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Where Silicon Valley Is Wrong on Innovation

Silicon Valley exemplifies the saying, “The more things change, the more they stay the same.” Very little has changed over the past decade, with the Valley still mired in myth and stale stereotype. Ask any older entrepreneurs or women who have tried to get financing; they will tell you of the walls they keep hitting. Speak to VCs, and you will realize they still consider themselves kings and kingmakers.

With China’s innovation centers nipping at the Valley’s heels, and with the innovation centers that Steve Case calls “the rest” on the rise, it is time to dispel some of Silicon Valley’s myths.

Myth 1: Only the young can innovate

The words of one Silicon Valley VC will stay with me always. He said: “People under 35 are the people who make change happen, and those over 45 basically die in terms of new ideas.” VCs are still looking for the next Mark Zuckerberg.

The bias persists despite clear evidence that the stereotype is wrong. My research in 2008 documented that the average and median age of successful technology company founders in the U.S. is 40. And several subsequent studies have made the same findings. Twice as many of these founders are older than 50 as are younger than 25; twice as many are over 60 as are under 20. The older, experienced entrepreneurs have the greatest chances of success.

Don’t forget that Marc Benioff was 35 when he founded Salesforce.com; Reid Hoffman 36 when he founded LinkedIn. Steve Jobs’s most significant innovations at Apple — the iMac, iTunes, iPod, iPhone and iPad — came after he was 45. Qualcomm was founded by Irwin Jacobs when he was 52 and by Andrew Viterbi when he was 50. The greatest entrepreneur today, transforming industries including transportation, energy and space, is Elon Musk; he is 47.

See also: Innovation: ‘Where Do We Start?’  

Myth 2: Entrepreneurs are born, not made

There is a perennial debate about who can be an entrepreneur. Jason Calacanis proudly proclaimed that successful entrepreneurs come from entrepreneurial families and start off running lemonade stands as kids. Fred Wilson blogged about being shocked when a professor told him you could teach people to be entrepreneurs. “I’ve been working with entrepreneurs for almost 25 years now,” he wrote, “and it is ingrained in my mind that someone is either born an entrepreneur or is not.”

Yet my teams at Duke and Harvard had documented that the majority, 52%, of Silicon Valley entrepreneurs were the first in their immediate families to start a business. Only a quarter of the sample we surveyed had caught the entrepreneurial bug when in college. Half hadn’t even thought about entrepreneurship even then.

Mark Zuckerberg, Steve Jobs, Bill Gates, Jeff Bezos, Larry Page, Sergey Brin and Jan Koum didn’t come from entrepreneurial families. Their parents were dentists, academics, lawyers, factory workers or priests.

Anyone can be an entrepreneur, especially in this era of exponentially advancing technologies, in which a knowledge of diverse technologies is the greatest asset.

Myth 3: Higher education provides no advantage

Thiel made headlines in 2011 with his announcement that he would pay teenagers $100,000 to quit college and start businesses. He made big claims about how these dropouts would solve the problems of the world. Yet his foundation failed in that mission and quietly refocused its efforts and objectives to providing education and networking. As Wired reported, “Most (Thiel fellows) are now older than 20, and some have even graduated college. Instead of supplying bright young minds with the space and tools to think for themselves, as Thiel had originally envisioned, the fellowship ended up providing something potentially more valuable. It has given its recipients the one thing they most lacked at their tender ages: a network.”

This came as no surprise. Education and connections are essential to success. As our research at Duke and Harvard had shown, companies founded by college graduates have twice the sales and twice the employment of companies founded by others. What matters is that the entrepreneur complete a baseline of education; the field of education and ranking of the college don’t play a significant role in entrepreneurial success. Founder education reduces business-failure rates and increases profits, sales and employment.

Myth 4: Women can’t succeed in tech

Women-founded firms receive hardly any venture-capital investments, and women still face blatant discrimination in the technology field. Tech companies have promised to narrow the gap, but there has been insignificant progress.

This is despite the fact that, according to 2017 Census Bureau data, women earn more than two-thirds of all master’s degrees, three-quarters of professional degrees and 80% of doctoral degrees. Not only do girls surpass boys on reading and writing in almost every U.S. school district, they often outdo boys in math — particularly in racially diverse districts.

Earlier research by my team revealed there are also no real differences in success factors between men and women company founders: both sexes have exactly the same motivations, are of the same age when founding their startups, have similar levels of experience and equally enjoy the startup culture.

Other research has shown that women actually have the advantage: that women-led companies are more capital-efficient, and venture-backed companies run by a woman have 12% higher revenues, than others. First Round Capital found that companies in its portfolio with a woman founder performed 63% better than did companies with entirely male founding teams.

See also: Innovation — or Just Innovative Thinking?  

Myth 5: Venture capital is a prerequisite for innovation

Many would-be entrepreneurs believe they can’t start a company without VC funding. That reflected reality a few years ago, when capital costs for technology were in the millions of dollars. But it is no longer the case.

A $500 laptop has more computing power today than a Cray 2 supercomputer, costing $17.5 million, did in 1985. For storage, back then, you needed server farms and racks of hard disks, which cost hundreds of thousands of dollars and required air-conditioned data centers. Today, one can use cloud computing and cloud storage, costing practically nothing.

With the advances in robotics, artificial intelligence and 3D printing, the technologies are becoming cheaper, no longer requiring major capital outlays for their development. And if entrepreneurs develop new technologies that customers need or love, money will come to them, because venture capital always follows innovation.

Venture capital has become less relevant than ever to startup founders.

Time to Rethink Silicon Valley?

The downfall of Travis Kalanick should show the world of would-be tech entrepreneurs that they need better role models, that they need to stop looking up to the spoiled brats who lead some of Silicon Valley’s most hyped companies and the investors who fund their misbehavior.

Travis Kalanick’s ouster from Uber is literally a watershed for the Valley, something that is capable of shaking up its entrepreneurs and venture capitalists alike. For too long, the elite have gotten away with sexism, ageism and, to coin a word, unethicalism. The cult of the entrepreneur idolized arrogant male founders who plundered money and even sank companies; the more money they raised (and often lost), the higher the valuations their companies received and the more respect they gained. Corporate governance and social responsibility were treated as foreign concepts.

Uber was not the worst offender in the tech industry; it was just the most visible and the one that got caught. Its investors have been rightly humiliated for having their heads in the sand. This is because it has for so long been clear that Uber needs management that is more responsible — to its employees, its drivers and its customers.

The trouble first surfaced in 2013, when complaints about male drivers’ assaulting female passengers met with denials of responsibility by the company. Then followed sexist “boober” comments by Kalanick; ads in France that pitched attractive female drivers; suggestions by an Uber executive that he would dig up dirt on a journalist; and the rape of a woman passenger in New Delhi partly caused by a lax screening of drivers.

See also: What to Learn From Uber’s Recent Troubles  

But through all of this, Uber investors supported the company and accepted the ethical lapses as if they hadn’t happened. All that seemed to matter was that valuations were rising; the business, expanding. Who cared that a top Uber executive had secured a copy of the medical report of the Delhi rape victim and shared it with other company executives, including Travis Kalanick, in an attempt to discredit her? The company was growing; investors were valuing it in the billions!

Things finally reached a boiling point with a series of allegations by a woman employee about rampant sexism and sexual assault at Uber headquarters. And, fortuitously, a board member illustrated the root of the problem by making a sexist remark at a meeting about eliminating sexism. The board was finally compelled to do something it should have done years ago: force Kalanick out and clean up its act.

To be fair, there are many technology companies that are, in this regard, exemplary, including Salesforce, Microsoft and Facebook. They are going to extremes to correct problems that they had found in their ranks. I know from discussions with executives such as Microsoft CEO Satya Nadella that they have been working hard and sincerely. But too many Silicon Valley stars are like Uber.

With the help of Arianna Huffington and Eric Holder, the company is at last working on reforming itself. And maybe the downfall of Kalanick will provide not only valuable but lasting lessons for the hotshots of Silicon Valley, and of tech cultures worldwide. If Uber can do it, so can the rest of the Boys Club. They have to realize that press releases won’t suffice, that real change is necessary.

Who are “they”? To begin with, the people who fund the offenders, the venture capitalists. They have not been held accountable, and they need to be.

The Diana Project at Babson College documented that, as of 2014, 85% of all venture capital-funded businesses had no women on the executive team, and only 2.7% had a woman CEO. The proportion of women partners in venture capital firms had also declined to 6% from 10% in 1999. And this is part of the problem for an obvious reason: Women don’t tolerate boys-will-be-boys behavior, because they aren’t boys. Moreover, as any number of studies have documented, diversity in companies yields a broader range of perspectives on the business itself and, often, better bottom-line results. And, as I have pointed out, high-tech women who are measurably better than men have been consistently discriminated against.

Venture capitalists are susceptible to business pressure. The money that they invest is not their own. It is raised from pension funds, universities and state governments. They must require venture capital firms to provide public disclosures about the diversity of the companies they invest in — including the gender and age of the executives. They must have a diverse set of investment partners, without sugarcoating the numbers using inflated titles for junior associates.

Next are the boards. Venture capitalists demand seats on boards as a condition for their investment but don’t usually fulfill their fiduciary duty to all shareholders and employees — they always put the interests of their own funds ahead of those of the company. They must take responsibility for the employees as well as for the success of the company, as board members are supposed to do. And startups must have diverse boards that provide balance and broad perspective, not chummy boys clubs dominated by venture capitalists.

Finally, all tech companies must take heed of the report that was put together by former Attorney General Eric Holder for Uber. There are obvious procedures to employ in making diversity a priority: such things as blind resume reviews; interviewing at least one woman and one minority candidate for each open position; limiting alcohol at work events and in the office and banning employee-manager relationships.

In most industries, discriminating on the basis of gender, race or age would be considered illegal. Yet, in the tech industry, venture capitalists brag about their “pattern recognition” capabilities. They say they can recognize a successful entrepreneur when they see one. The pattern always resembles Mark Zuckerberg, Bill Gates, Jeff Bezos a nerdy male. Women, blacks and Latinos need not apply. Venture capitalists openly admit that they only fund young entrepreneurs because, they claim, older people can’t innovate.

See also: A Trip Through Silicon Valley  

Silicon Valley got a free pass when computers were just for nerds and hobbyists. Few cared about its arrogance and insularity, because its companies were building products for people who looked just like their founders. And these child geniuses inspired so much awe that their frat-boy behavior was a topic of amusement. But now technology is everywhere; it is the underpinning of our economic growth. What is more, the public is investing billions of dollars in tech companies and expects professionalism, maturity and corporate social responsibility.

There is no free pass for the tech industry anymore. It must grow up and clean house.

Do We Face a Jobless Future?

In Amazon’s warehouses, there is a beehive of activity, and robots are increasingly doing more of the work. In less than five years, they will load self-driving trucks that transport goods to local distribution centers where drones will make last-mile deliveries.

Soon afterward, autonomous cars will begin to take the wheel from taxi drivers; artificial intelligence will exceed the ability of human doctors to understand complex medical data; industrial robots will do manufacturing; and supermarkets won’t need human cashiers.

The majority of jobs that require human labor and intellectual capability are likely to disappear over the next decade and a half. There will be many jobs created, but not for the people who have lost them — because they do not have those skills. And this will lead to major social disruption unless we develop sound policies to ease the transition.

See also: May the Forms Be With You!  

The industry behind these advances — and reaping huge financial rewards from them — has been in denial. Tech entrepreneur Marc Andreessen, for example, calls the jobless future “a Luddite fallacy”; he insists that people will be re-employed.

But now others, including Facebook’s Mark Zuckerberg, Tesla’s Elon Musk and Bill Gates, are acknowledging a skills mismatch, with the potential for mass unemployment. They advocate a universal basic income (UBI), a payment by the government that provides for the basic wants and needs of the population.

[Mark Zuckerberg tells Harvard grads that automation will take jobs, and it’s up to millennials to create more]

But these tech moguls are simply kicking the can down the road and shifting responsibility to Washington. UBI will not solve the social problems that come from loss of people’s purpose in life and of their social stature and identity — which jobs provide.  And the politicians in Washington who are working to curtail basic benefits such as healthcare and food stamps plainly won’t consider the value of spending trillions on a new social-welfare scheme.

In a paper titled “A New Deal for the Twenty-First Century,” Edward Alden and Bob Litan, of the Council on Foreign Relations, propose solutions for retraining the workforce. They believe that there will be many jobs created in technology and in caring for the elderly — because Western populations are aging.

The authors say that young people starting careers should be equipped with the education and skills needed to adapt to career changes and that older workers who become displaced should receive assistance in finding new jobs and retraining for new careers. Government shouldn’t provide the jobs or training but should, the authors say, offer tax incentives and insurance, facilitate job mobility and reform occupational licensing. To encourage employees to gain new skills, there should be “career loan accounts” from which they can fund their own education — with repayment being linked to future earnings.

[‘Coal country is a great place to be from.’ But does the future match Trump’s optimism?]

To minimize the effect of wage cuts resulting from changing professions, Alden and Litan advocate a generous wage-insurance scheme that tops up earnings; enhancements to the Earned Income Tax Credit; direct wage subsidies; and minimum wage increments. They believe, too, that a voluntary military and civilian national service program for young people would help alleviate the social disruption and teach important new skills and provide tutoring to disadvantaged students, help for the elderly and improvements of public spaces such as parks and playgrounds.

These ideas are a good start, but the focus was on maintaining a balance between Republicans and Democrats, on being politically palatable. The coming disruptions are likely be so cataclysmic that we need to go beyond politics.

See also: Outlook for Taxation in Insurance  

We have already seen the increasing anger of the electorate from both the right and the left in the U.S. elections. We are witnessing the same in Europe now. As technology advances and changes everything about the way we live and work, this will get much worse. We must understand the human issues — the trauma and suffering of affected people — and work to minimize the impacts.

As Harvard Law School’s Labor and Worklife Program Executive Director Sharon Block said to me in an email: “I don’t think we can be limited in our thinking by what can get through Congress now — nothing can. We need to be using this time to come up with the big new ideas to develop a bolder progressive vision for the future — and then work to create the conditions necessary to implement that vision.” The problem here is that with this future fast approaching, not even the inventors of the technologies have a real answer. This is why there is an urgent need to bring policymakers, academics and business leaders together to brainstorm on solutions and to do grand, global experiments.

The Key to Digital Innovation Success

More than a half century ago, Ted Levitt transformed the strategic marketing agenda by asking a seemingly simple question. In his classic Harvard Business Review article “Marketing Myopia,” Levitt declared that truly effective executives needed the courage, creativity and self-discipline to answer, “What business are we really in?”

Were railroads, he asked, in the railroad business or the transportation business? Are oil companies in the oil business or hydrocarbon or energy business? The distinctions aren’t subtle, Levitt argued, and they subverted how companies saw their futures. Marketing myopia blinded firms to both disruptive threats and innovation opportunities.

Levitt’s provocative question remains both potent and perceptive for marketers today. But my research in human capital investment and “network effects” suggests that it, too, needs a little visionary help. Increasingly, successful market leaders and innovators – the Amazons, Apples, Googles, Facebooks, Netflixs and Ubers– also ask, “Who do we want our customers to become?”

That question is as mission-critical for insurance and financial services innovators as for Silicon Valley startups. The digitally disruptive influence of platforms, algorithms and analytics comes not just from how they transform internal enterprise economics but from their combined abilities to transform customers and clients, as well. Successful innovators transform their customers.

See also: The 7 Colors of Digital Innovation  

The essential insight: Innovation isn’t just an investment in product enhancement or better customer experience; innovation is an investment in your customer’s future value. Simply put, innovation is an investment in the human capital, capabilities, competencies and creativity of one’s customers and clients.

This is as true for professional services and business-to-business industries as for consumer products and services companies.

History gives great credence to this “human capital” model of innovation. Henry Ford didn’t just facilitate “mass production,” he enabled the human capital of “driving.” George Eastman didn’t just create cheap cameras and films; Kodak created photographers. Sam Walton’s Walmart successfully deployed scale, satellite and supply chain superiority that transformed “typical” shoppers into higher-volume, one-stop, everyday-low-pricing customers.

Similarly, Steve Jobs didn’t merely “reinvent” personal computing and mobile telephony; he reinvented how people physically touched, stroked and talked to their devices. Google’s core technology breakthrough may appear to be “search,” but the success of the company’s algorithms and business model is contingent upon creating more than a billion smart “searchers” worldwide.

The essential economic takeaway is that sustainable innovation success doesn’t revolve simply around what innovations “do”; it builds on what they invite customers to become. Simply put, making customers better makes better customers.

Successful companies have a “vision of the customer future” that matters every bit as much as their products and services road maps.

Insurance, fintech and insurtech industries should be no different. The same digital innovation and transformation dynamics apply. That means financial services firms must go beyond the “faster, better, cheaper” innovation ethos to ask how their innovations will profitably transform customer behaviors, capabilities and expectations.

In other words, it’s not enough to answer Levitt’s question by declaring, “We’re in the auto/property/life insurance business.” The challenge comes from determining how insurance companies want their new products, innovative services and novel user experiences to transform their customers. How can insurance companies invest in their customers in ways that make them more valuable? Who are they asking their customers to become?

So when insurers innovate in ways that give customers and prospects new capabilities — like Progressive’s price-comparison tools and Snapshot vehicle-usage plug-ins or Allstate’s mobile-phone-enabled QuickFoto claims submission option — they’re not just solving problems but asking customers to engage in ways they never had before.

Who are these companies asking their customers to become? People who will comparison shop; allow themselves to be monitored in exchange for better prices and better service; collaboratively gather digital data to review and expedite claims. These are but the first generation of innovation investments that suggest tomorrow’s customers will do much more.

This is of a piece with how a Jeff Bezos, Steve Jobs, Mark Zuckerberg or Reed Hastings innovates to make their customers — not just their products — more valuable.

Today’s Web 2.0 “network effects” business model — where a service becomes more valuable the more people use it — are superb examples of how smart companies recognize that their own futures depend on how ingeniously they invest in the future capabilities of their customers. Their continuous innovation is contingent on their customers’ continuous improvement. Call it “customer kaizen.”

How rigorously and ruthlessly fintech, insurtech and insurance companies champion this innovation ethos will prove crucial to their success. Being in “the blockchain business” is radically and fundamentally different than asking who we want our blockchain users to become.

See also: ‘Digital’ Needs a Personal Touch  

Giving better, faster and cheaper advice on risk management via digital devices is different than fundamentally transforming how customers perceive and manage risk. It’s the difference between “transactional innovation” and innovation based on more sustainable relationships of mutual gain.

The insurance industry needs to transform its innovation mindset. Start thinking how innovations make customers and clients more valuable. If your innovations aren’t explicit, measurable investments in your customers’ futures, then you are taking a myopic view of your own.

Today’s strategic marketing and innovation challenge is how best to align “What business are we in?” with “Who do we want our customers to become?”

Innovation, Community and Timelessness

“A thing of beauty is a joy forever.”

This is the opening line of the very famous poem called Endymion by John Keats, published in the early 1800s.

While this line is intended to set up a beautiful story about timeless romance, the line itself in popular culture has been used in literature, movies, ads and general conversation to describe everything from nature to art to science and more.

Why? Because Keats did an awesome job of extracting the nuance of something that everyone can relate to — not just love, not just beauty, but timelessness. It’s human nature to want timelessness and sometimes even take it for granted.

Good innovators know when something is going to fail the timelessness test. However, great innovators look at what’s failed or failing and, like a priceless painting unrecognizable from years of dust, extract what’s timeless and work hard to put it into a modern context.

Let’s look at some of the most famous modern innovators and put a label on what timeless element they extracted and modernized.

  • Steve Jobs (Apple): 24/7 connection to what’s important
  • Mark Zuckerberg (Facebook): Social exchange and acceptance
  • Jeff Bezos (Amazon): Convenience and time-saving
  • Travis Kalanick (Uber): Anything on demand, including a job

Any company that is constantly looking at its products and their applicability to new consumers is practicing good innovation. However, those that can define the nugget of timelessness have a greater advantage.

See also: Innovation Challenge for Commercial Lines  

Recently, my colleagues and I have had the privilege of working with the American Fraternal Alliance, and we’re in the midst of an inspiring innovation initiative for what could be considered a dusty corner of the life insurance industry.

1. Why is it dusty?

For background, fraternal benefit societies are organizations of people who usually share a common ethnic, religious or vocational affiliation and may provide insurance to members, primarily life insurance. While this model dates back hundreds of years, the dustiness doesn’t come just from age. For starters, the practices and language used by these societies can conjure up outdated or inaccurate images because connotations of words and phrases change over time. More important, for some, there is a decline or weakening of the common bond that drew the group together in the first place, requiring it to be updated.

2. Why is it inspiring?

The insurance industry provides a valuable utility to the public, yet consumers today have a negative impression of the industry. Recent developments in healthcare don’t help that impression. Fraternals are a special kind of insurance organization that is required to give profits back to their communities; thereby, done right, they shift the focus naturally from what they offer to why they offer it.

3. What do they want to accomplish?

The American Fraternal Alliance members want to reposition the fraternal model into the modern day and help more consumers understand it. However, it’s not an exercise of logos and fonts or sexy models selling something. It’s about finding and extracting what’s timeless and then communicating that in the right way.

4. How did they start?

This group started with a small investment, to determine if there was an opportunity in the first place. What was found was very encouraging. While the awareness levels in the market were quite low as a starting point, when consumers intending to buy life insurance in the next two years were provided with a simple description of a fraternal, the overall impression was very positive. Then, when fraternals were described in a new way, overall positive impression went up by another 23 percentage points. Further, the interest level in buying from a fraternal was 70% when prospects were exposed to a new positioning message.

This is further validated by signals in the market. We see younger consumers favoring brands that give back to communities all around the world. In addition, the disruptors in insurance are leveraging new definitions of community as a selling point for peer-to-peer models.

See also: Examining Potential of Peer-to-Peer Insurers  

That’s not to say there isn’t a lot of work still to be done. However, the innovation lesson here for the life insurance industry may be that community is timeless, and modernizing it may mean more to the future of insurance than modernizing insurance itself. Extracting what community really means and working hard to deliver on that value is what will ultimately move the needle in a meaningful way. Fraternals, dustiness aside, are in a great position to do that.