Lessons in Entrepreneurship: Moneyball (Big Data in Baseball)

I really enjoyed the Moneyball movie, starring Brad Pitt and co-written by Aaron Sorkin (one of my favorite screen writers).  So much so, that after watching the movie, I was compelled to read the Moneyball book by Michael Lewis, from which the movie was based.  I am glad that I did, because as much as Moneyball is a sports story, I think it is an even better business case study, for companies with limited budgets compared to their competitors, like many of the readers of this blog.

For those of you that did not read the book or see the movie, Moneyball is the story of the 2002 Oakland A's baseball team and their unorthodox front-office GM, Billy Beane.  Beane had the challenge of working for one of the "poorest" teams in baseball, with an annual payroll budget that was around 75% less than the budgets of perrenial World Series contenders, like the New York Yankees and Boston Red Sox.  Billy was determined to put a championship-caliber team on the field, regardless of his budget challenges, and he needed to think way "outside of the box" in order to do so.

What he basically did was counter to everything people in baseball would deem reasonable.  He implemented big data driven management techniques that were years ahead of the big data hoopla we are in the midst of today. He took certain control of the on-field decision making away from the manager on the field (in what other industry would the CEO not control every aspect of his business, was his thinking).  He overrode the decisions of all his talent scouts (for the same reasons, saying they were looking for all the wrong things in players based on years of "old school" thinking). 

The guts of Beane's strategy came down to him getting a competitive edge by using big data in baseball to glean insights for on-field advantages and other arbitrage opportunities he could exploit.  As an example, other teams were focused on recruiting high-potential high school players with high batting averages and perfect physiques, in terms of strength and speed.  Beane knew the market overvalued things like that, and that he couldn't afford them.  What he also knew from the big data, was that on-base percentage (not batting average) was a much better indicator for "buying runs and wins", and it didn't matter what the batter looked like physically, provided he could consistently get on base, via hitting or walks.  And, that proven college players, tended to have a much higher odds of Big League success than promising high schoolers who were still developing.  Those were the guys that were less "sexy"; maybe they were overweight or older in age or coming off an injury.  But, in all cases, their imperfection in the eyes of others, based on the wrong metrics for winning on a shoe-string budget, made them affordable "jewels" in Beane's system.

Beane was adamant that taking any optional on-field action that resulted in an out was never good for driving in runs and winning games.  So, he implemented hard and fast rules for his players and coaches.  Walks were of much higher importance, than swinging for the fences on bad pitches.  Sacrifice flyballs to advance the runners on base only handcuff the inning with an additional out.  And, God forbid if a player actually tried to steal a base, and risk being thrown out in the inning.  Beane tried to take much of the "risk" out of baseball, and basically tried to stack the casino odds in his favor.  All based on the big data in baseball that was available, that no one else was using to make business decisions in this  "good old boys club" called Major League Baseball, which had been run much the same as it was during the days of Ty Cobb or Babe Ruth.

Beane's success with this model was incredible.  Despite losing three all-star players from the year before, that he could no longer afford when their contracts came up for renewal, the Oakland A's won their division and set the record for all-time consecutive wins in the process.  Despite the budget constraints and all the naysayers saying Beane's big data strategies would never work, given the collective wisdom within the "MLB club" and the media, the Oakland A's defied all the odds and put a championship-caliber team on the field--one where discipline and hard work was rewarded, and big egos fueled by meaningless statistics were left behind. 

Even though the Oakland A's did not make it to the World Series that year, anyone with their head on straight took notice.  Many of the other teams were quickly trying to reinvent their ball clubs, in the same way Beane had reinvented his.  Beane had actually changed the game of baseball, and he was in hot demand from many other teams wanting his services, including the mighty Boston Red Sox, who made him an offer to join their team as the highest paid GM in professional sports history (which Beane turned down to stay at Oakland, closer to his family).

The business lessons from this story are numerous: (i) don't be afraid to "swim upstream", counter to conventional wisdom, if you are confident your methods will work; (ii) big data runs through all businesses: what datapoints can you exploit that your competitors are not; (iii) are you managing your business on the right metrics; (iv) make sure you run your business like a business, with proper controls to make sure the desired management outcomes are acheived; (v) Beane's insights came from his own personal experience as a former highly-regarded high school player that never lived up to Big League expectations, so take lessons from your own experience; and (vi) David can slay Goliath, regardless of budgets, with a little smart thinking. 

So, to all you aspiring startups out there going up against big well-funded competitors: Batter Up!!

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Lesson #135: Why Big Companies Struggle with Innovation

As I have been doing startup consulting at Red Rocket, I have also had many executive conversations with several big companies.  These companies were anywhere from $150MM to $25BN in revenues in size, so definitely well-established businesses in their respective industries.  But, one thing had become perfectly clear in all cases:  once a company gets to a certain size, it starts to lose its appetite for risk, across many facets of its business.  And, the bigger the company gets, the more risk averse it gets, regardless of whether or not the company had innovation wired into its original DNA as a high-flying startup from years before.  I think there are many reasons for this.

SHIFT IN OWNERSHIP

Venture capitalists clearly understand risk.  Investing in startups is about as risky an undertaking an investor can make.  It is in those risks, that great companies are born and funded.  But, VC's understand that for every "home run" they hit, there are many more "strike outs" along the way.  They also know, they need to have enough "at bats" to make sure the home runs have a reasonable chance of getting hit, to offset the numerous strikeouts they will incur along the way.  Furthermore, VC's actually frown upon near term profits, knowing they are in a race for long term market dominance, and prefer to trade near term EBITDA for long term sales and market share.

Private equity firms take over when companies scale beyond the interest of the venture capitalists.  And, most private equity firms are the antithesis of VC's in their thinking.  They are more conservative in the way they value businesses, focusing on EBITDA instead of revenues.  The reason this happens is they tend to lever up their investments with a lot of debt, to save on equity capital required, which requires the business to drive a lot of profits to pay down their debts over time.  Things you do to drive profits, are typically at the expense of reinvesting those profits into additional growth and innovation of the business.

Then, once companies go public, you have pretty much started the inevitable death of innovation in companies.  Managing to quarterly earnings reports where companies are crucified for missing their forecasted earnings by as little as one penny per share, sending their stock prices tumbling, is the key driver here.  No big company board director or executive is willing to take any major risks, that will trigger shareholder lawsuits in the wake of missing a quarterly earnings report.  And, the minute risk taking stops, innovation is quickly halted and the noose begins to tighten, slowly over time.  It would be a lot better if public companies were incentivized for hitting five year sales targets, as in the VC world, instead of being held hostage to hitting quarterly earnings.

SHIFT IN LEADERSHIP

There is a mindset in the recruitment world that certain CEOs are only good for certain periods of time in the company's growth curve.  For example, the founders that take a business from $0 to $10MM in revenues, should be different than the executive that takes it from $10MM to $100MM in revenues, should be different than the executive that takes it from $100MM to $1BN in revenues, and so on.  In some cases, I agree with that, as the jobs are really quite different.  But, in many cases, I think that could be a mistake.  For example, Apple kicked out founder Steve Jobs for a proven big company guy in John Sculley, and it wasn't until they brought Steve Jobs back years later, that Apple refound its ability to innovate, designing great new products that consumers wanted to buy in mass.

One company that I think got it right was Google.  Instead of kicking out founders Sergey Brin and Larry Page, they kept them involved in management under the tutelage of a proven big company guy, Eric Schmidt. And, once they were trained in the issues of being a "big company" executive, they took the reins back, and never lost their commitment to entrepreneurship and innovation along the way.  That's how a successful internet search engine ended up innovating driverless cars and a myriad of other new inventions in unrelated industries--they didn't paint themself into a pre-determined box, as many big companies do.

SHIFT IN HUMAN RESOURCES

Startups hire A-type personalities where entrepreneurship and risk taking is wired into their DNA.  But, as companies get bigger, they build more formal human resources departments.  And, human resources directors are typically risk averse in their hiring practices.  There tends to be a "shift towards the middle", hiring people that won't "ruffle a lot of feathers" within the organization.  This creates two problems: (i) you typically lose a lot of the A-type personalities who are more innovative leaders; and (ii) you hire a bunch of people who all think and act exactly the same, with people not encouraged or rewarded for thinking outside the box.  Just like in the VC world, I think HR managers would be better served by hiring a few more "home run hitters", even if they have a couple strikeouts along the way.  Otherwise, your team batting average will end up at .250 hitting a bunch of singles and doubles, not at .350 with a chance for winning the World Series.

MANAGING TOWARDS THE MIDDLE

Big companies are all about consensus building.  And, as in life, when do big groups of people agree on most anything?  Only 50% of American's think our President is doing a good job, as an example.  So, what things tend to get the most agreement?  The things that most everybody can agree on, the stuff in the "middle", that are not too extreme in thinking, one way or the other.  Therefore the big ideas around new product innovations or merger candidates, often get passed over for simple iterations on proven things, where consensus can be built.  If companies were managed less like a democratic government, with everyone getting an equal vote, bolder ideas would have a higher chance of rising to the top, and innovation would better prosper.

PROMOTION FROM WITHIN, FEAR OF UNKNOWN

Nine times out of ten, a big company prefers to hire internally, with junior level people rising through the ranks into more senior positions.  The plus side of that is it builds long term employee loyalty with people that know the business inside and out, at all levels along the way.  The downside is very few new ideas are brought to the table, from outsiders with a fresh perspective, that haven't been brainwashed along the way on how to do things a certain way.  But, even if they are open to bringing in outsiders, the insiders can often veto people that they think are "smarter" than themselves, or who may jeopardize their personal career path, or even worse, innovate the business in a direction that could potentially put their own jobs at risk.  To me, business, like the evolution of life, should be all about "survival of the fittest".

CONCLUSION

Companies like Apple, Amazon and Google don't get enough credit for continuing their meteoric growth since day one of their businesses, all the way into becoming multi-billion dollar companies.  They are clearly exceptions to the rule, compared to most other businesses.  They each made long-term commitments to innovation, as the core driver behind their decision making, regardless of the near-term consequences to their profitability or investor desires.  In addition, the one common thread to these companies was the fact the CEOs who founded these businesses, all stayed involved in senior management during their company's growth.  Guys like Steve Jobs, Jeff Bezos and Larry Page who all have entrepreneurship wired into their DNA, and would never be held hostage to their investors or let their teams or company culture become too "comfortable" in their success or too conservative in their thinking.

But, unfortunately, for every Apple out there, there are a thousand other companies that lost their "startup mojo" somewhere along the way.  Companies like Woolworth, Montgomery Ward, Borders Books, Blockbuster Video, American Motors and Pan Am Airlines, that once "ruled the roost" of their respective industries, to only get knocked off by more innovative competitors and come crashing down.  Their downfalls did not happen over night, it happened over decades.  But, the writing was on the wall the minute innovation got suffocated out of their businesses, for the reasons discussed above.

So, my appeal to all you big companies out there playing by "big company playbooks": unless you are constantly innovating, building an entrepreneurial culture where risk-taking is encouraged, and hiring diverse teams of smart people who are entrepreneurs at their core, even if they don't quite fit the company mold or create a sense of uneasiness into their more conservative peers, you all ultimately risk heading to the corporate graveyard. The question is, by when?

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Lessons in Marketing: Grammy Awards 2013

I am a big music fan, and always enjoy watching the annual Grammy Awards, which aired last night.  As I was watching, I couldn't help but notice all the smart business marketing that was happening throughout the evening.  Here were my big award winners from last night:

Corporate Advertisers (Especially Target, Pepsi, Bud Light):  I felt more than ever, the corporate advertisers, as a whole, did a much better job of tailoring their creatives and messaging to the target audience watching the show.  Target pushed music sales of three Grammy nominated artists, like Justin Timberlake and Taylor Swift, soon after they performed on stage, including "tracks only available at Target".  Pepsi launched a teaser video of the new song of Tate Stevens, winner of the music show X Factor, which drove thousand's of people to their website to see the rest.  In addition to Target, Bud Light timed a Justin Timberlake featured ad, singing the same song in the same outfit, shortly after his big performance on the show.  Corporate advertisers are finally "getting it": you can't use one-size fits all creatives; messaging needs to be highly personalized to fit the target audience.

Justin Timberlake:  If you need a good PR person, hire Justin Timberlake's PR manager.  Timberlake has been "retired" from music for the last few years, but he wanted to get back into to it.  What a better way, than to announce his decision a couple weeks before the Grammy's with a well orchestrated PR effort, announcing he is going to be singing his newest song on the biggest music stage on the planet.  Then knock the cover of the ball with his performance, and get Bud Light and Target to pound it home with additional exposure in their ad creatives during the show.  It was like he was never gone, with him immediately relevant again in the music scene after his long hiatus. Here is Timberlake's Grammy peformance and the matching Target ad and Bud Light ad.

Maroon5 & Alicia Keys:  How do you make two of the biggest music stars on the planet even bigger?  Put them on the stage together, singing a mashup of their two current hit singles, "Daylight" by Maroon5 and "Girl on Fire" by Alicia Keys.  The two songs and combined duet performance fit together like a glove, and the Twitter-sphere exploded, with people wondering where they could buy and download the track.  You can see the Grammy performance video here.

Sting & Bruno Mars:  When I first heard Bruno Mars's current hit song "Locked Out of Heaven", all I could think was, it sounded like a song right out of the Sting's mouth and style.  And, there was a lot of negative sentiment online saying the same.  So, what does Bruno Mars do?  He performs the song at the Grammy's, and invites Sting on stage to sing along, showing it wasn't an issue for either of them, putting it to rest.  And, in the process, Sting is thrust back on stage into the limelight, next to one of the biggest stars of today, making himself relevant again.  Great move by both of them.  Here is the video.

Kelly Rowland:  Kudo's to the PR manager for Kelly Rowland, formerly of Destiny's Child, where co-singer Beyonce has captured the far majority of the buzz since the the band broke up.  But, a cameo performance by Kelly Rowland in Beyonce's Super Bowl half time show last week, coupled with the Rowland's "dress of the night" at the Grammy's (as simply an award presenter, not as a music performer), which lit Twitter abuzz, put her back on the map in a major way.

Ryan Seacrest:  You cannot turn your head in the music world and not see Ryan Seacrest, between his radio show, hosting American Idol, replacing Dick Clark on the Rockin' New Year's Eve special, and now, him being featured on last night's show as the new honorary Chairman of Grammy Foundation Board, in charge of coming up with a new award for "Music Instructor of the Year".  But, more importantly, what I love about Seacrest: it never appears like the publicity is centered around him.  He is simply the humble and friendly facilitator, in the right place at the right time.  But, let's call it straight, Ryan is a master at personal branding by associating with all the key events in his industry.

Twitter:  As usual, major media outlets, like the Grammy's last night, continue to embrace Twitter as their social communication platform of choice.  It didn't hurt Twitter one bit to have the emcee, LL Cool J, continually reminding the watchers at home to use specific Twitter hashtags to provide their reactions to the show.  And, then have him read off some of the key tweets throughout the night and answering several of their questions live.  Another coup for Twitter.

Do you think I missed anything?  If so, add them in the comments field below.  Otherwise, incorporate marketing lessons like these, into your own businesses.  What's going to be your "Grammy's moment", to light your brand on fire??

For future posts, please follow me at:  www.twitter.com/georgedeeb

[NEWS] Nominations Open for Techweek 100 in Chicago

Nominations are now open for Techweek 100 in Chicago.  If I, or others, have helped your biz or Chicago's tech scene, let them know. And, be sure to sign up to attend the event in June.  Thanks.

http://techweek.com/chicago/events/techweek-100/techweek-100-nominations-for-2013/ …

Lesson #134: Where to Best Locate Your Startup

According to BuiltinChicago, there is a new startup formed in Chicago every 48 hours.  As more startups are created, and the existing companies grow and expand, demand for well located, creative and affordable office space is increasing.  Today’s lesson is going to tackle how to go about locating your work activities, in general, and more specifically, with some alternatives here in Chicago.  To help me with this project, I solicited the help of Steve Schneider, an EVP at DTZ, a corporate real estate specialist in town.

WHAT CITIES?

You can startup a new business pretty much anywhere these days, especially given global connectivity to the internet.  But, I would suggest locating your startup in a city that has a well-established startup ecosystem for your industry, where you can easily source needed employees, mentorship or investors.  In the tech world, that used to be limited to places like Silicon Valley, Boston and Seattle.  But, startup ecosystems are popping up everywhere, both in big cities, like New York and Chicago, and around key university campuses, like Austin, Boulder, Ann Arbor and Raleigh-Durham.  So, do your homework to see if your city is well positioned to help you succeed, or whether you should consider making a move.

The reason to locate your offices in large population centers are numerous, including: (i) large pools of first class talent, from entry level to high level executives; (ii) easy access to public transportation; (iii) an oversupply of available space, where discounted rents can often be found; (iv) plenty of creative, open loft space buildings which are better suited for startups; and (v) close proximity to digital infrastructure hubs for your tech connectivity needs.

WHAT NEIGHBORHOODS, IN GENERAL?

 
Try to locate your startup in neighborhoods within close proximity to other startups in town, to leverage the local startup ecosystems and to more easily share learnings with other startups near you.

WHAT NEIGHBORHOODS, IN CHICAGO?

River North has become the premier destination for startups in Chicago, given its proximity to the startup epicenter at 1871 in the Merchandise Mart, and its concentration of open, creative loft space, which are in high demand from marketing, technology and other startups.  However, due to the higher rental prices ($22-$26 per foot) and lack of space in River North, the River West market has become a destination for start-ups seeking less expensive alternatives ($18-$25 per foot).  For even lower rents ($15-$18 per foot), consider other area neighborhoods, like Evanston, Bucktown and Ravenswood were many startups are located., although they are harder to commute to.

WHAT SPACES, IN GENERAL?

I have always heard about “two guys in a garage” launching a startup, but frankly, I have never known any startup to actually do that here in Chicago.  So, where should you work from?  High level: wherever you can keep your costs at an absolute minimum, even at zero, until the business has its “sea legs” underneath it.  And, these costs need to be flexible and variable based on your growth needs, so don't lock into any space you’ll quickly outgrow or a lease you can’t easily exit.  Here is some high level guidance by company stage:

Under 5 Employees:  Everything is on the table at this point, from working at home, to working out of a Starbucks, to finding an empty cubicle in your lawyer’s office, to a more formal startup co-working space, where you can rent a desk for $300-$400 per month.  The advantage of the latter, is immersing yourself into a startup ecosystem, and sharing learnings with other entrepreneurs.  Not to mention, many of these facilities bring in outside mentors for tutelage, and help negotiate discounts for services from outside vendors.  If you can afford it, I suggest the shared startup space, given its advantages.

5-20 Employees:  At this stage of your growth, you have to think creatively how to find space.  Some startup co-working spaces can handle companies of this size, but many cannot.  So, you need to make a call how certain you are of your company’s future.  If your growth is solidly taking off, you can perhaps look for a longer term, permanent space.  But, most likely, I would try to find a company that has more space than they need, and ask if you can share in their rent costs, on a month-to-month basis, to work at a some of their open workstations.  They would gladly like the cost savings, since they are paying for more space than they need, and you should not have to lock into a long term commitment.

Over 20 Employees:  It is hard not to move to a committed space of your own, at this point.  You’ll want it for privacy, security and convenience by this stage of your growth.  Your two primary options are direct leases with landlords, which can be expensive, or sub-leases from current tenants, which can be 25%-50% cheaper than direct leases with landlords.  If you can find it, a sub-lease is the way to go, especially if you can find one with your desired open floor plan, that is already furnished and already wired for your connectivity needs, since it will most likely be a shorter term in length.  CoStar is a the MLS of the corporate rental industry, where you can find available subleases.  If you can’t find a sub-lease, try to find a direct lease where there will be limited build-out requirements, so the landlord can pass along those savings to you in the form of lower rent.  And, shoot for shorter term leases (e.g., 1-3 years), if you can, to allow you maximum flexibility to move as you grow, or to cut the lease if you need to lower costs.  Assume you will need 150-200 square feet per employee, and take your future growth into consideration.

WHAT SPACES IN CHICAGO?

Shared Space:  Numerous shared co-working spaces for startups have been established in Chicago, with more launching all the time. Some of the bigger shared spaces in town include: 

·         1871 @ Merchandise Mart

·         TechNexus @ 200 South Wacker

·         Catapult Chicago @321 N. Clark

·         VentureShot @ 744 N. Wells

·         OfficePort @ 9 West Washington

·         The Coop @ 230 West Superior

·         Workspring@ 30 West Monroe & 12 East Ohio

·         Enerspace @ 412A North Carpenter 

·         Regis @ 564 W Randolph

 

And, if you can, consider applying to local startup incubator or accelerator programs in town, to leverage their office space, including TechStars Chicago (formerly Excelerate Labs), Healthbox (for healthcare related startups) and NuevoLabs (for hispanic related startups).  Here too, new incubator and accelerator programs seem to be launching all the time.  In addition, many of the venture capital firms in town, also house their startup portfolio companies in an incubator type of setting, including Sandbox Industries and Lightbank, if you are lucky enough to secure both their capital and their office space.

Stand-Alone Space:  There are numerous startup-friendly buildings in Chicago, so be sure to speak with your broker for a then-current list of available space.  But, according to Steve, and my own experience in town, here is a sampling of startup-friendly buildings to consider: 600 W. Chicago (home of Lightbank),  564 W. Randolph, 400 S. Jefferson, 626 W. Jackson, 564 W. Randolph, 111 N. Canal,  55 W. Monroe, 111 W. Jackson, 20 N. Wacker, 180 N. Lasalle and 29 N. Wacker.  I especially like a lot of the buildings managed by Urban Innovations, has they have more of an open loft feel in key startup neighborhoods. I also like a lot of the buildings around Greek Town, in the vicinity of 833 W. Jackson.  There are also a few startup-friendly buildings that are currently under development at 1000 W. Fulton, 111 N. Canal, 401 N. Morgan and 1000 W. Fulton, which will be launching soon.

For more thoughts on your office needs and setup, I would suggest re-reading Lesson #55 on How to Create a Healthy Office Environment, and Lesson #41 on Security Considerations for Your Startup.

For additional information, feel free to contact Steve Schneider at DTZ at 312-424-8119 or steve.schneider@na.ugllimited.com, who is happy to help you think through your best options here.


ADDENDUM (06/24/16):  

Check out this more recent post of Chicago area startup accelerators, incubators and shared office spaces as good locations to locate your startup.

For future posts, please follow me at:  www.twitter.com/georgedeeb.