

Yesterday I was talking with my brother Levi who runs a highly successful financial services company about different types of investors.  As sometimes happens, a 2×2 matrix began to emerge.

This not only describes different investor types but also different types of gamblers.  If you know anyone really into either gambling or investing (this goes for both stock investors and VC’s) you’ve probably picked up some variation of these four basic types.

The types are about the way rules and systems are viewed.  I’ve spoken with a great many investors who live by them.  They tell me their sound rules built on solid theory and insight are the only thing that keeps them disciplined and keeps emotion in check to sustain long run returns.

Others say that if rules worked everyone could be rich.  It’s only by breaking rules and being unbound by rigid formulas that you can win big.

I suspect that both of these are true and the key might be to discover your own personality, risk tolerance, and unique intelligence or insight that you do (or do not) bring to the table.  Some people need rules.  Some people would be hampered by them.

Here’s a rough attempt to show some archetypes in the investor world that might illustrate the four categories:

Archetypes

If you don’t recognize some names or you’re not sure what is meant by them, here’s a chart that describes the characteristics of each:

Description

If you recognize these categories, which are best to work with?  Say you are seeking funding for some project or startup.  Some investors have very tight criteria for who they’ll work with.  It can be good and it can be bad, depending upon what you want and what the criteria are.  Many people imagine that the best case would be an investor with no rules, who they could win over on gut instinct and then have a smooth, easy process of getting funding and using it.  This may be true, but it could also mean a) you get no valuable insight from the investor or, b) you get weird, unpredictable phases of meddling and odd requests for pivots.

This chart gives a little description of what working with each category might be like:

Working with

I don’t pretend to have a lot of experience working with investors or gamblers, but I’ve been around enough to see these types pretty clearly.  I’m probably missing some big things and offending some people, and my descriptions may not be reflective of your experience.  This is the result of one short conversation, not a lot of study.

If you strongly disagree or see something I’m missing, hit me up with your take!

The Hunt-to-Meat Ratio and Personal Fulfillment

I was talking with Levi about an article we both came across describing how extreme athletes and entrepreneurs share a brain chemistry that gets a bigger high off of overcoming risky challenges.  The basic idea is that both types of people need that ever ratcheting risk or they become depressed.  This is why entrepreneurs who get a big payday almost always end up launching another venture instead of retiring on an island.  We discussed how plausible this seemed, and in the process hatched the hunt-to-meat ratio.

Hunting is hard and unpredictable.  It requires some practice and training, you may come up empty, or your prey or another predator could turn on you and end it all.  It’s physically and mentally trying, involves lots of patience punctuated by quick bursts of adrenaline-fueled activity, and pre and post hunt analysis.  The assumption is that we hunt because we value the meat.  This is only partially true.  We also hunt because we value the meaning and fulfillment we derive from the hunting experience itself – because of, not despite, the risk.

The thrill-seeker or serial entrepreneur might have a very skewed ratio wherein a much larger percent of their fulfillment comes from the hunt than from the meat that results.  This is all of course arbitrary and from the hip, but I’d say I’m somewhere around 85% hunt, 15% meat, meaning the vast majority of my fulfillment comes from the activity and not so much from the reward at the end.  Levi and some other entrepreneurs I’ve met are probably more like 95-5.

A great many people genuinely believe that they hate work and they’d be happy if they just had wealth without effort.  They believe that their satisfaction ratio is something like 10-90 or 5-95.  They focus only on the meat and hate the hunt.  They end up depressed, and many wrongly conclude that it’s because they need even more meat and less hunt.  They think the ideal life would be 0-100.  This is a tragic misnomer.  Though everyone’s level of fulfillment from leisure and wealth vs. the thrill of a challenge will differ, I suspect it’s hard to be really happy with a percentage of fulfillment that comes from the hunt lower than 50.  A 50-50 hunt-to-meat ratio means you enjoy the challenge of the work in equal proportion to the rewards.  With no struggle at all, we wilt.  Welfare recipients and trust-fund kids alike.

I’m not sure to what extent we have to discover our inherent hunt-to-meat ratio and to what extent we can create it.  Can you learn to get more fulfillment out of work with a different mindset, or does lack of fulfillment simply indicate you still haven’t found the right hunt?  Rather than wishing you didn’t have to hunt at all, I suspect finding your optimal mix and the optimal hunting style that gets you going is more effective.

The Obedience-Entitlement Matrix and Generational Differences

I love a good two by two matrix.  Trying on new lenses through which to interpret the world is a big part of intellectual exploration.  Plus, it’s fun.  I have been fascinated for some time with differences between generations, especially since I’ve interacted a lot with Millenials (or Generation Y) in the last several years, and now I’m interacting with the next generation (I’m calling them Generation Z, because I’m not sure any other title exists currently).  There are some pretty significant differences between these two generations, not to mention the huge difference between both and Generation X, Baby Boomers, and even earlier generations.

In order to explore these generational differences, and to sate my desire for matrices, I put together the Obedience-Entitlement matrix.  Obedience – the degree to which a person follows orders and maintains existing norms – is measured from high to low on the vertical axis.  Entitlement – the degree to which a person believes they are owed something from others – is measured from high to low on the horizontal axis.

You can see the four quadrants that result.  The first label in each quadrant describes the dominant trait displayed by individuals or groups in that quadrant.  The second label in each quadrant serves as a kind of archetype, describing informally the role people in that quadrant play in a society.  Don’t mistake the second label as a career description.  It may be that, but obviously many societies don’t have slaves in the formal sense, and many people who make good soldiers are not necessarily soldiers, etc.  You get the idea.

Don’t be too distracted by the word “Slave” in the upper left quadrant.  Again, it’s an archetype.  I tried to think of a less loaded but still accurate word to describe people who are highly obedient and don’t challenge authority, and are highly dependent and expect to be taken care of.  Slave is the best word I could find.  Obviously not the kind of slaves that revolt or escape, but kind that accept their lot and seek nothing more than the most comfortable slave life possible.

Obedience-Entitlement Matrix

 

So here’s where I started having fun with it.  Thinking in terms of generational differences, I tried to map out the dominant characteristic that describes each of the last four generations.  The Greatest Generation and Boomers were pretty easy.  It gets harder after that.

The ‘Greatest Generation’

The WWII generation fits pretty nicely in the upper right quadrant.  They tend to be deferential to authority and feel a need for maintaining a constant order in the world.  They don’t mind knowing and staying in their “place”, and they don’t expect anything for free.  This generation is accustomed to earning everything through hard work and individual effort, and they keep their gripes to themselves rather than upsetting the apple cart with direct action.

Baby Boomers

Boomers are in the bottom left quadrant.  They grew up questioning everything and tearing down what didn’t suit them.  A big part of their revolt came when they felt they didn’t get what they deserved.  They want things, and you’re damn-well gonna give it to them.  This is a group that’s willing to question all authority structures, and yet doesn’t mind fawning over those promising free goodies.  This is a source of radical idealism, but practical problems.

Generation X, Millennials, and Generation Z

Here’s where it gets hard.  I’ll theorize on why it gets harder in a minute, but first let’s see what we can do.

Generation X might be the least clear.  I consider myself a Gen Xer, even though my date of birth may or may not put me in the tail end of that group, depending who you ask.  I have older siblings and grew up primarily with people and accouterments considered Gen X.  So what does grunge music and a bunch of movies about discontent corporate workers and long-haired slackers mean for the matrix?  I’m still not settled on this one, but I think Gen X is mostly in the upper right quadrant in deed, if not in words.  You don’t see the abiding respect for authority that the Greatest Generation displays, yet for all the complaining and philosophizing about the system, Gen Xers pretty much do the ‘normal’ thing.  They complain about it and feel like it’s pointless, but they do it.  Xers don’t seem to have a strong sense of entitlement either.  In fact, they seem to expect mostly bad things to happen, and have made a kind of stoic peace with it.

On to Millennials.  Here’s where I’ll tick some people off.  If I can narrow down the diverse set of Gen Y characteristics to only the most common, I’d have to place them in the upper left quadrant.  Millennials are demanding and ‘high maintenance’ if you ask employers or parents.  But not in a revolutionary way that truly scares those in authority.  Millennials aren’t threatening to the status quo as much as they are frustrating.  It’s hard to know what they need.  They want a lot of things, and they want someone else to figure it out and give it to them.  They aren’t afraid to openly criticize or make demands of authority, but mostly as a way to vent emotions.  They want to be taken care of above all, and have an abiding sense that the world is unfair if they don’t get what they want.  If you provide, they’ll obey.

Generation Z is really interesting to me.  Only in the last few years have I spent a good deal of time around this generation.  I place them primarily in the bottom right quadrant.  They’ve seen older siblings pay a lot of money for college only to end up in debt living in the basement.  They’ve never known the phenomenon of ever increasing home values and 401(k)’s.  They don’t expect their lives to be better than their parents by some automatic function of time passing.  They’re not entitled.  But they also feel comfortable openly criticizing existing institutions.  Unlike most Millennials, however, they’re not afraid to do something about it and pay the price.  Unlike boomers, they don’t see revolt or reform as the best way to confront the status quo.  They simply walk away, opt out, and exit what they don’t like.  They’ve grown up in a world full of options, and they don’t feel the urge to go along with, or revolt against the game.  They just quit and find or create a new one.

The End of Generations?

X, Y, and Z are pretty hard to easily categorize.  Not just on this matrix, but in general.  They don’t seem to share really dominant characteristics the way previous generations do.  Perhaps that’s because not enough time has yet passed for us to have the ability to look back at their full record.  But I also suspect that the value of defining generations is declining across the board.

We have more choice and customization than ever.  It was once the case that everyone in a certain age range was sure to have a lot of shared experiences.  You saw the same shows, heard the same songs, wore the same clothes.  There weren’t many options.  Today it’s not uncommon for one 18 year old to be a huge fan of a band or TV show that another 18 year old in the same town has never even heard of.  The number of shared experiences and cultural icons has diminished.  This is a very exciting development!  Oppression and stagnation thrive off of sameness.  Collectivism is a dangerous mindset, but it’s becoming endangered.

Your Turn

Play around with the matrix yourself.  Place generations, individuals, companies, sports teams, or anything else on it.  Tell me why I’m wrong.  See if you can adapt it to be of more use to you.

You Were Born an Entrepreneur

Have you ever watched a baby with a goal?  They know what they want, but they don’t know how to get there.  They have limbs they can barely control and a variety of toys, tools, and furniture around them.  They collect information by watching others.  They test and explore, flailing their limbs until they invent their own kind of motion to get from point A to point B.  It’s remarkable when you think about it.  None of the adults around them are crawling, but babies find this solution on their own.  They will not be denied.

It takes years in a conformity-based education system to train that kind of initiative out of us.  In fact, conformity was one of the primary goals of the education system when it was established.  Experts believed that people needed to be molded into uniform widgets, then plugged into an assembly line like spare parts, ready to take orders.  It wasn’t a great model then, and it’s even worse for the world today.

Despite the slower economy, opportunity abounds.  Cloud-computing and other innovations have dramatically reduced the cost of creating, collaborating, and starting a business.  The best businesses are struggling to find people who can come in and add value, out-of-the-box thinking, and innovation.  The market is full of unmet needs, but there aren’t enough entrepreneurs to solve them.

Now is not the time to wait around for more jobs to open up.  Now is not the time to wander aimlessly through a status quo education, or sit in classrooms struggling to stay awake.  Now is the time to rediscover your inner entrepreneur.  Break free.  Pick goals, even if they’re notional, and think clearly about the best way to achieve them.  Test different approaches.  Is the well-worn path really the best option?

Regulation Schmegulation

The number of hurdles to jump before you can legally create value is astounding.  There’s a law at every corner, working to impede the peaceful pursuit of profit.

Highly resourceful or talented people simply find ways around it.  They pivot, contort, or even work to alter the law to achieve their goal.  They devote entire divisions of their companies to overcoming these arbitrary obstacles.  But eventually, they can overcome them.  Some entrepreneurs have an amazingly high risk tolerance, and choose to ignore the laws entirely and provide their products illegally.  Others aren’t willing to risk prison but have the smarts, connections, or wealth to navigate and comply with the labyrinthine legal system.

So what’s the problem with state intervention in the market?  Visionaries can find a way to achieve their vision, laws or not.  The problem isn’t for them.  It’s for everyone else.

People with limited means and average ability suffer.  The barriers are often too much for them to overcome and too risky to ignore.  Their ideas languish.  Each new obstacle sucks away too many resources and leaves them unable to move forward.

Even those who with no particular entrepreneurial vision suffer.  The immense dead-weight loss of all the creators devoting resources to fighting, influencing, or complying with the regulatory state destroys value for all.  I’ve met business owners who devote ten or twenty percent of company resources to state created problems, meaning ten or twenty percent fewer resources are available to solve customer problems and make everyone better off.

People think economic regulations hamper big businesses and rich people.  The opposite is true.  If an idea is big enough and an entrepreneur driven and resourceful enough, it can come to fruition, despite the state.  But there’s no way to comprehend just how many smaller ventures never got started, or how much more wealth would be created for all if the ham-fist of regulation were entirely replaced by the invisible hand of the market.