Week%207%20-%20Opportunity%20Recognition%20Readings.pdf

Reading 29 In this lesson you will learn about the innovative process, a series of steps people take to encourage the creation and use of new ideas. This process helps entrepreneurs stay competitive and earn profits. In the next lesson you will learn how to put the process into practice. The Innovative Process: How Entrepreneurs Develop New Ideas Everyone gets a good idea from time to time. YOU might be sitting at your desk doing nothing when all of a sudden you realize there is a better way to do your job, spend your money, or use your time. It's nice to have good ideas, but relying on having a bright idea now and then is no way to run a business. Staying ahead of the competition requires entrepreneurs to establish a method of developing and using innovative ideas. It's all too likely that an innovative competi- tor will capture more sales and earn more profits. Let's see how using the innovative process can help an entrepreneur succeed. Manuel owns a fitness center. He has invested more than $30,000 in equipment and pays $1,500 in rent every month. He employs five physical-fitness technicians and a dietitian to advise his customers on proper eating habits. Manuel charges an annual $250 member- ship fee and $10 an hour for using his facility. There are several other businesses in town that offer similar services at similar prices. Although Manuel is trying his best, he never seems to earn much profit from his business. Last month he called his workers together and explained his problem to them. He asked them if they could come up with any ideas to help the business. Manuel offered a $500 bonus to any worker who thought of an idea that he decided to use. The workers had many ideas. They ranged from getting endorse- ments from famous sports stars to giving away free tennis shoes. Only one seemed like a good idea to Manuel. His dietitian, Stacy, suggested that the business stay open 24 hours a day and that the $250 annual membership fee be eliminated for people who came in between 11:OO PM and 8:00 AM. She said that many people work late and might want to exercise before or afker work. Staying open would not increase Manuel's rent or the cost of the machines he had pur- chased. All he would have to do would be to hire several more people to work nights. Manuel tried Stacy's idea and found his income increased 40 percent while his costs increased only about 20 per- cent. He was thrilled, and Stacy was pleased to receive the $500 bonus for the idea she suggested. Over the next few months Manuel studied the results of his new policy. He discovered that although people came in most nights, on Sunday evenings there were rarely any customers. As a result, he closed once a week from 10:OO PM on Sunday to 8:00 AM on Monday. Although Manuel did not realize it, he was using the innovative process in his business. The innovative process is a series of steps that encourages the creation and implementa- tion of new ideas. This process is similar to the decision-making process you learned about in Reading 4. Following are the steps in the innovative process. problendopportunity identification and definition brainstorming research and development implementation evaluation remediation The first step in the innovative process involves identifying areas in which there are opportunities for improvement or in which problems may develop in the future. It also involves defining the objective of the innova- tion. This is what Manuel did when he described his low profits to his workers. Other entrepreneurs would see other opportunities or problems for their firms. For example, a firm that relies on recent high-school gradu- ates to supply labor can see that smaller grad- uating classes will make it more difficult to hire needed workers in the future. The owner of such a firm should take steps to find a new source of labor before running short of work- ers. Entrepreneurs should study trends in their communities so that they are not sur- prised by unexpected events. After entrepreneurs identify an area that may represent a future opportunity or problem, they should encourage brainstorming among employees to address the identified opportuni- ty or problem. Brainstorming is done in meetings at which people are asked to think of as many creative ideas as possible that deal with a particular topic. One person's ideas are likely to help others think of new ways to accomplish objectives. Participants in the brainstorming should not evaluate their ideas or make plans for implementation at this stage in the process. The sole purpose of brainstorm- ing is to think of creative ideas. People should be praised for originality. No one should pull rank or belittle any other person's ideas. Manuel's employees brainstormed when they thought of ideas that could help his profits. The brainstorming encouraged creativity. It is often difficult or impossible to include all workers in brainstorming meetings. There are other ways to get their creative ideas. Something as simple as a suggestion box may be used. An employee-award program rewards employees for ideas that are used successfully . Employees need to feel that they will be personally rewarded in a meaningfid and predictable way if their ideas are imple- mented. Saying, "If you have a good idea, we may give you a bonus," is not likely to encour- age many workers to participate in the pro- gram. Saying "If we use your idea, we will pay you 20 percent of any money earned or saved" is more likely to result in a positive response. Manuel's offer of $500 is an example of an employee-award program. The next step is to plan for implementation of creative ideas. Once possible ideas have been suggested, they need to be investigated by workers who know, or can find out, which ones are possible and reasonable. This step in the innovative process is one form of research and development. Once entrepreneurs are aware of how an objective can be achieved and of its probable cost, they can implement the decision by committing resources to carry it out. Manuel studied his employees' ideas and implemented Stacy's because it was the one that seemed most reasonable. Putting an idea into practice is not the end of the innovative process. The results of new ideas must be measured and evaluated. Evaluation is the organized method of mea- suring the success of an implemented plan. Just because people think they know how an idea will work does not mean they will always be right. It is possible they did not understand the situation, or conditions may have changed. Entrepreneurs must check and eval- uate all parts of their operation, both new and old, continually. They must be ready to take advantage of new opportunities. They must keep little problems from becoming big prob- lems. When Manuel realized hardly any cus- tomers came to his center on Sunday nights, he decided to make a change. He closed his business at the slow time. The final step in the innovative process is remediation. Remediation means that if something is not working, the entrepreneur needs to act to change the situation. When an idea is not working, it is not necessarily wrong. There may be a simple way to make it work. However, something needs to be done quickly. It is almost always a mistake to ignore a problem because it will probably become worse. Entrepreneurs can take steps to improve their chances for future success by following the innovative process. CHECK YOUR UNDERSTANDING Consider each of the following questions. If you he not sure of an answer, review the reading to find the information you need before moving on to the next question. 1. What are the six steps in the innovative process? 2. Why should entrepreneurs study trends in the markets in which they do business? 3. What is the purpose of brainstorming? 4. How does an employee-award program work? 5. What is the purpose of research and devel- opment in the innovative process? 6. When a decision is implemented, why isn't the innovative process complete? 7. What is likely to happen to an entrepre- neur whose firm does not have a working innovative process? SOMETHING FOR YOU TO THINK ABOUT Consider the cartoon in Illustration 29a. The business owners have decided to replace a number of their workers with new machines. How may this have been the result of the innovative process? How does this situation show that not all people benefit equally from the results of innovation? EXTENSION ACTIVITIES 1. Work with several of your classmates to create a bulletin board that illustrates the innovative process. Draw or cut out pic- tures to depict each step and,provide appropriate labels. 2. Using the school or public library, investigate the story behind an invention and write sev- eral paragraphs in which you describe how the innovative process was or could have been used to create or market the invention. Illustration 29a 104 A Brief History of Innovation Many of the revolutionary products of the last century sprang from small companies. If you don't already appreciate the impact that entrepreneurial businesses have had on your every waking hour, just try to imagine life without these inventions. From: Inc. Magazine, October 2002 | By: Mary Kwak The rise of large corporations dominates much of the narrative of 20th-century business. Yet many of the innovations that have advanced industry, enlightened society, and deepened culture sprang from small companies. If you don't already appreciate the impact that entrepreneurial businesses have on your every waking hour, just try to imagine life without the following. 1919 Hard hat Edward Bullard, Inventor The Great War didn't make the world safe for democracy, but it did make it a little safer for construction workers. The "hard-boiled hat" was inspired by the helmets doughboys wore, according to protective-equipment company Bullard, which patented the product in 1919. Originally made of steamed canvas and glue, hard hats also appeared in aluminum and fiberglass before plastic prevailed. No significant variations emerged until 1996, when Bret Atkins created the Western Outlaw, a cowboy-hat version with the advantage of serving as two Village People costumes in one. 1929 Foot Sizer Charles Brannock, Inventor Proust can keep his madeleines -- our favorite sense memory is the cool-metal caress of the Brannock Device. The son of a shoe-store owner, Charles Brannock spent his college years designing an instrument to replace the rulerlike stick that shoe salesmen used to measure feet. The result: a black-painted aluminum plate with sliding gauges for heel-to-toe, width, and arch measurements. Virtually unchanged in 73 years, Brannock's invention is still produced by the Brannock Device Co., in Liverpool, N.Y., which has sold more than a million of the devices since production began in 1929. 1935 Parking Meter Carl Magee, Inventor Page 1 of 5A Brief History of Innovation | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20021001/24702_Printer_Friendly.html He may or may not have been a smokin' preacher, but the Rev. C.H. North won his footnote to history with an unrelated claim: he was the first person in the United States to receive a parking ticket owing to an expired meter. That was in August 1935; a month earlier the Dual Parking Meter Co. had installed its breakthrough Park-O- Meters around Oklahoma City, which paid $23 a pop for the devices. Dual Parking (now POM) was founded by newspaper editor and entrepreneur Carl Magee shortly after he was named to Oklahoma City's Chamber of Commerce Traffic Committee. As for North, the good reverend argued in court that he had stopped just for a minute to run into a store and get change. The judge dismissed his case. 1936 Phillips-head screw Henry Phillips, Inventor "It's not a bug; it's a feature." That first-line defense of programmers everywhere also applies to the low-tech Phillips-head screw. Do-it-yourselfers hate the distinctive fastener for its tendency to "cam-out," or slip, when plied with a screwdriver. But it was that intentional design flaw that made the Phillips almost impossible for assembly-line workers to overscrew, a feature that endeared it to automakers, who were its first adopters. Although the product, patented in 1936, quickly became the standard for a variety of industrial and consumer uses, its inventor, Henry Phillips, never manufactured a single screw. Instead, he set up the Phillips Screw Co. to license his recessed-cross screw design. 1937 Shopping cart Sylvan Goldman, Inventor Imagine grocery shopping as rush hour on a single-lane road. That's what it would have been like if two Houston supermarket owners had popularized their vision of outfitting grocery stores with a track that customers would push their baskets along while plucking items from the shelves. Fortunately, Sylvan Goldman had a better idea: cross two wire baskets with a folding chair and put the whole contraption on wheels. In 1937, Goldman, whose family owned supermarkets in Oklahoma City, began advertising his invention as a new "No Basket Carrying Plan." The carts became a hit and turned Goldman into a multimillionaire. 1949 Aerosol-can valve Robert Abplanalp, Inventor Not with a bang but with a whimper. That's how the early aerosol cans tended to fizzle out. As they sat on the shelf, they would leak and depressurize, eventually releasing only a sad little hiss. Then, in 1949, Robert Abplanalp, a 27-year-old machine-shop operator from the Bronx, gladdened the hearts of whipped-cream lovers everywhere by inventing a cheap, reliable aerosol-can valve that could be mass-produced. Today his company, Precision Valve Corp. -- which is based in Yonkers, N.Y. -- claims that people use its products a billion times a day. As for Abplanalp, he collected close to 300 aerosol-related patents and was named to Richard Nixon's "kitchen cabinet." 1953 WD-40 Rocket Chemical Co., Inventor If at first you don't succeed, try, try another 39 times. That was the winning formula for Rocket Chemical Co., the three-person San Diego company that developed the country's most popular industrial lubricant in 1953. Originally designed to prevent corrosion on missiles and planes, WD-40 (Water Displacement perfected on the 40th try) has inspired its users to flights of creativity: Denver firefighters, for example, applied a generous dose to Page 2 of 5A Brief History of Innovation | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20021001/24702_Printer_Friendly.html dislodge a naked burglar from a vent. Roughly four out of five U.S. households own at least one can of the stuff, which until 1995 was the only product sold by the company (now named WD-40 Co.). 1963 Pop-top can Ermal Fraze, Inventor Some are born great, some achieve greatness, and some have greatness thrust upon them by a cold can of beer. Finding himself without an opener at a picnic one day, Ermal Fraze solved a problem that had long bedeviled engineers -- how to attach a pull tab to a tear strip scored into the top of a can. "I personally did not invent the easy-open can end," Fraze maintained, describing the innovation that he patented in 1963. "What I did was develop a method of attaching a tab." In other words, it's the rivet, stupid. Once trials by Iron City brewery had established the demand for ready-access beer, Fraze's Dayton Reliable Tool & Manufacturing Co. became a leading supplier of machines and precision tooling for the can industry. Pop-tops, meanwhile, went on to fill playgrounds and parking meters until the inseparable tear strip was invented in the 1970s. 1968 Air-bag sensor Allen Breed, Inventor Allen Breed made a fortune selling devices that people hope they'll never have to use. In 1968, Breed adapted his patented ball-in-tube sensor, which was designed to control the firing of rockets, to trigger air-bag inflation in the event of a car crash. He spent the next 15 years trying to persuade the Big Three to make air bags standard equipment. But it was only after the federal government required that all new cars have passive restraints by 1990 that the market took off. As the leading supplier for GM and Ford, Breed Technologies saw its sales increase nearly 40-fold in five years, reaching $89 million in 1992, when the company went public. 1977 Sports bra Hinda Miller and Lisa Lindahl, Inventors Chafing. Jiggling. Errant straps. In 1977, Hinda Miller and Lisa Lindahl rescued women from all three evils with a pair of jockstraps and some thread. After Miller, who was working as a costume designer, sewed the first prototype, the two friends started JBI (now part of Sara Lee) to market their invention. First-year sales were a paltry $3,840, but the product got a boost when the New York Post snapped a Playboy bunny demonstrating one. Armed with a blow-up of the photo, Miller and Lindahl collected $500,000 in orders at the Sporting Goods Manufacturers Association's 1979 show. 1982 Touch screen Elographics, Inventor How fitting that the roots of a chad-free future lie in Al Gore's home state of Tennessee. Elographics introduced the touch screen on a bank of 33 TVs at the 1982 World's Fair in Knoxville. Founded in 1971 by Oak Ridge National Laboratory researcher Sam Hurst, Elographics developed the resistive overlay -- a sandwich of conductive sheets that uses changes in voltage to register pressure -- and replaced its earlier opaque displays with glass. Customers took a while to figure out how to use the technology, but by the early 1990s, point-of-sale applications were driving sales growth of 30% a year. Today Elo TouchSystems (a division of Tyco Electronics) holds 30% of an $800-million market worldwide. Page 3 of 5A Brief History of Innovation | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20021001/24702_Printer_Friendly.html 1983 Contraceptive sponge Vorhauer Laboratories, Inventor There's no greater honor in the pop-cultural pantheon than to have your product become a catchphrase on Seinfeld. So all hail Bruce Vorhauer, who labored seven years to bring the ingenious contraceptive to market. Vorhauer was working for American Hospital Supply when he heard that a researcher had developed a spermicide-infused sponge. Vorhauer raised $400,000 to buy the patent himself, and Vorhauer Laboratories Inc. received FDA approval in 1983 to produce the highly popular Today sponge. In 1995, however, manufacturing problems forced the sponge off the market -- leading, ironically, to its moment of greatest fame, thanks to Seinfeld. 1989 Rolling carry-on bag Robert Plath, Inventor In the 1980s, road warriors strode Rambo-like across airports with hefty computer and garment bags slung across their backs. Now those masters of the universe are gone, replaced by chino-clad clones with neat black bags that follow obediently at heel. The man responsible was Robert Plath, a pilot who shrank a soft-sided rectangular suitcase and stood it on end and added wheels. Plath had 100 bags manufactured in Asia and sold the lot to fellow pilots in 1989. By the mid 1990s, Plath's Travelpro was doing more than $50 million in sales. 1993 Coffee-cup sleeve Jay Sorensen, Inventor Spill a scalding cup of coffee into your lap, and you have two ways to get rich: (a) sue McDonald's, or (b) invent a product that could save millions from the same fate. Reluctant realtor Jay Sorensen chose (b) after suffering a dousing in 1991. Two years later, he unveiled the Java Jacket, an insulating sleeve made from waffle-textured cardboard that wraps around a standard paper cup. Starbucks later launched a similar product, provoking a legal wrangle, but Sorensen's family-run company has prospered by focusing on independent coffeehouses and chains, which have snapped up more than 600 million Java Jackets. 1999 Folding keyboard Bob Olodort, Inventor Size matters -- or sizr mwttets, as the virtual keyboard of a Palm V might put it. The challenge of creating a keyboard for handheld devices was that such a product would have to be large enough for human fingers to peck at but small enough to work with a portable. Veteran inventor Bob Olodort made a couple of false starts -- including an accordion-pleated prototype -- before coming up with a collapsible four-piece design that debuted in 1999. The Stowaway keyboard, produced by Olodort's company, Think Outside, sold more than a million units in its first year. 2000 Footless panty hose Sara Blakely, Inventor For decades, pants and open-toed shoes freed women from panty hose. Two years ago Sara Blakely stuffed those women back in. After an unpleasant encounter with a snug pair of pants, Blakely hit upon her big idea: control- top panty hose that would do undercover duty while leaving her feet fashionably bare. In 1999 a series of cold Page 4 of 5A Brief History of Innovation | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20021001/24702_Printer_Friendly.html calls led Blakely to a North Carolina mill owner who agreed to help the entrepreneur. The following year Spanx appeared in such upscale stores as Saks Fifth Avenue. And although Danskin's Pennaco division beat Blakely to market by a couple of months, Spanx soon became the fashion insiders' favorite, with sales hitting $400,000 in the four months following Oprah's plug for the product. Mary Kwak is a freelance writer based in Cambridge, Mass. The Innovation Factor: Part III Innovation, We Trust Creation Nation A Brief History of Innovation Ordinary People, Extraordinary Creativity Please E-mail your comments to editors@inc.com. Copyright © 2008 Mansueto Ventures LLC. All rights reserved. Inc.com, 7 World Trade Center, New York, NY 10007-2195. Page 5 of 5A Brief History of Innovation | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20021001/24702_Printer_Friendly.html Innovation: How the Creative Stay Creative Innovative companies require innovative people. For lessons on developing a creative work force, we asked some of the nation's top innovation consultants how they do it in their own shop. From: Inc. Magazine, June 2008 | By: Leigh Buchanan Get Multicultural Cultural melting pots produce inventive meals, believes Sohrab Vossoughi, CEO of Ziba, an innovation consulting firm in Portland, Oregon. Ziba counts some 26 nationalities and 19 languages among its 120 employees. "People with different genetic backgrounds tend to have healthier children," says Vossoughi, an immigrant from Iran. "It's the same with ideas as it is with biology." Ziba, he says, also benefits from employees' knowledge of global markets. Provide Lots of Free Time to Think "The five last bastions of thinking are the car, the john, the shower, the church or synagogue, and the gym," says Joey Reiman, CEO of BrightHouse, an Atlanta-based innovation consulting firm whose clients include Coca- Cola (NYSE:KO) and Delta Airlines (NYSE:DAL). Note the absence of office from that roster. In addition to nearly five weeks' vacation, BrightHouse's 18 staff members get five Your Days, in which they are encouraged to visit a spot conducive to reflection and let their neurons rip. No mandate to solve a particular problem. Just blue- sky thinking -- often under actual blue skies. Reiman believes this unstructured cogitation is just as important to a project's success as time spent hunkered down in client meetings. Or as he puts it: "I think; therefore, I am valuable." Similarly, at Maddock Douglas, an Elmhurst, Illinois, firm that helps companies develop and market new products, employees can bank from 100 to 200 hours a year to pursue whatever intrigues them. (Google popularized a similar model, allotting engineers 20 percent of work hours for personal projects.) "Everybody has a place on their time sheets where they can say, This is not for a billable client," says president Raphael Louis Viton. Encourage Risky Behavior Every year, BrightHouse holds an event known as March Fo(u)rth. On that date, each employee is encouraged to do something -- jump from a plane, scuba-dive, start writing a novel -- he or she has never attempted. "If we're known for anything, it's possibilitarianism," says CEO Reiman. Maddock Douglas, meanwhile, gives an annual Fail Forward award, which is designed to celebrate endeavors both ambitious and disastrous. Last year, a designer at the firm won for an unorthodox publication design that wound up laying waste to the production schedule and resulted in a costly error. "It was a total embarrassment," says president Viton. "But she was trying to do something new and different and better. She went for it, and she won an award for it." Write it Down Frog Design, a San Francisco-based consulting firm, publishes Frog Design Mind, a print and online magazine that serves as a quarterly compendium of staff articles on subjects that excite employees. Each issue is themed, but that's it for boundaries. In the most recent issue, on health, one designer used illustrations and captions to capture the discombobulating experience of being deaf in one ear. Another proposed monitoring people's health using a technologically enabled version of a Tibetan singing bowl. "We do it to keep our employees fresh, but thousands of people read it," says president Doreen Lorenzo. "We recently got a very large health care client because they read that issue." Page 1 of 2Innovation: How the Creative Stay Creative | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20080601/innovation-how-the-creative-stay-creative_Printe... Hire Smart At Innosight, a Watertown, Massachusetts-based firm founded by Clay Christensen, interviewers use case studies to assess problem-solving skills. Partner Julie Sequeira recently asked a job applicant how he would reverse the newspaper industry's declining fortunes. "I couldn't get him to stop thinking about the printed newspaper," she says. "That indicates risk-averse thinking." Chris Conley, co-founder of Gravitytank, a 30-employee firm in Chicago, is interested in how applicants deal with criticism: whether they tear into a creative exchange or defend their first idea to the bitter end. "To innovate, you have to be very open to critique, to why things won't work," says Conley. Bring in Outsiders Many top innovation firms tap the perspectives of outside experts -- be they physicists, poets, actors, archaeologists, theologians, or astronauts. At BrightHouse, such distinguished professionals, otherwise known as "luminaries," are constantly cycling through the office. When the firm was working on a project for Red Lobster, it invited Robert Ballard, the oceanographer who discovered the wreck of the Titanic; he helped the team explore the association between its corporate identity and mankind's eternal fascination with the ocean. When working on a major reorganization of Emory University, BrightHouse enlisted Edgar Mitchell, the sixth man to walk on the moon; he talked about how constant training can leach fear from the unknown. CEO Reiman assesses the potential of each project for cross-disciplinary ferment and then consults the company's Rolodex. For employees, the experience is akin to a never-ending liberal arts education with the world's most prestigious faculty. Be Flexible. Very Flexible At InnovationLabs, in Walnut Creek, California, almost everyone is an outsider. That's because the company operates on the Hollywood model: It has just four principals and pulls together a new team for each project. Those teams, drawn from a worldwide network developed through referrals, may include business professors, webmasters, scientists, even the occasional dancer. Also, unlike many consulting firms, InnovationLabs has no prescribed process; team members can work any way they like. Given that many may not have met before an assignment, each project becomes a learning experience as contractors share brainstorming and visualization techniques. "Some people are amused when they work with us, because we're so averse to telling people what to do," says managing partner Langdon Morris. "But we want our people to be creative about how they help clients be creative." Do it for Free Creative folks enjoy applying their talents to noble causes -- and, increasingly, their employers keep them happy by providing opportunities to do so. At BrightHouse, employees with great ideas for improving public life receive a $1,000 bonus on the spot. "It's a way to reward people not for the hours they put in but for the size of their hearts," says CEO Reiman. Mix Up Your People Some companies shake things up by letting employees loose in others' playpens. Ziba promotes such cross- fertilization with its Ambassador Program, in which employees spend about three months working in disciplines (known as tribes) different from their own. During that period, employees do their own work but also experience their colleagues' specialties. They sit in on brainstorming sessions and staff meetings and offer their own insights and critiques. Says CEO Vossoughi: "It creates an understanding of another world." Copyright © 2008 Mansueto Ventures LLC. All rights reserved. Inc.com, 7 World Trade Center, New York, NY 10007-2195. Page 2 of 2Innovation: How the Creative Stay Creative | Printer-friendly version 7/18/2008http://www.inc.com/magazine/20080601/innovation-how-the-creative-stay-creative_Printe... How to Kill a Great Idea! Jonathan Abrams created the first online social network and enlisted Silicon Valley's best and brightest to run it. Yet Friendster flamed out spectacularly. What went wrong? From: Inc. Magazine, June 2007 | By: Max Chafkin It's not easy being the brains behind one of the biggest disappointments in Internet history. Sure, there are those who describe you as a visionary, but in the same breath they'll deride you as a lousy businessman. Bloggers attack you, call you "a real asshole" and "a very lucky idiot savant." Former investors badmouth you. Other entrepreneurs copy your ideas without giving you credit. The New York Times makes reference to your "ballooning ego" and the local Fox affiliate can't even get your name right. Jonathan Abrams--founder of Friendster, the first online social network, and a pioneer of one of today's hottest trends on the Web--tries his best not to think about these things. And with two new companies, he has plenty to distract him. Last September he opened Slide, a stylish basement lounge in downtown San Francisco. And in March, he launched a new bid to make it big on the Web--Socializr, a website that lets users invite people to parties and other events. And yet the story of how Friendster, once the hottest start-up in America, became the butt of a business joke continues to preoccupy him. And no wonder. By the rules of Silicon Valley, Friendster--a bold idea backed by experienced investors and the best managers money could buy--was destined for greatness. Instead, it failed spectacularly. "I did what you're always told to do as a young entrepreneur," Abrams says. "I brought on experienced investors to help Friendster fulfill its potential. But the all-star team was the curse of death." If he had invented something as mundane as a brilliant customer relations management application, no one would know Jonathan Abrams's name. But as the creator of the first online social network, Abrams promised something truly exciting: to change the way people communicated with one another. As Fortune put it in October 2003, "There may be a new kind of Internet emerging--one more about connecting people to people than people to websites." In the months following its launch earlier that year, Friendster garnered millions of devotees, who used its name as both a verb and a noun. By the end of 2003, the company Abrams founded in his San Francisco apartment had raised $13 million from the same investors who'd backed Amazon (NASDAQ:AMZN), Yahoo (NASDAQ:YHOO), and eBay (NASDAQ:EBAY) and had appeared in scores of major magazines and newspapers. Friendster was a company the world could understand, participate in, and dream on. It was the next big thing. Friendster is among the few start-ups that changed the world--but not as its founder had hoped. During March 2007, one out of every five Americans visited MySpace.com, a copycat site that was built in 2003 by Intermix and sold to News Corp. (NYSE:NWS) two years later for half a billion dollars. Those MySpace visitors listened to music, scoped out crushes, made plans with friends, decided that Stephen Colbert was cool--and in the process altered the way we think about and use the Internet. Meanwhile, Friendster fell to 13th place among social networks in the U.S. and saw its market share decline to 0.3 percent. GoBigNetwork com/Funding Feedback - AdsbyGoogle Page 1 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl... In the business and technology media, the fall of Friendster has been widely portrayed as an isolated management failure--with Abrams shouldering most of the blame. Indeed, Friendster now has the dubious honor of being the focus of a Harvard Business School case study on how not to manage a tech company. It ran out of money last year and was recapitalized at a valuation of $3 million, effectively making it a subsidiary of Kleiner Perkins Caufield & Byers, one of its VC investors. The recap stripped Abrams of his board seat and almost all of his equity. The founder, now an outsider, retains roughly 4 percent of the company, which has since received more venture capital but has yet to turn a profit. Most observers agree that while Friendster might still swing a modest sale, a big acquisition or an IPO is out of the question. "Everyone saw this as a no-brainer, as 'How could they screw it up?'" says Russell Siegelman, a general partner at Kleiner Perkins and a current board member at Friendster. "But not all the deals we do work." Statements like that are just one more thing that gets under Abrams's skin. He's a prickly sort, with lots of opinions and little reluctance to share them. However, until I tracked him down at his bar last October, he had been uncharacteristically reticent about Friendster. But over the course of several hours (and during interviews in the months that followed), Abrams laid out a narrative that is decidedly different from the one put forth by the Silicon Valley VCs, bloggers, and journalists. He argues that Friendster fizzled not only because it fell victim to mismanagement, but because he embraced a system that is designed to create far more failures than successes. Friendster, he believes, was not simply a singular failure, but a systematic one. And he's determined that things be different with his new Web venture, Socializr. "In the old days, entrepreneurs would bootstrap and figure things out over the first few years," he says. "The VCs come in too early these days." Abrams is not the only one who feels this way. "The basic venture capital system is structured so that there are built-in conflicts of interest between the VC and the entrepreneur," says Joel Spolsky, founder of Fog Creek, a New York City software company, and writer of the popular blog Joel on Software. It's a point that even some investors are willing to concede. "Most VC firms have adopted a model where they make 20 investments and have two hits," says Peter Rip, a partner with San Francisco-based Crosslink Capital, which has backed such companies as Good Technology and TiVo (NASDAQ:TIVO). The traditional VC model works fine for investors, since the returns from one Google (NASDAQ:GOOG) far outweigh the losses from nine Friendsters. It's fine for the VCs themselves, who reap healthy management fees regardless of the outcome. And it's fine for the network of professional managers who bounce from start-up to start-up, earning well wherever they go. But it isn't much good for an entrepreneur who has a promising idea--and who would prefer odds that are better than 20 to 2. Spolsky believes that working with a VC imposes a level of risk that someone prepared to invest his life--not to mention his life savings--in a single enterprise simply should not tolerate. "An entrepreneur would rather have a 100 percent chance of owning an $80 million company than a 10 percent chance of having a $800 million one," he says. Friendster never felt like a long shot to Abrams, who seemed to understand Silicon Valley as well as just about anyone. He came to Netscape in 1996 as a software engineer, having worked several years for Canadian telecom giant Nortel (NYSE:NT). He spent a year and a half at Netscape, writing code for the Navigator Web browser and immersing himself in the culture of the time and place, becoming a regular at meetings of the Silicon Valley Association of Startup Entrepreneurs and the Software Development Forum. Abrams left Netscape in 1998, and nine months later started HotLinks, an early foray into what is now called "social search." Abrams's idea--to organize webpages based on users' favorite sites--was prescient and would eventually appear in the form of successful ventures like Digg and Del.icio.us. Over the course of a year and a half, HotLinks attracted 500,000 registered users, but it ran out of money in the wake of the technology collapse. In the spring of 2001, HotLinks merged with a British software company, and Abrams left to work for another start-up. As he suffered through the dot-com bust, Abrams began mulling a new idea: software that would somehow integrate one's online and offline identities. "The way people interacted online was either anonymous or through aliases or handles," he says. "I wanted to bring that real-life context that you had offline online--so instead of Page 2 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl... Cyberdude307, I would be Jonathan." Abrams was also mindful of Gary Kremen's Match.com, which eight years after its founding was finally coming into its own. Now part of IAC, the site was booking $76 million a year in revenue--roughly one-quarter of the $300 million online dating industry in 2002. Abrams saw that the cultural perception of online dating had changed. "All of a sudden, people who I would not think of as strange and desperate--normal people--were talking about using Match.com," he says. Friendster crystallized in the summer of 2002 while Abrams was walking with a friend in a Santa Clara park. They were chatting about the online-offline problem and out popped the idea: Each person would have a standardized homepage, à la Match.com. But instead of simply advertising their interests and good looks, users could link their profiles to those of their friends, creating a network of connections that would mirror those that existed in the real world. His friend liked the idea, and Abrams started work immediately. Three months later, he had a prototype, which he posted on the fallow server of a friend's failed dot-com. He sent invitations to about 20 of his closest friends, unsure of what would happen next. "The least likely thing in my mind was starting another company," he says. "I wasn't sure what I was going to do." Abrams's invention--which would be awarded patent number 7,069,308 four years later as a "system, method, and apparatus for connecting users in an online computer system"--was far more enticing than he initially imagined. As an online dating tool, it represented a potential improvement over Match.com because users could figure out if they had acquaintances in common with a potential mate, thus bypassing the awkward unsolicited e- mail in favor of an introduction by a mutual friend. But beyond its applications in dating, Abrams's software was compelling as a pure idea. The beauty of Friendster was its exhaustively complete network. Every time a homepage loaded, Friendster's servers calculated a single user's connection to other users within four degrees of separation, which could mean hundreds of thousands of individuals. Because the network was constantly changing as new users joined and connected with one another, these calculations had to happen on the fly--in what would eventually amount to trillions of rapid calculations. The effect was to give users a vivid sense of how they fit into their social groups as well as into the larger world. Abrams, it seemed, had created a piece of software that could tell us who we were. Prototype in hand, Abrams began looking for seed funding. He delivered his first pitch on Thanksgiving Day in 2002 to a former HotLinks vice president, Melissa Lloyd, over dinner with Lloyd and her husband at their home in Sun Valley, Idaho. Abrams's hosts had no idea what he was talking about but agreed to invest a few thousand dollars anyway. "We believed in Jonathan," Lloyd says. "So we said, 'Here's your money; we don't want to hear about it again.'" The Lloyds sent Abrams home with a check for several thousand dollars and eventually invested tens of thousands more. What happened next, says Lloyd, who now lives in Seattle, was "one of the most exciting times of my business life." Over the next few months, Abrams rounded up $400,000 from a dozen investors. He opened Friendster in March 2003. The site grew virally as Abrams's friends invited their friends, and by June it had 835,000 registered members. Four months later, there were more than two million, generating some 10 million page views per day. The growth presented immediate engineering headaches. In theory, Abrams's intricate network was a beautiful thing. In practice, the constant calculations, which were being continuously served on millions of homepages, required more than a terrabyte of expensive RAM memory. By late 2003, load times regularly clocked in at over a minute and users were beginning to complain in blogs and forums. Abrams's software would need to be scaled somehow. "We would fix one problem, and then a few days later there would be another bottleneck," recalls Ian McFarland, a software developer who joined Friendster in April 2003. Simply buying enough servers to keep up with the growth was a major challenge. The problem might have been solved if someone had reworked the software to ignore distant connections--for example, by calculating only connections between friends. But Friendster's engineers were so preoccupied with day-to-day slowdowns that they neglected to step back and ask what was causing them. Abrams, for his part, was distracted by business needs: hiring, recruiting investors, looking at partnerships, and--most time-consuming of all--public relations. Between March and October of 2003 Friendster was all over the media. Time called it one of Page 3 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl... the best inventions of 2003 and Entertainment Weekly named Abrams "Friendliest Man of the Year" in its annual "Breakout Stars" issue. With no outside PR help and no marketing personnel, Abrams handled everything from talk show appearances to chatting with reporters. While the press coverage was exciting--and undeniably helpful in building Friendster's user base and increasing its attractiveness to a burgeoning online ad marketplace--it monopolized his attention, preventing him from making even small fixes that would have dramatically improved the site's performance. If the engineering challenges at Friendster were obvious, Abrams was having too much fun to worry. He assumed that with enough money and the right people, the problems would solve themselves. By July 2003, with the site pushing a million members, Abrams raised $1 million from Ram Shriram, an early investor in Google; Peter Thiel, who co-founded PayPal; and Tim Koogle, who'd served as CEO of Yahoo from 1995 to 2001. Three months later, he turned down a $30 million acquisition offer from Google in favor of a $13 million VC round from Kleiner Perkins and Benchmark Capital, at a valuation of $53 million. The deal, one of the first big transactions since the bursting of the tech bubble, was widely portrayed as the harbinger of a dot-com renaissance. In December, the Venture Capital Journal called social networking "the new Internet gamble," adding that "the Net is hot again." Kleiner and Benchmark were, in fact, so eager to grab a piece of Friendster that they agreed to a highly unusual condition: a $4.7 million cash payout for Abrams. Nonetheless, Abrams believes he made a critical mistake in negotiating the deal. He kept about a third of the company's stock but no longer had control of the five-person board. The deal specified that "preferred" shareholders--the VCs--would pick two board members, that Abrams would pick two, and that there would be a tiebreaker who would be mutually acceptable to both sides. Abrams says he didn't pay much attention to the issue because he had resolved to let the experienced VCs take charge. As Friendster entered 2004, Abrams tapped Tim Koogle to join the board; he took a seat himself. Roger Lee, a partner at Battery Ventures, took the mutual seat, while the preferred seats went to Kleiner's John Doerr, a director at Amazon and Google, and Benchmark's Bob Kagle, the VC who discovered eBay. Abrams agreed to let Koogle run the company as interim CEO while the two men focused on building a professional management team. To fix Friendster's engineering woes, they hired Jeff Winner, who'd co-founded Collabra Software, a business collaboration tool sold to Netscape in 1995 for $108 million in stock. John Briggs, a seven-year veteran of Yahoo, was hired as VP of product management. Mary Lou Song, employee No. 3 at eBay, was charged with managing the rapidly expanding user base. The CEO job went to Scott Sassa, who had been president of NBC West Coast, overseeing hits like The West Wing. He was a well-connected entertainment executive who could credibly strike content deals with traditional media companies. Each of the new hires came to Friendster with strong ideas about how to make the company as big as possible as fast as possible, with an eye toward a big exit for the investors. With new rivals--most notably, MySpace and Facebook--emerging, they wanted to move fast. But agreeing on a game plan turned out to be a problem. "There was this leadership battle on top that was like a war in Valhalla," says Chris Lunt, who joined Friendster in 2003 and took over as director of engineering when Winner left in late 2004. "Everybody had their own agenda." The result was a kind of corporate schizophrenia. Rather than improving the software, Friendster went on a partnership binge, resulting in a hodgepodge of incongruous and poorly integrated features: blogs (with Six Apart), video sharing (with Grouper), personalized searches (with Eurekster), VoIP (with GloPhone), and Internet radio (with Pandora). The tenor of the board meetings quickly deteriorated, with Abrams becoming increasingly isolated from the board, which now also included Sassa. "We had an inexperienced founder and a lot of experienced and high- powered board members," says Kleiner's Siegelman. "There were too many cooks in the kitchen." Abrams, the board's chairman, hardly considered himself inexperienced and felt ignored by his five colleagues, who, he says, generally sided with Doerr. He was particularly vexed by the company's apparent obsession with partnerships. "At the board meetings they would say, 'We should do a deal with AOL,'" he recalls. "And I'd be like, 'Guys, the site is not working.'" He never got anyone's attention, and in 2005 he was stripped of his chairmanship. He stopped coming into the office regularly. Page 4 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl... In hindsight, the decision to marginalize Abrams, an experienced engineer, probably was a bad move. Rather than address the problem of too many calculations, Sassa opted to make massive investments in hardware and software in 2004. Under Winner's leadership, a team of engineers completely rewrote Friendster's code into a different programming language and spent more than $1 million on a Hitachi (NYSE:HIT) storage area network, effectively halting business development for six months. Although Winner claims the rewrite was successful, load times continued to be a problem as late as 2006, according to Chander Sarna, Friendster's current vice president of engineering. "The ex-Friendster people are not going to like me for saying this, but there was a lack of spending discipline," Sarna says. "There were very basic problems that good code writers should have fixed to begin with." Whether or not it was a success, Winner's program was divisive. Many of the software developers considered the rewrite unnecessary, while the product development team complained that they needed to add features to the site in order to compete with MySpace. The result was constant bickering between cliques and side projects that went nowhere. Sassa, a Hollywood deal maker who had never closely managed engineers, lacked the technical expertise to moderate those disputes. "It was the most frustrating place to work," says Lunt. At the board level, Siegelman says, there was a realization that the management team was "dysfunctional," but the board was loath to micromanage. "The pot kept getting stirred, but nobody said, 'I'm turning down the flame because this isn't the right recipe,'" he says. Meanwhile, scant attention was paid to Friendster's users. Lunt remembers marveling sometime in early 2004 at how Friendster's traffic would mysteriously spike at 2 a.m. Intrigued, he started looking at the site's log. Oh, my God, he thought, everyone is from the Philippines. He worked backwards, looking for "patient zero"--the first American to "Friendster" a Filipino. He found Carmen Leilani De Jesus, a 32-year-old marketing consultant and part-time hypnotherapist from San Francisco, the 91st person to join Friendster. She was directly connected to Abrams as well as to dozens of Filipinos, who'd in turn connected to thousands more. In fact, more than half the site's traffic was coming from Southeast Asia. From a business standpoint, the revelation was devastating. Friendster, it turned out, was paying millions of dollars a year to attract eyeballs that were effectively worthless to its advertisers. Says Abrams: "We needed to make a tough decision"--either spin off the Asian business or become the No. 1 Filipino social network. But because the Filipino users had come by way of their American friends, there was no easy answer. If Friendster cut the cord to Asia--either by drastically cutting back on engineering resources or by kicking the Asian users off the site altogether--it risked damaging its American user base. The Carmens of the world might look for a less restrictive site. Of course, that's what happened anyway. Unbeknownst to Abrams, Sassa, and Friendster's investors, demand for social networking was changing. The lure of Friendster--and, to a much greater extent, MySpace--was not the elegant web of connections but rather the opportunity to gawk at strangers. Rather than using Friendster to make dates, most of its users were simply cruising around and looking at the weird interests, pictures, and blog- droppings of strangers (including so-called "fakester" profiles of Jesus and Burt Reynolds). Real-life connections, the core of Abrams's vision, were not quite as relevant as he'd imagined. Thus, the free-spirited MySpace, which allowed anyone to look at anyone else's profile and didn't bother to calculate connections, took off. The site surpassed Friendster by the end of 2004 after only a year in business. A mere nine months later, it would be clocking 22 million unique users per month in the U.S., compared with 1.1 million for Friendster. As MySpace pulled away, morale at Friendster plummeted. This was especially true among the engineering ranks--normally the workaholics in any tech start-up. "Week after week nobody was getting anything done," Abrams recalls. "You just felt like, what are we all doing?" (Sassa, who recently founded Uber.com, a social networking site, did not respond to repeated requests for comment. Friendster board members Tim Koogle, Roger Lee, Bob Kagle, and John Doerr also demurred.) That summer, with four months of operating capital left in the bank, Sassa resigned. Kleiner Perkins promptly hired him as "CEO in residence," a position he would hold for just under a year. Without Abrams's knowledge, the board then offered the CEO job to Taek Kwon, a 31-year-old whom Sassa had approached as a candidate for a VP-level position. With the understanding that the VCs would Page 5 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl... inject more money into the company, Kwon agreed to become Friendster's fourth CEO in two years. Given his age and resumé--he had previously been an executive vice president at IAC's (NASDAQ:IACI) Citysearch--he was also the least qualified. When Abrams was told of the hiring at a board meeting, he was irate. Several weeks later, he met Kwon for dinner at a South Bay restaurant. As they ate, Kwon grilled Abrams about missed opportunities: Why hadn't Friendster incorporated music or videos? What about a functionality that would allow users, and even companies, to invite people to parties? "I started laughing," Abrams recalls. They were all suggestions, he says, he'd been making for years. "That's when I decided to start a new company." For his part, Kwon was heartened by the conversation, hoping that he'd have more success wrangling the board and controlling the engineers. The optimism did not last long. Shortly after the dinner, Kleiner's John Doerr called to inform Kwon that he was resigning from the board. A new round of VC funding was not discussed. By February 2006, Kwon had resigned and Siegelman had declined to participate in Kleiner's next fund. Abrams was off the board, and Friendster was on the auction block. No serious bids were made. Following the dinner with Kwon, Abrams disappeared from a public life that had been packed with speaking engagements, television appearances, and magazine photo shoots with beautiful women. He traded those for the solitude of programming, spending 12 hours a day attempting to build a new company out of the event functionality he'd wanted to include in Friendster. He also threw himself into the opening of his bar, Slide. He told few people what he was doing. Auren Hoffman, a friend and now an angel investor in Socializr, says that in mid-2006 he mentioned in passing that he disliked Evite, the IAC-owned website that dominates the market for party invitations. "I don't know if I told you this," Abrams responded. "But for the last six months I've been working on something to kill Evite." In his interactions with the rest of the world Abrams was more cryptic--even adversarial. He didn't bother to explain Socializr and gave no press interviews, even as he was attacked by bloggers who questioned whether he was really building a serious company. "Socializr in Private Beta, zzzzzzzz," announced a TechCrunch headline. "Will the new start-up be a lame burnout project or new life for Abrams?" asked ValleyWag. Slide is located in an expansive basement next to one of San Francisco's biggest nightclubs. The name refers to its entrance: a spiral playground slide that patrons ride down into the bar. It's late in the afternoon when I arrive. The empty space is dark and hazy. Abrams gets up from a meeting with his partners and walks me to the far corner. We sit down in one of the deep oversized booths, which give the place the feel of a 1920s speakeasy. A crew sets up the stage for the night's entertainment, a turntablist called DJ Solomon. As he leans back, tucking his legs under his knees in a yogalike pose, Abrams cuts the figure of someone far younger than his 37 years. Face fashionably unshaven, he sports a Puma track jacket, a black T-shirt, designer jeans, and a slight paunch. A waitress outfitted in a flapper costume--an evanescent white skirt over black leggings--serves us designer water while bizarre jazz reworkings of pop standards like Michael Jackson's "Beat It" play through the sound system. Ask Abrams what he's learned and you're confronted with a torrent of mea culpas, disclaimers, and recriminations from a man who is at once bitter and resigned. "I take responsibility," he says. "I was naive. I thought these big-shot guys were going to help Friendster." His biggest regret, he says, was turning the company over to Silicon Valley's best and brightest. As Friendster sputtered, Abrams says, he suppressed his entrepreneurial instincts, keeping quiet when he probably should have been lashing out. With Socializr, Abrams is doing what he would have done at Friendster if he'd stayed in control. "Friendster was never finished--it was a prototype that I stopped having the ability to develop," he says. Like Evite, Socializr helps concert promoters, bars, and anyone else who likes to host gatherings invite people to their events. Abrams hopes that lay users who receive invitations through Socializr will create profile pages on the service as well, which could develop into a full-fledged social network. Page 6 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl... When you sign up--a process that takes a minute or so--Socializr offers to troll the Internet for things like your MySpace profile, your Flickr photos, and your LiveJournal blog, and automatically builds a profile that aggregates all of this information. Because this content is stored on other people's websites, bandwidth, processing, and storage costs are relatively low. "Now that there are 100 people who have copied my ideas with Friendster, being the 101st social networking site is silly," he says. "I'm building a product that can integrate with those sites." The software remains in development but has already earned some good reviews. "This wasn't designed by people eager to get in on the game," wrote a blogger for Wired.com. "It was designed by a crew of people who have been playing the game since the beginning." But the most important lessons from Friendster have less to do with what Socializr does than with how Abrams plans to run it. Abrams was seduced by the experience of his "all-star team," assuming that talented people would come up with the right solutions. This time, he plans to favor quick and dirty engineering solutions over the elegant but not necessarily practical ideas that were imposed by Friendster's management. Having only two employees helps--as does making do with less than $1 million in angel funding. The idea is to grow slowly, have fun--and, above all, avoid hot-shot venture capitalists. "I'm hoping it'll be like 2002 and 2003, when I didn't have a lot of money and I got a lot done," he says. But if he's not building a traditional VC-backed start-up, what is he building? Is it a hobby project or an IPO in the making? Here Abrams is less clear. Abrams has put none of his own money into Socializr. He is cagey on his timetables and plans for growth. When I ask him what Socializr might look like in three years, he laughs: "That's a long time for me." Coming as it does from the guy who invented social networking, the statement seems curiously unambitious. And then there's the question of why an active Internet entrepreneur would start a nightclub in the first place. Abrams says that Slide is neither a distraction nor a major financial risk. "As you can tell"--he gestures at the posh lighting, the attractive waitress, the abstract art--"I'm doing fine." Abrams is alluding to his personal wealth, but his almost perky tone suggests his mental state, a hard-fought detachment that has allowed him to recover from failure. Abrams may be a cynic, but it's easy to forgive his cynicism--even if you blame him for the biggest tech flop since the bubble burst. After all, it's not often you encounter a visionary who has decided it's okay not to be one. Max Chafkin is a staff writer for the magazine. Copyright © 2008 Mansueto Ventures LLC. All rights reserved. Inc.com, 7 World Trade Center, New York, NY 10007-2195. Page 7 of 7How to Kill a Great Idea! | Printer-friendly version 7/30/2008http://www.inc.com/magazine/20070601/features-how-to-kill-a-great-idea_Printer_Friendl...