Small Business News
In a business culture obsessed with data, here's a bit of counterintuitive advice: Stop using numbers to rate your employees' performance. Here's why.
In a business culture increasingly based on data, it's no surprise many employers opt for a performance review process that's numbers-based. The problem is, numerical ratings aren't nearly as objective as you think.
At least so says Marcus Buckingham, author of "StandOut: Find your Edge, Win at Work," and the founder of TMBC.
"I argued that such rating systems don't accomplish the task managers expect from them, which is to accelerate the performance of their people," he writes in the Harvard Business Review. "At best, they serve other goals: allocating compensation fairly, and aligning each individual's goals with the values and strategies of the company."
Buckingham says even if these two objectives above were all you wanted to find out, these numerical approaches--called Human Capital Management (HCM) systems--have "intractable problems." Below, read why Buckingham says you should find a new rating system for your employees.
Don't rely on assumptions.
HCM systems are entirely based on the assumption that a manager can be a reliable rater of employees' strengths, weaknesses, and skills, Buckingham says. This is a dangerous assumption, Buckingham says, for there is no evidence that shows "inter-rater reliability" (meaning two managers will rate the same employee exactly the same) will happen within your company. In fact, it's possible you'll see two totally different ratings from two managers. So, if you are using these ratings to identify and fire low performers, promote top performers, and give out bonuses, you're in trouble.
Subjectivity is difficult to root out, Buckingham writes. "It appears that, when it comes to rating someone else, our own strengths, skills, and biases get in the way and we end up rating the person not on some wonderfully objective scale, but on our own scale." He says that managers will rate your employees' skills by comparison--"Does she have more or less of this strength or skill than I do?" If the employee has more, the rating is high; if she doesn't, the rating is low. Buckingham calls this "false precision."
Do not ignore the individual.
Your best managers will get to know each of your employees--weaknesses and strengths--and help them achieve the goals you set out for the company. But Buckingham says numerical rating systems do not differentiate between individual employees. "[The rating systems] ignore the person and instead tell the manager to rate the person on a disembodied list of strengths and skills, often called competencies, and then to teach the person how to acquire the competencies she lacks," he writes. But often these competencies, such as strategic thinking and learning agility, aren't the sort of things that a manager can measure easily with numbers. Good managers recognize an employee's unique traits as the "raw material" that can be shaped in order to "create the performance they want."
The holiday provides a great chance to catch up on sleep. Here's how to take advantage of it.
If you're used to moving a mile a minute at work, taking a long Thanksgiving weekend to rest might be a little, well, difficult. It's hard to stay away from email--and constantly checking in with work. And if you're traveling across time zones, jet lag can alter your natural sleep rhythm.
But there are a few simple tricks to getting some extra snooze time over the holiday break.
1. Keep your phone handy. That is, if you’re using one of the many sleep apps available. Try JetLag Genie, which formulates a plan to help shift your sleep schedule and ward off jet lag.
Not traveling? Try Pzizz or Relax Completely, both apps offer relaxing music and a hypnosis session to lull you to sleep.
2. Stop eating at least three hours before bed. Inc. contributor and nutritionist Barbara Mendez said that those who snack up until bedtime are likely to have broken sleep. That’s because when the body works to digest foods, it can hinder the ability to wind down in time for bed.
3. Avoid alcohol close to sleep. It’s true that as a depressant, alcohol can make it easier to fall asleep, but it can also make it harder to stay asleep. "Alcohol raises your core body temperature, increasing the chance you’ll wake up in the middle of the night -- and making it difficult to fall back asleep," Mendez said. So keep your holiday drinking to earlier in the day and pace yourself in the evening.
4. Open the windows and shut off all your screens. Cool temperatures help to induce sleep. A dark sleep environment can also help you to have a more restorative sleep, so turn off your TV, laptop, phone, or anything else in the room making it bright.
5. Take a warm shower before bed. Taking a shower is both calming and sleep-inducing. A warm shower increases your body temperature, and as your body cools, the effect creates a feeling of drowsiness.
6. Don't worry about sleep. It's true: The more you obsess over sleep, the harder it will be to get some. A recent Harvard sleep study recommended that you take a break if you can't fall asleep in 20 minutes. You can read under dim light until you get tired again.
For more sleep tips, read the rest of Mendez's article here. And if you need more convincing that sleep is absolutely necessary for your well-being, read this article about what sleep deprivation does to the brain.
These three steps can help you set up a reverse mentoring program to keep your team at the cutting edge.
Typically, when we think about mentoring or coaching, we're really thinking about experienced employees taking younger employees under their wing.
There are plenty of good reasons for this. Mentoring helps get young talent acclimated to your culture and processes. It also helps to keep turnover low. Mentoring, it turns out, is the number one thing young employees want from their employer.
But there's another kind of mentorship you can use at your company, and it works basically in reverse. When it comes to helping senior employees identify the latest trends and technology, who better to help than those closest to them: their younger counterparts.
The Financial Times recently wrote about some of the companies championing reverse mentoring programs, and how it benefits both parties, from helping younger employees form a stronger bond that they might in a traditional mentor system to helping an older employee understand how to best use LinkedIn.
Let's take a look at three principles from the article for setting up a system at your company.
1. Make it mutually beneficial.
While the senior employee is the one who theoretically benefits from exposure to the younger employee in a reverse mentorship, the younger employee should gain something as well. If your organization already features a traditional mentorship program, which it should, it might make sense to restructure your existing traditional mentorships into a two-way street encompassing both parties' personal development.
2. Sell it.
The suggestion that your older employees could learn a thing or two from the younger could, unfortunately, come with the chance of backlash. To mitigate it, you need to make sure you spell out how the company and the senior employees stand to benefit. In particular, the Financial Times notes, make sure you're not suggesting that the senior employees' skills are redundant compared to their youthful counterparts.
3. Think beyond tech.
From a skills gap perspective, technology figures to be the place where your younger employees can most help. But consider a reverse mentorship an opportunity to think outside the purely vocational. For instance, this is a great way to expose your employees--both older and younger--to generational differences that will help them better think about your company and their jobs both now and in the future.
Say what you want, but funding and expansion don't mean a thing when you're trying to kill it.
Whenever you ask a start-up CEO how it's going, the first statement out of their mouth is usually something about how they're "killing it." Always trying to present a upbeat facade, they will then go on to share a handful of metrics to support that statement.
How do I know? Because I did the same thing.
I never really knew how to answer this question, so I'd smile and rattle off the biggest metrics I could think of. The trouble was, the metrics I was using weren't connected to our success or sustainability. Here are five metrics I hear mentioned by start-up CEOs that have no correlation with your ultimate success.
How Much Capital You've Raised
Many CEOs believe that raising money validates their idea, especially when it draws media attention.
But while it's true that raising capital means a select few believe in your potential, by no means does it mean you have a successful business. It just means someone thinks they can make money off you.
How Many People You've Hired
The more people you hire, the more successful you are, right?
Actually, hiring lots of people probably means you're inefficient as a small team. Perhaps you're taking on too many projects or not being diligent about whom you hire.
Contour was a 50 person company that should have been a 25 person company. We solved our problems by adding more people instead of asking the hard question: Do we really need to hire these people?
How Many Users You Have
Some start-ups grow to an astronomical scale. And if you're Facebook, Instagram, Twitter, Pinterest, or Snapchat, you can raise enough capital to focus on a metric that has nothing to do with the quality of your business. Friendster, Myspace, Hulu, and Zynga are great examples of how this metric can quickly turn on you.
What does matter is how many customers you have, how happy they are, and how often they use your product. If you have a growing number of customers using your product or service frequently, you're on your way to creating a very successful business.
Remember: Customers pay you. Users don't.
Where You've Expanded
At Contour, we sold our product in 40 different countries, but that didn't reflect the quality of our business. We were leading in each new market? No. Were we adding value by being there? No. And did we have more than a single sales person activating each country? Definitely not.
Being a successful international start-up is incredibly hard. So before you rattle off the number of countries you are in, make sure each country is actually a success.
Where You're Selling
So you've opened a hundred stores and your product's on thousands of shelves. As great as that sounds, it doesn't mean you're adding more customers. The more stores you have, the higher the risk is your inventory won't sell. And slow turning product can be the death of a start-up.
If you're unprofitable in one store, adding more won't turn it into a healthier business.
What oDesk's VP learned about building a business in the backwoods of Mississippi.
In May 2002, I quit my investment banking job at JP Morgan in New York City. After years of 80-hour workweeks, I was ready for something else.
At first, I took a big detour. An uncle living in the backwoods of Mississippi had 10 acres near a gorgeous national forest, where he planned to launch a canoe rental business. Compliments of a nasty divorce, everything he owned (except for his truck) was headed for bankruptcy auction. Standing on the local courthouse steps, I bought his land, and suddenly, there I was, bootstrapping a business with my uncle.
The business was called Soggy Bottom Canoe and Kayak Rental. It was my first start-up. And it was an unmitigated disaster. Before it was all over, it would drain my investment banking savings and a good portion of my parents' savings when they tried to save the business I'd written off.
Eventually, I called it a day and moved to Silicon Valley. A marriage and four kids later, running a start-up in the backwoods of Mississippi feels like a lifetime ago. But I've realized I still apply the (expensive) lessons I learned at Soggy Bottom. Here's how you can too.
Test before you invest
The saying "if you build it, they will come" is only true in some cases. Before you invest, you've got to test whether the business you're building is what customers want.
When I arrived at the Soggy Bottom property, it was a work in progress with a half-built pavilion. For a while, I slept in a motel and then on the floor of the building. We invested heavily in finishing out our facilities and buying equipment--32 canoes, 16 kayaks, four trailers and two vans, so by the time our July 4th opening rolled around, everything was immaculate.
The "Now Open" sign went up and we waited for the crowd to rush in.
The sound of chirping crickets was deafening.
Sometimes they don't come
In our quest to have the best facilities and equipment, we neglected to speak to even a single prospective customer. No Boy Scout troops, no church youth groups, no fraternities from Southern Mississippi University. As a result, I can count on only one hand the number of times, in the seven years that we owned the business, that we reached even half of our booking capacity.
Today, I still fight against the urge to make big investments before we've "beta tested." Every time that urge pops up, I picture gleaming new canoes hitched up to sad empty passenger vans.
Fake it before you make it
Today, I know testing is critical. We describe what we are thinking of offering, gather feedback, and invite participation in a beta. We set the expectation that we have something valuable to offer, but that it's not yet well-oiled--and that their help will be a critical part of our fine-tuning process.
While start-ups may lay claim to the "beta" approach and consider it a best practice (check out this beta test page on Reddit), testing isn't a new concept. When restaurants open, they "fake open" first by holding free invite-only dinners to work out the kinkswith diners who know they're going to be guinea pigs.
At Soggy Bottom, we knew we had a wonderful stretch of water. But we didn't know that we should have spent the bare minimum effort on infrastructure. Every bit of effort remaining should have gone into letting people know about our new business, inviting them in, and hanging onto their feedback.
If we'd mocked up a full-scale operation in the short-term then built one out once we had proof of concept, perhaps we would have made it in the long run.
You don't need to spend a bundle to make a lasting impression on your clients and customers.The holidays are a great time for small businesses to show how much they appreciate their customers. You don’t need to spend a lot of money to make a lasting, positive impression. Here are some ideas: Make a donation “In honor of our customers, a donation has been made to…” Consider making a donation to a charitable organization that supports your local community or an organization your clients or customers support. Check their website to see if the company is aligned with any particular cause or initiative. This spreads goodwill and cheer for everyone associated with your business, regardless of the amount. Share your profits Let customers share in the spirit of giving. Designate specific products or services for a holiday promotion, with a percentage of all profits going to a well-deserving organization. Express yourself Sometimes, it really is the thought that counts. One of the most rare and treasured gifts in this digital age is a handwritten note. Your best customers and partners may receive holiday greeting cards, but a note from you will stop them in their tracks. Take five minutes to tell them exactly why you are grateful for their business. Make a connection Help your customers by introducing them to people they need to know. Holidays are a frenetic time when work and life collide, and the greatest gift may be the name of your best babysitter, personal shopper, or friend who sells jewelry, cookware or handbags. Found a great deal or tip? Share it with your busy customers and save their sanity, too. The thud factor There are an awful lot of chocoholics in the world. Make a serious impression by sending a giant caramel-and-almond-encrusted Fuji apple from Rachel Dunn Chocolates. The Unbelievable Apple is a 3-pound whopper and costs less than $24. It’s perfect for sharing with an office group or large family. The packaging and product exceed every expectation and never fail to WOW our special peeps. Make it personal Pay special attention to the person or people responsible for sending you business. Dig for clues on Facebook, Pinterest and LinkedIn to find their personal interests. Do they like science fiction books, reggae music, local wine, foreign movies, a local restaurant? Social media makes it easier than ever to dazzle with an inexpensive yet extremely thoughtful gift. Coffee gift cards One gift that never fails to perk up customers is a coffee card. Even if they don’t like coffee, you know they can grab a snack, share a frappinated drink with a friend, relax with a soothing tea -- or re-gift with ease. Any denomination is appreciated, and wrapping is a snap.
By skillfully engaging its members about the services they wanted, Fallon Community Health Plan improved customer satisfaction and increased retention.
Health insurance providers are being forced to adapt. How should they decide what to change and how to stimulate growth? Because consumers now have more choice and purchasing power when selecting a health plan, they will increasingly guide innovations in health care--even more directly than they do now--through a process called "co-creation."
The results of a recent IBM study support this idea. The study revealed that C-level business executives across multiple sectors worldwide have big plans to put the consumer at the helm of business strategy. Inspired by consumer-centric innovation, the most savvy, forward-thinking companies will ensure they are on the right path by launching health care products and services which will not only attract new customers but will also keep existing ones who now demand more from their health insurers.
Co-creating Innovative Solutions
Some Massachusetts health insurers got a head start after the state launched its own health insurance exchange, the Massachusetts Health Connector, in late 2006. One such insurer, Fallon Community Health Plan (FCHP), sought to distinguish itself through collaboration with consumers. In 2012, Fallon worked with a private online community of more than 300 customers from around the Commonwealth to understand their issues with choosing a health insurance plan. Overwhelmingly, the company learned that people were frustrated by the complexity of the product and felt they lacked sufficient education to make informed choices.
So Fallon took action. It introduced the idea of a retail space to members of the community and asked them what they’d like to see in it. The result of their feedback was the company’s first brick-and-mortar FCHP Information Center, where insurees can come in to ask questions, discuss their options with healthcare representatives, and even take yoga classes, participate in smoking cessation workshops, and receive a host of other valuable benefits.
Fallon also tested the community’s reception to a health insurance plan that rewards wellness. Members were so inspired by this concept that they offered their own ideas about how to make it better. In 2013 the "Healthy Health Plan" was introduced, offering customers incentives and assistance to become and remain healthy.
As health insurance companies partner with their customers, allowing them to provide valuable input, insurers nationwide have a real chance at reaping the mutually beneficial rewards of lowered costs, increased enrollment, and customer satisfaction. Along the way, we’ll become a healthier, happier and better informed society--something I think we can all agree is a big step in the right direction.
Washington may be a partisan mess, but business owners want a fix to the broken immigration system, and politicians are starting to listen.
About three weeks ago, House Speaker John Boehner said he would never introduce a Senate bill on comprehensive immigration, even though it had passed by a wide majority in the upper house in June.
But the speaker reversed course last Thursday and spoke of his willingness to enact changes, saying immigration reform was definitely "not dead." He suggested that the House might take up immigration in a series of smaller bills. Despite bitter bipartisan bickering over most everything these days in Washington, there's a growing consensus that reform needs to get done.
That will mean a great deal to fast-growth companies in hot sectors such as technology, which are short on skilled workers. But it will also affect smaller businesses that depend on agricultural workers or similar laborers, such as farms and landscaping companies, which rely primarily on undocumented workers.
"The average voter thinks the immigration system is outright broken, so [House Republicans] realize they have to be able to claim some comprehensive victory, even if it is passed in parts," says Dan Siciliano, an immigration expert and professor at Stanford Law School. If they don't, he says, they are in danger of losing support from Latino and business voting blocks.
One of the sticking points from the Senate bill had been the amount of power allocated to the executive branch, which must implement whatever is passed. The bill would allow the executive branch to perhaps deemphasize such things as building a border fence, while also pushing measures such as granting citizenship to underage immigrants. By breaking the bill up into pieces, Congress would maintain more control over key provisions, Siciliano says.
There are more than 11.7 million undocumented immigrants in the U.S., according to Pew Research Center. Immigration reform would include an accelerated path to citizenship for many, but it could also beef up security along the border, streamline an immigration system that forces highly qualified workers to wait more than a decade for citizenship, and put into place a federal worker verification program.
To the tech sector, enacting legislation soon is critical. "The talent Silicon Valley companies lose on a daily basis is costing us dearly," says Emily Lam, senior director of federal issues for the Silicon Valley Leadership Group, a tech-business group that focuses on immigration reform. "If [reform] doesn't happen this coming year, we may wait many more years, and at that point Silicon Valley may not be 'Silicon Valley' anymore given that our success is built on human capital and innovation."
Immigration reform hasn't been undertaken since 1986, when Congress reached a bipartisan agreement that provided citizenship to less than 5 million undocumented immigrants.
The majority of U.S. citizens today favor new immigration reform, according to the Public Religion Research Institute, which issued a report on Monday. It found that 60 percent of Republicans, 57 percent of Independents, and 73 percent of Democrats favor a path to citizenship for undocumented immigrants. Majorities of white, evangelical and mainline Protestants, as well as religiously unaffiliated people, support immigration reform, as do majorities of residents in states with the biggest immigrant populations.
Nearly 60 percent of U.S. citizens say the immigration system is completely broken, and 41 percent said it should be an immediate priority for President Obama.
Business lobbying groups see an opening, and they're hoping to get immigration reform passed sooner rather than later.
"The fundamentals for reform are strong and both parties want to get this done, and we think that there is no reason to wait," says Todd Schulte, executive director of Fwd.Us, an immigration-focused business group founded by Facebook's Mark Zuckerberg, Linkedin's Reid Hoffman, and other tech luminaries.
To draw attention to the shortage of documented technology workers, Fwd.Us recently held a "hackathon" with undocumented programmers who had come to the U.S. as children. They were charged with trying to come up with ways to solve the government gridlock over immigration using technology. Silicon Valley Leadership Group, an immigration-reform policy organization, says it will hold two similar hackathons in December.
Other small business groups, such as the American Nursery and Landscaping Association, plan to get active in the coming months as well, by lobbying Congress and rallying constituents. "In the agricultural sector, we are increasingly seeing labor shortages, losses, and management decisions to scale back," says Craig Regelbrugge, vice president of government relations and research for the AMNLA in Washington, D.C.
"I don’t see farmers, faith leaders, and business people letting up [on their demand for immigration reform] in 2014," Regelbrugge says.
Cornell is taking a gamble that a new program will help bring its business-school curricula into the information era. Only, do great programmers really need business degrees?
If digital and data are the future of business, science and engineering grads are bound to lead the way.
That's why Cornell University is creating a one-year MBA program designed particularly for engineers. It's betting that the engineers, at least the variety with computer science and programming backgrounds, can be the next generation of business leaders.
The university's Johnson Graduate School of Management plans to launch the business-school program to give software developers and computer engineers a dose of management skills. Cornell created the program, expected to launch next year, after conversations with tech startups and larger companies such as LinkedIn about what skills are difficult to find in employees. The curriculum was created to provide a mix of courses on software development, leadership, and persuasion.
These types are so endlessly employable that there are agencies popping up to represent and recruit them. Students are learning that this is where the jobs are. Science and engineering undergraduate degrees grew in popularity by 19 percent--nearly twice as fast as others--over the past five years, a new National Student Clearinghouse study found.
Here's how the Cornell program will work, per the Wall Street Journal:Unlike a traditional M.B.A., where courses last a semester, faculty will teach subjects such as design thinking and digital marketing in short bursts. Those will be followed by hands-on work exploring a startup project or pitching in on a company-sponsored assignment. Business students will work alongside engineering and computer-science students to prepare them for the group dynamic of life in technology.
Perhaps this interesting move isn't so much for the students's career prospects (what programmer isn't in-demand enough right now?) as for the image of the business school. It's still putting down roots in New York City and is trying to make its mark and gain relevance.
Cornell's new campus is still going in on Roosevelt Island, as part of a city initiative to foster tech-sector growth, and currently Cornell is housing some graduate-level engineering and computer science courses at Google's Manhattan HQ. Daniel Huttenlocher, the school's dean and vice provost of what's being called Tech Campus told the Journal the program is part of an evolution of b-school curricula.
"If technology really is permeating everything that we do in this information economy, business-school curricula will need to change over time. We're just trying to get way out ahead of it," he says.
And while many MBAs pursue a path of entrepreneurship, plenty of employers haven't who haven't been interested in hiring them might just warm up if they have the tech chops. The Journal reports:Employers such as Next Jump Inc., a New York-based online rewards company with about 200 employees, will be watching Cornell closely. Chief Executive and founder Charlie Kim says he swore off hiring business students since a batch of M.B.A. hires appeared more focused on spreadsheets and strategy than action. He says he expects the Cornell students to be "thinkers and doers."
Reaction on Twitter to Cornell's announcement was largely positive, but a few people smartly called out the added credibility a bit of tech skills might give to an MBA these days:November 25, 2013
November 25, 2013
Cornell's shacking up with Google (for now) as it rolls out a new tech-focused MBA program. http://t.co/UvJk23LC0s-- Rachel Feintzeig (@RachelFeintzeig) November 25, 2013
There are plenty of advantages to encouraging the open discussion of career ambitions in your organization--even if those ambitions lead people out of your organization.
It may seem counterintuitive, but assisting employees who are looking for a new job can actually create a more positive and productive workplace.
Most managers would say they're supportive of their employees. But the results of a recent poll by the SmartBlog on Leadership really got our attention. Asked what they do when they find out an employee is seeking a new job, a whopping 67.5 percent of business leaders said they help by making introductions or offering guidance.
That kind of overwhelming support--not just acceptance but assistance of outgoing talent--seems to belie intuition. But once you think it through, there's a lot of good logic behind this mind-set.
1. It makes you look good.
Mike Figliuolo, managing director at ThoughtLeaders who published the results of the poll, writes: "If they're not happy, help them go. . . If you actively oppose them or fire them, those actions become part of your reputation (and it's not pretty), which will make it harder for you to recruit replacements."
2. You get more honest insight about what's not working.
When employees give you two weeks' notice and an exit interview, they control the conversation. Being open about their move can create more opportunities for real reflection. "Simply ignoring their search doesn't make it go away and you lose the chance to understand why they're dissatisfied (probably you)," Figliuolo writes, "thereby precluding you from improving your own performance."
3. Speaking of that "two weeks' notice" . . .
Management consultant Alison Green advises a culture of open career discussion between managers and employees. One benefit, she notes at AskAManager.org: She gets a major heads up that somebody is thinking to leave. "I've had employees give me as much as eight months notice that they planned to leave!" Green writes. "This is fantastic for me as a manager, because it allows me to structure the hiring of their replacement so that the new person starts with a week or two of overlap with the exiting person, which both helps with training and eliminates the vacancy period we'd otherwise have."
Establishing an Open Culture
Those three reasons should show some value in having this sort of employee-manager openness. But something about the concept still feels uncomfortable. So how can you establish a culture encouraging employees to be transparent about their futures? Figliuolo provided some insights.
• Incentivize employee development. Bonuses are too often tied to the bottom line, Figliuolo says. But by tying managerial bonuses to development--a certain number of employees need either to be promoted internally or to accept higher positions elsewhere, for instance--managers will be compelled to open these dialogues. "But if it's not a goal, it's not going to happen," he says.
• Change the language of the performance review. "The standard question of 'Where do you see yourself in five years?' is crap," Figliuolo says. Instead, the conversation should be about skills: which skills the manager thinks the employee should develop and which sorts of skills they want to develop. This conversation could spark an expanded discussion about a given staffer's future role with the company or whether he or she is better off leaving--either the department or the firm--to pursue another path.
One criticism of open discussions is that they can encourage employees to take liberties with just how much time they're devoting to the hunt. But Figliuolo argues that openness actually prevents this from becoming an issue, because the manager and employee are on the same page. "They're going to start looking whether you know about it or not," he says.
John Warrillow, founder of The Sellability Score, explains that, as an entrepreneur, you add the most value to your company in the first 5 years.
Digital entrepreneurship is transforming the Middle East. Here's how policy makers can harness this trend to promote economic growth and social progress.
Of the countless “aha” moments I have had while studying entrepreneurship in the Arab world, few impressed me more than the first mobile-spectrum auction in Morocco in 1998. The Moroccan government expected the auction to raise $50 million to $70 million. Moroccan officials were stunned when the first bid came in at $1 billion.
The lesson? Government officials looked backward and concluded that mobile telephony was a luxury toy. Meanwhile, businesses looked forward and saw a world where everyone uses mobile devices. Today, most countries in the Arab world have more than 100 percent mobile penetration because many of their citizens own more than one device. As a result, the face of political, business, and social activity has changed for good.
Two years after the Arab uprisings, political repression and civil strife are alive and well in affected parts of the Middle East. Behind the grim headlines, however, a quieter revolution has begun to emerge, one that might ultimately do more to change the face of the region: tech-enabled entrepreneurship. A new generation of Arab entrepreneurs isn’t waiting for public institutions to solve traditional problems or create business opportunities. Instead, they are using technology to address them now.
They are inventing apps to crowdshare navigation of traffic-clogged Arab cities and creating online platforms to crowdfund startup ideas. They are launching video platforms offering classes in languages, math, and computer programming to supplement often-inadequate formal education. They are building enterprises that use solar energy to add arable land or create fresh water. They are testing countless initiatives in health and wellness.
The Arab world has a collective GDP the size of India’s and per capita GDP nearly twice that of China. To reach the region’s growing population of digitally savvy consumers, local entrepreneurs are building e-commerce capacity and innovating in mobile payments. With the world one click away, entrepreneurs who were once confined to local markets can reach virtually any market connected to the Internet.
When I ask US and Arab officials how they plan to engage with the Arab startup revolution, I am frequently greeted with blank stares or token gestures. For decades, local and international officials have applied a command-and-control mind-set to the Arab world. They live in a top-down world of mass programs and bureaucratic machinations. They are unclear what to do in a bottom-up world where millions of citizens have instant access to one another and nearly all the world’s knowledge. Crucially, officials often fail to understand the implications of these shifts for economic growth and job creation in the region.
Local and international officials often pay lip service to the importance of promoting entrepreneurship in the service of growth, job creation, and social progress in the Middle East. It’s time for them to start walking the talk. Here are four steps that Arab governments and the international community can take right now to leverage the digital startup revolution in the region.
1. Loosen Trade Restrictions
E-commerce is set to explode in the Arab world, where consumers now spend more than $1 billion a year online. This figure is expected to double within two years. To give a sense of the opportunity here, offline retail sales in the Arab Middle East total about $425 billion a year. However, each country in the region has its own obscure, cumbersome, and costly shipping regulations. Moving goods between Arab countries is like launching Amazon.com in the United States if every state had its own customs bureaucrats checking each package and adding fees and taxes at every step.
One promising sign is that the member states of the Gulf Cooperation Council have agreed to loosen restrictions on trade between members. The next step is a region-wide convention to streamline the movement of goods and services throughout the Middle East. Such an agreement would quickly increase trade volumes in the region, to the benefit of entrepreneurs and consumers alike.
2. Encourage the Free Circulation of Knowledge and Ideas
The Arab world urgently needs a system to transfer promising technology developed in universities and other research institutions into the startup ecosystem. For example, universities in Gulf countries are developing advanced solar-power and desalinization technology. What’s missing is the web of connections among research labs and the startup community that one finds at MIT or Stanford.
Another problem is that Arab countries generally lack investment laws designed to encourage tech-based innovation. The legal picture is not entirely bleak. For example, it’s easier to enforce a contract in parts of the Arab world than it is in many East Asian countries. Yet most countries in the region lack clear and coherent legal protections for real and intellectual property rights. Most Arab countries restrict financial flows, making it difficult for businesses to repatriate capital. Laws that criminalize bankruptcy tend to stifle the ability of entrepreneurs to fail quickly and then restart. Such restrictions deter entrepreneurs and investors from pursuing new ventures in the Middle East.
3. Modernize Regulatory Regimes
Some of the most interesting mobile-payment startups I’ve seen anywhere are in the Middle East. But Arab entrepreneurs have told me that government permitting institutions can’t move fast enough to keep up with them. In most Arab countries, separate bureaucracies regulate telephony, banking, domestic transactions, and foreign transactions. Yet mobile-payment technology touches all these sectors. By updating regulatory regimes so that they reflect 21st-century economic realities, Arab governments can help accelerate the growth and impact of innovative tech companies.
4. Facilitate Risk Prevention for Early Stage Investors
In an effort to encourage foreign direct investment in emerging markets, large aid institutions such as the US Overseas Private Investment Corporation and the World Bank have long offered debt financing and political-risk insurance for companies that invest in these markets. While not everyone agrees about the overall efficacy of these programs, risk-mitigation products have certainly helped a number of Western companies reach middle-class consumers in the Middle East and other emerging markets that combine economic potential and political volatility.
However, startups rarely qualify for debt financing, and multilateral aid organizations are often ill equipped to support equity investment. Moreover, the amounts required to launch a typical tech startup are much smaller than these institutions are used to disbursing. I encourage multilateral aid organizations to support the emerging Arab startup economy by focusing on bottom-up investment products and strategies.
I can’t predict how the politics of the Middle East will unfold over the next three years, or even the next three months. I can say with virtual certainty that there will be many more Arab consumers carrying the computing power that put a man on the moon in their pockets. Every mobile operator I have met expects 50 percent smartphone penetration across much of the Middle East within three years. Many Gulf states have already surpassed this level.
As a result, the nature of problem solving in the Arab world will change dramatically. We will see more bottom-up innovation that challenges the technical and regulatory capacities of governments and other large institutions. In my view, these institutions are missing a generational opportunity to embrace new drivers of economic growth and job creation. As a matter of common sense, Arab officials and the international community should listen and adapt to the needs of startup entrepreneurs across the Middle East. As a mentor of mine wisely noted, however, common sense is not that common.
Christopher M. Schroeder is a US-based Internet entrepreneur and investor, and the author of the recently released Startup Rising: The Entrepreneurial Revolution Remaking the Middle East. He may be followed on Twitter at @cmschroed.
This article was originally published on McKinsey & Company's Voices, voices.mckinseyonsociety.com. Copyright (c) 2013.
The best part about it? No app, checklist, or special process was required.
I think I’ve discovered the ultimate productivity trick (and sanity saver). After 25 years of traveling 50 percent to 75 percent of the time for business, I’ve stopped. Completely. I returned home from my last trip on May 17 and haven’t taken a business trip since.
I initially cut out business travel for self-preservation reasons. If you read my last Inc. column, you know that I struggled through a depressive episode in the first half of 2013. Depression wasn’t new to me, but this time I slammed into a wall. After months of traveling almost nonstop and binge sleeping on the weekends to recover, I woke up one day in January and realized I couldn’t--and didn’t want to--do it anymore.
So I stopped. As part of a series of tactical life changes, I eliminated business travel the rest of the year to see how it worked out. The result? It has been incredible--so incredible that I’ve decided not to travel for business at all in 2014.
In case you’re wondering, my work is international. Foundry Group, the VC firm where I’m a partner, has investments all around the United States. Techstars, which I co-founded, has programs throughout the country and has recently expanded overseas.
My writing on start-up communities (Startup Communities: Building an Entrepreneurial Ecosystem in Your City) and with organizations like the nonprofit UP Global takes me around the world. So I felt compelled to travel. Sometimes I enjoyed it, but as an introvert, mostly I found it exhausting. I wondered, Could I really be as effective at this work without traveling?
Part of the reason I was able to travel as much as I did was that I set up my systems to be able to work from anywhere. If I had to be in New York for a few days, I was just as connected to Boulder (my home base) as I would have been from anywhere else. My epiphany was that because I
could work from anywhere, why not make that place Boulder?
There were only two things I had to do to make this work. The first was decide to stop traveling completely. I’m not good at doing things moderately, so it had to be all or nothing.
The other key was really mastering videoconferencing. It’s not a new technology--I’ve been using it for many years--but the vast majority of companies I work with have unique, inadequate setups. Usually this means you wind up with the least-common denominator: a crappy Skype call.
At the Foundry Group office in Boulder, we installed Oblong’s Mezzanine system, which we believe is the future technology for collaborative, distributed work. (Full disclosure: Foundry is an investor.) We rolled out LifeSize videoconferencing in every Techstars office. We made sure each conference room had high-quality audio and video for any Web-based videoconference call. We figured out how to deal with multiparty calls and learned the magic trick of separating audio and video streams.
I tried every videoconferencing software program I could find and practiced relentlessly, driving as many calls to videoconferencing as possible. And I learned that when I am on a videoconference, I can’t have anything else going on, or else I pay almost no attention. So I’ve learned to give the task at hand my sole focus.
It has been transformative for me. Since June, I feel as if I’ve been doing the best work of my life. I’m as creative as I’ve ever been. I’m in the moment completely when I’m working. I’m no longer shredded from the exhausting and dehumanizing process of trying to get from one place to another by air travel, and I’m getting all my work done at the same time. The real bonus? Walking my dog every morning is a special joy, and going to bed each night with my wife is magnificent.
Regulators are extremely nervous about equity crowdfunding. But crowdfunding compares quite favorably to something another arm of government loves: the lottery.
Entrepreneurs like the idea of equity crowdfunding. Once it’s up and running, equity crowdfunding should allow business owners to easily sell shares in their company to anyone who wants to buy them, without going through the cumbersome Regulation D process or spending tens of thousands of dollars on legal fees.
The U.S. Securities and Exchange Commission does not like equity crowdfunding. The commission worries that crowdfunding will become an invitation to fraud and abuse. They note that even legitimate companies have high failure rates. Anyone--no matter how poor or financially unsophisticated--could put money into these risky ventures. It’s a disaster.
By that same reasoning, you know what else is a disaster? The lottery. And no one's anticipating new restrictive federal regulations on the lottery any time soon. Quite the opposite: State governments spend hundreds of millions each year promoting the lottery, trying to get more people to play the games. The Minnesota lottery has a $15 million marketing budget.
So why do we love the lottery and look askance at crowdfunding? Is it because the lottery is framed as a game, no riskier than bingo played in church basements? Is it because we haven't quite got over our cultural suspicion of entrepreneurs who can't get a job at a 'respectable' company? Is it because regulators are scared to death of change? You tell me. But if you gave me a hundred bucks, I'd put it in a new company before I'd spend it on MegaMillions.
Risk? We'll give you risk
Although equity crowdfunding isn’t a reality yet, I’ll bet the odds of at least breaking even on your crowdfunding investment are going to at least match those of winning Powerball.
Your odds of buying a winning lottery ticket are approximately seven percent. That includes small prizes, where you essentially break even, such as winning a dollar or a free ticket. The odds of winning a jackpot in one of the big PowerBall or MegaMillions drawings are about one in 175 million. In other words, zero. You’re gonna lose your two bucks.
What are the odds of getting fleeced by a shady crowdfunder? Granted, there’s no way to know, right now, how many attempts at crowdfunding will be turn out to be frauds.
But let’s say, just for argument’s sake, that the new crowdfunding platforms result in an astonishing rate of fraud. Let’s say that a full half of what appear to be legitimate companies attempting to crowdfund turn out to be rackets. And let’s say 60 percent of the remaining companies die within five years, which is in line with U.S. Small Business Administration estimates.
In this extremely unlikely scenario, your crowdfunding investment will still maintain its value, or grow in value, 20 percent of the time. That’s a nightmare for most investors, and a nightmare for the crowdfunding industry. But compared to the lottery? It’s a gold mine.
More money than it seems
The lottery may still appear benign compared to crowdfunding, because most tickets cost only one or two dollars. And the SEC is concerned about people who don’t have a lot of money losing thousands to crowdfunding scams. But the low price of lottery tickets is illusory. In 2012, lotteries sold a total of $69 billion in tickets. That means the average U.S. adult spends about $287 on the lottery each year.
The average kickstarter pledge is $71.41. So even if you limit your consideration of kickstarter to those who actually make pledges through the site, you’ve got much less money at risk here, per person, than in the lottery.
Meanwhile, despite the fact that virtually everyone, rich or poor, loses money on the lottery, most states enthusiastically support their lotteries. They don't put up barriers to make it harder to play. And lottery players certainly don’t have to show that they understand the risks or that they have money to burn: in most states, they just have to be 18.
This isn’t to say that we should outlaw the lottery or that we should eliminate all regulations on crowdfunding. But crowdfunding doesn’t need to be nearly as scary as we’re making it out to be. It’s already underway in Great Britain, where investors actually get a generous series of tax breaks in return for taking a risk and helping to encourage entrepreneurship.
Or we could combine the two: Win Powerball, put the proceeds into your favorite startup. Any takers?
Congratulations on your recent confirmation as Chairman of the Federal Communications Commission. I would like to extend my best wishes as you assume leadership of an agency that is vitally important to our nation’s small businesses. Many of the issues the FCC will be confronting over the coming months are at the heart of the Small Business Administration Office of Advocacy’s mission to ensure that federal regulation preserves the ability of small businesses to compete and innovate in today’s economy.
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