Marina Gorbis's Blog, page 1565

A History of Entrepreneurship Can Hurt Your Job Prospects

Employers and recruiting agencies sent 63% fewer positive replies to fictitious candidates whose CVs showed they had owned and managed small HR consulting companies, in comparison with equally qualified candidates whose CVs showed they had been project managers in corporate HR consulting divisions, according to research in the UK led by Philipp D. Koellinger of Erasmus University in the Netherlands. Among the female candidates alone, the gap was even wider, at 75%. Thus it appears that starting a business has consequences for entrepreneurs' job prospects: Self-employment sends a "negative signal" to the job market, the researchers say.

The Women Who Become Board Members

An interview with Boris Groysberg and Deborah Bell, authors of the article Dysfunction in the Boardroom.

Download this podcast

A written transcript will be available by August 2.

Does the Fed Chair Need to Be a Great Manager, or Just a Great Economist?

By the end of the year, President Obama will likely make one of the most important economic decisions of his presidency: appointing a new Federal Reserve chairman. The two leading candidates, according to reports, are Janet Yellen, the Fed's vice chairman, and Larry Summers, a former member of the president's economic team and Secretary of the Treasury under the Clinton Administration. Both have impressive economic credentials but differ in background and reputation, raising the question of what, exactly, makes a great Fed chair.

Is success as Fed chair simply a matter of being a brilliant economist, or are a consensus-driven leadership style and the ability to effectively manage the Board of Governors and the Federal Open Market Committee equally critical?

That question is particularly relevant in the case of Summers, who has a reputation — rightly or wrongly — for being brilliant but aggressive and hard to work with. Luckily, research by two economic historians can help answer it.

In a 2004 paper for the Journal of Economic Perspectives, Christina and David Romer, both of the University of California at Berkeley, looked at the history of the modern Fed to identify which factors best predicted success as chair. (Christina Romer, also a former member of the Obama team, has been mentioned as a candidate for chair but is not considered a likely pick.) Here's the short version: "The key determinants of policy success have been policymakers' views about how the economy works and what monetary policy can accomplish."

In reaching this conclusion, the authors looked at testimony to Congress and other statements by Fed chairmen and determined, not surprisingly, that what they said was closely linked to what the Fed ended up doing. They then found that realistic and well-reasoned economic statements were directly tied to policy success. (The authors treat these statements as "beliefs" held by the chairman, but one need not assume they fully reflect that individual's beliefs to accept the rest of the analysis.) The paper then explores a number of variables, looking for correlations with the "sensible beliefs" that lead to successful tenures.

The authors first examined professional backgrounds, but found little relationship:

This analysis suggests that concrete background characteristics have been
highly imperfect indicators of future views. Training in economics, experience on
Wall Street, nonpartisan public service in economic policymaking and limited
political involvement have been correlated with sensible beliefs, but there are
exceptions to nearly every rule.

The paper goes on to look at the public writings and statements by Fed chairs prior to their appointments, and finds that this method better predicts success:

Fortunately, there is something else that predicts chairmen's views exceptionally well: their own writings and statements. Each of the past Federal Reserve chairmen expressed quite clearly the views that dominated policymaking during his tenure at the confirmation hearing or before.

Before applying these conclusions to the present case, some caveats are necessary. First, looking at professional backgrounds is not the same thing as considering temperament and leadership. One cannot dismiss the importance of these qualifications on the basis of this analysis. Second, much has changed since 2004, including the Fed's toolbox. Under Chairman Bernanke, the Fed has pioneered various "unconventional" policies aimed at stimulating the economy and lowering unemployment. In today's environment of uncertainty and experimentation, management ability may be of particular importance.

Nonetheless, this research is worth bearing in mind when considering who would make the best Fed chair. Leadership, temperament, and background are no doubt important, but they should take a backseat to the candidates' economic views.

That leaves the minor detail of what exactly the two leading candidates believe when it comes to monetary policy. Yellen has said and written more on the subject in recent years than Summers, meaning that it's a lot easier for us to predict what she'd do as Fed chair. But President Obama and the Senators who would have to approve the new Fed chair do at least have a fallback with Summers — they could ask him.

Are We Asking Too Much of Our CIOs?

It is all well and good — and true — to say that the role and mandate of the CIO are expanding. Smart commentators here and elsewhere have described why and how that is happening. But too many organizations are stretching their Chief Information Officers (CIO) too thin. CIOs are being tasked with managing internal business systems, cloud-based services, big data innovation, data security, and the 24x7 needs of global customers who access company data on personal devices. Effective leadership and management across these areas is possible, but not without without providing CIOs with the proper support structures and instituting necessary organizational alignment.

It's time for a forward-looking but realistic assessment at the expanding role of the CIO, and what it takes to fulfill this successfully. Not surprisingly, the keys are balance, support, and alignment. Here are some constructive ideas:

Ray Wang, Principal Analyst & CEO of Constellation Research Group outlines four personas of the next generation CIO:

Chief "Infrastructure" Officer: "Keeping the lights on" and managing existing systems
Chief "Integration" Officer: Bringing together internal and external data and systems
Chief "Intelligence" Officer: Fostering business intelligence and getting the right data to the right people
Chief "Innovation" Officer: Looking for disruptive technologies to drive innovation

Today's CIOs must learn to balance all of these personas. As Jennifer Kenny, CIO of SRI International, describes it, CIOs need to be "Whole Systems" thinkers and practitioners (that's business systems, not computer systems). Research focused on the careers of 14 highly successful CIOs found that, beyond the skills needed by all C-level executives (an extensive network, emotional intelligence, leadership, etc.), CIOs especially need:

an integrative mind
focus and vision
a trusting and trustworthy nature (to better build and nurture cross-functional teams)

Finding people who have such a broad base of skills is problematic, at best. And juggling all of these roles and responsibilities leaves CIOs with little time to think about innovation. Bruce Whetstone, an IT management consultant covering a variety of industries, argues that the CIO already has several full-time jobs, managing infrastructure and the integration of internal and external data and systems (Intel's CIO, Kim Stevenson, calls those roles "table stakes"), as well as business intelligence. This doesn't leave much bandwidth for innovation. And Whetstone doesn't see many companies meeting IT halfway. Instead, "people want to blame IT when the data isn't at their fingertips." Whetstone argues that companies need to do a better job of empowering the entire organization to access and manipulate data, while at the same time integrating the CIO's role more seamlessly into business units (and business unit budgets). Indeed, we may begin to see more business unit leaders in CIO roles in the future. For example, at the Las Vegas Sands Corporation — an analytics heavy business — Rom Hendler serves as SVP, Chief Marketing Officer, and interim CIO.

Match the CIO reporting structure to the strategic goals of the organization.

But, empowering CIOs and employees throughout the organization isn't enough.

Tomorrow's organizations will also need to align the CIO reporting structure to the strategic goals of the organization. Research from Dr. Rajiv Banker and colleagues at Temple University's Fox School of Business found that organizations with cost leadership strategies and CIOs who report to the CFO have higher performance than peers with CIOs who report to the CEO. However, organizations with product differentiation strategies have higher performance when the CIO reports to the CEO. Alignment with strategic positioning will be key to success.

The bottom line is that before we can ask our CIOs to do more for business, we need to evaluate how the organization can provide the support necessary for all four of the CIO personas to function. The right model for your own company may be to employ a single broad-based CIO who can deliver on all four persons; a technical CIO who works in collaboration with other IT executives with business backgrounds; or tighter integration across the C-suite, perhaps through formally aligning the goals of the CMO/COO and CIO.

The office and activities of the CIO need to be in tune with the needs of the organization. This is more than a shuffling of responsibilities. Work towards a meaningful redesign that will carry you through the decade.

Reinventing Corporate IT
An HBR Insight Center





Is Your Organization Ready for Total Digitization?
Why Can't a CIO Be More Like a CFO?
Exploit IT for Strategic Benefit
IT Cannot Be Only the CIO's Responsibility

Coping With Change in Emerging Markets

In 2000, Chrysler's then president, James Holden, traveled to India to study the market. Upon returning to Detroit, he summarized his visit with the remark: "Call me when (India has) built some roads," according to Forbes correspondent Robyn Meredith in her 2007 book The Elephant and the Dragon.

Holden didn't anticipate that the Indian automobile market would grow by over 500% over the next 10 years: India's car sales shot up from 518,000 units in 2000 to 2.8 million in 2010, making it the world's sixth largest car market. Not surprisingly, Chrysler is notable for its near-absence — in 2012, Chrysler-Fiat's share was 0.4%— from the Indian market today.

Five years ago, logos were essential to sell luxury products in China. Consumers didn't see the point in splurging on designer products if people couldn't see that they had the money to do so. Plastering Louis Vuitton's LV or Gucci's G all over their products was critical for those companies to earn premium prices.

It's different today. Affluent Chinese have shopped in New York, London, Milan, and Paris, and they've seen what Americans and Europeans buy and use. They've become more comfortable with their wealth and are starting to emulate their global peers. Subtlety is in with China's luxury shoppers, at least in the big cities.

Markets change much faster in developing nations than they do in developed countries, as these examples show. The pace of change in preferences and sizes poses a dilemma for executives in multinational companies. If tomorrow turns out to be different from today, as it undoubtedly will, their strategies will be out-of-sync with reality. At the same time, they also face the risk that any predictions they make may prove to be nothing more than a figment of the imagination.

In an environment of constant change and churn in the marketplace, senior executives can take four steps to increase the odds of getting their strategies right:

Learn from heterogeneity. "The future is already here, it's just not evenly distributed," noted futurologist William Gibson. Emerging markets are pretty diverse. Look at the range of per capita incomes: Brazil's is approximately $13,000, China's $5,500, Indonesia's $3,500, and India's is just $1,500.

Systematically analyzing data across emerging markets therefore increases the ability to anticipate market evolution and consumer behavior. Pairwise analysis can be particularly helpful. Senior Lenovo executives say that the PC market's growth in rural China has been useful in predicting the evolution of that segment in India, for instance.

Keep experimenting to test assumptions. If you were the leader of a luxury products business in China three years ago, you may have felt that the market was going to change. However, it would have been impossible to predict with any confidence the speed at which that shift would take place and how it would differ across markets. A useful way of uncovering that information is to experiment constantly.

Experiments carried out across customer segments and market segments generate rapid and low-cost learning. When Wal-Mart entered China, it treated the first stores it opened as living laboratories. It tested different store formats and varied merchandise mixes to understand which approaches would work in what markets.

Leverage stakeholders' wisdom. Find out what assumptions guide your competitors. What do suppliers think? What do distributors believe and, in the case of B2B businesses, what do customers think? What do equity analysts say, especially those who follow local companies? And what are the opinions of the experts who track your industry?

Tracking stakeholders' perspectives may not yield a consensus prediction. But it will force you to question your assumptions, reducing the risk of being blindsided. Sealed Air China used this approach to decide whether it should develop lower-priced packaging material and go head-to-head with local rivals.

Be prepared to change course. Given the multiplicity of factors, political and economic, that shape the evolution of emerging markets, it's all too likely that you will run into the unexpected. These need not always have a negative impact; for example, a sudden food safety crisis involving local rivals may boost demand for your products.

Executives must understand that working in developing countries is akin to whitewater rafting, not canoeing. Coming to grips with that fact will make all the difference between tasting success and getting overwhelmed by the turbulence in those markets.

Be the Company Customers Can't Live Without

Imagine you're the CEO of a startup offering a technology solution when the economy plunges into the worst downturn since the Great Depression. Up to then, you've delivered impressive results; your product has reached $22 million in revenues in four years on the market and your solution is recognized as a leader by the tech pundits.

Imagine choosing that time to tell your Board that, in essence, you want to walk away from about half of that business.

You may at this point be imagining yourself out of a job. But hear me out. As you may have guessed, this really happened and the "you" in the story is actually me. I'm happy to say that the conversation with the Board went quite well, our business has nearly tripled since that day, and I'm still the CEO. And I've learned that there is a big difference between being a good company and building one that customers can't live without.

Discover Where You Make the Most Difference

By staying close to your customers and listening to their problems you can define your true value. At Imprivata, we had an "Aha" moment when we realized that the kind of problems we were solving in the healthcare industry were larger, strategic issues, compared to the more tactical problems we were solving in other industries. It was clear that we had what it took to deliver value that our healthcare customers couldn't live without. Make it your business to figure this out and determine where you are solving your customers' highest-order problems.



And then, of course, do your homework about the competitive landscape. Just because your solution has the most to offer one industry doesn't mean that industry lacks other, perhaps even better, options. Once you identify your best purpose, determine what's driving growth in that market. Are there clear market leaders? What are the holes in their solutions? What value do customers still need that the current market isn't delivering? Are there any external conditions that could inhibit or encourage growth? How big is the opportunity?

Make the Big Bet

CEOs get paid to make the high-impact decisions that simple data analysis doesn't render obvious. When a big opportunity presents itself in a dynamic market there's no time to "wait and see." You track trends, read the tea leaves, and know when to make your move.

With a big bet like a decision to narrow your focus on a make-or-break segment, you need to go all in. You can't be constrained by your old ways of thinking about product enhancements and other investments in the future. Now everything must be viewed through the lens of being that company a certain set of customers depend upon. Consistent communication with customers to understand their evolving challenges, then innovating with that perspective in mind is critical to maintaining strategic importance to your clients.

Making the bet also means staying the course, always sticking to the commitment. Every decision you make needs to align with the goals set out in the plan. If something doesn't support the plan, you need to make the tough call no one wants to hear and say no — even if it means giving up a few million dollar deals (something we had to do multiple times). If you, as the CEO don't stay committed to your plan when it's difficult to do so, you can't expect the rest of your executive team — or staff — to make the transition.

Align Your Team

Once you have discovered your purpose, done your homework, and doubled down on your bet, it's time to focus on team building. Do you have the right players in place to engage with your clients' next wave of strategic issues? Where are the gaps? In building our team we place value on passion and creativity over prior experience, and look for people who have the courage of their convictions.

In your interactions with the team, you need to communicate your focused plan so often that it feels like overcommunicating. Distill the company vision so that it is concise and easily understood. Everyone — whether the person is the SVP of sales or an entry level administrator — needs to understand how the decisions they make in their daily roles can help that vision materialize. Every year, we set three corporate goals and announce them at our annual kick-off meeting. The goals are then reiterated at each quarterly company meeting, and at departmental meetings throughout the year. If everyone knows the goals, it is much easier for employees to make effective decisions that move the company forward. And the more invested employees are in this process, the more pride they take in the company's overall success.

In 2012, Imprivata's revenue reached approximately $54 million. Three years after we decided to consolidate our focus on a single vertical market, more than 80 percent of that revenue is from the healthcare industry. Focusing on the market where we have the most strategic value for our customers — where we have become intrinsic to their success - has given us a higher sense of purpose.

The irony does not escape me that we have a steep economic downturn — something many young companies don't survive — to thank for this. For our organization, the financial crisis and recession emphasized how valuable it is to be a business that customers can't live without, regardless of the economic cycle. It forced us to focus on where we could deliver the most value, and to chart a new course.

Create a Crowd Competition That Works

It's no secret that people in business are turning to the crowd to solve their toughest challenges. Well-known sites like Kickstarter and Indiegogo allow people to raise money for new projects. Design platforms like Crowdspring and 99designs give people the tools needed to crowdsource graphic design ideas and feedback.

At the Hult Prize — a start-up accelerator that challenges Millennials to develop innovative social enterprises to solve our world's most pressing issues (and rewards the top team with $1,000,000 in start-up capital) — we've learned that the crowd can also offer an unorthodox solution in developing innovative and disruptive ideas, particularly ones focused on tackling complex, large-scale social issues.

But to effectively harness the power of the crowd, you have to engage it carefully. Over the past four years, we've developed a well-defined set of principles that guide our annual "challenge," (lauded by Bill Clinton in TIME magazine as one of the top five initiatives changing the world for the better) that produces original and actionable ideas to solve social issues.

Companies like Netflix, General Electric, and Proctor & Gamble have also started "challenging the crowd" and employing many of these principles to tackle their own business roadblocks. If you're looking to spark disruptive and powerful ideas that benefit your company, follow these guidelines to launch an engaging competition:

1. Define the boundaries. Open-ended challenges are rarely successful; participants aren't engaged, ideas often aren't actionable, and you'll waste time combing through too many responses to find the few good ideas. Instead, clearly define the types of solutions that you are seeking, and the success metrics. For our latest challenge — solving the global food crisis — we set the boundaries to urban areas, which ensured that solutions were targeted to places where they could have the greatest impact. Similarly, GE's recent Hospital Quest challenge focused participants on addressing operational issues, and intentionally excluded other pressing topics such as medical outcomes and patient comfort.

2. Identify a specific and bold stretch target. Frame the challenge in a quantifiable way. Making the target a stretch will inspire your participants to think big and ensure that solutions have a significant impact. When Netflix launched its Netflix Prize, it set an aggressive target, demanding that the winning solution present a 10% improvement over Netflix's current ability to predict whether a viewer would enjoy a recommended movie. These sorts of targets may seem unattainable at first, but we have found that every time we set the bar high several teams manage to reach or exceed it.



3. Insist on low barriers to entry. The point in the early phases of the competition is to encourage as many ideas from as many different people as possible. Proctor & Gamble, on the P&G Connect + Develop site, requires only a name, email, and physical address to submit an idea. If your application includes an endless list of questions, you should start over. And if your janitor catches wind of a business challenge you plan to present to your team and expresses interest, why not let him contribute? You may find he delivers the most innovative, disruptive idea.



4. Encourage teams and networks. The social problems the Hult Prize tackles are often large in scale, and highly complex. A lone individual rarely has the expertise to harness ideas from adjacent disciplines, design a solution, and build a robust implementation plan. Diverse teams, on the other hand, generate solutions that no single individual could develop. The winning Netflix team, for instance, was comprised of a combination of earlier teams that came together and shared their expertise and partial solutions to reach the stretch target. Similarly, one of the winning teams of the Northrup Grumman Lunar Lander X Prize at Armadillo Aerospace began as a venture between a game programmer and local rocketry enthusiasts in Texas.

In addition to encouraging team entries, you can go a step further and create networks of mentors, coaches, judges and enablers. These networks will help to refine, pressure test, and roll-out the great ideas generated through your initiative, encouraging not just breakthrough innovation, but long-term success.

5. Provide a toolkit. Once interested parties become participants in your challenge, provide tools to set them up for success. If you are working on a social problem, you can use IDEO's human-centered design toolkit. If you have a private-sector challenge, consider posting it on an existing innovation platform. As an organizer, you don't have to spend time recreating the wheel — use one of the many existing platforms and borrow materials from those willing to share.

Whether you're launching the next big social initiative or simply looking for creative ideas to help meet your business objectives, use these principles to get the most from the crowd. Have you tried tapping the crowd to find disruptive ideas for your business? If so, what principles would you add to this list?

There's No Formula for Fixing Detroit, and That's a Good Thing

The news of Detroit's bankruptcy has brought countless explanations of what went wrong, some of them pretty interesting. But the main point of a bankruptcy — especially this bankruptcy, which has been looming for decades — is to get a fresh start.

So it's been dismaying to see how little attention has been paid in the past week's news coverage to the fact that central Detroit is already in the midst of fresh start, a revitalization that feels far more organic and durable than past top-down efforts like the construction of the Renaissance Center in the late 1970s and the arrival of casinos in the late 1990s (although the casinos do appear to pay the bulk of the city's bills at the moment). Decrepit buildings in downtown and midtown are being renovated and converted into loft apartments, hotels, restaurants, and offices. Compuware and Quicken Loans have moved their headquarters and thousands of employees from the suburbs to the city. There's an incipient venture-capital and startup scene, and lots of small creative businesses. The area's pro sports teams are almost all back downtown. Young, upwardly mobile people are actually moving to Detroit.

At the moment, this renaissance is almost completely disconnected from what's going on in the rest of the city. A small group of affluent, well-educated Creative Classers (and a larger number of occasional suburban visitors) has occupied an island in a sea of economic despair. One telling factoid: Detroit had been without a major chain supermarket since 2007. Now it has one in midtown, and it's a Whole Foods! (For non-U.S. readers, Whole Foods is a high-end natural foods chain long known by the nickname "Whole Paycheck.")

Outside of this rejuvenating core and a few residential neighborhoods that are still holding strong, Detroit is an underpopulated, crumbling mess. In 1950 the city had more than 1.8 million inhabitants; this year the population will probably slip below 700,000. Providing city services like police protection and garbage pickup across 139 ever-emptier square miles keeps getting more expensive and difficult (Detroit now has much lower population density than famously sprawling Los Angeles — although it's still denser than more recent boomtowns such as Houston and Phoenix). Just since 2000, the city has lost 26% of its people, with the white flight that began Detroit's decline in the 1950s long since overtaken by an exodus of middle-class African-Americans.

Those left behind are increasingly those who can't get out — with a per capita income of just $15,261 and 36.2% of the population below the poverty line, Detroit is now by most measures the poorest big city in the country.

It has also been uniquely dysfunctional. Cities live or die as economic entities, and Detroit's economy of course grew up around its automotive entrepreneurs. But over time the automakers evolved into change-averse business bureaucracies. Only General Motors remained based in Detroit, and while it certainly tried to help the city it's probably fair to say that its executives had little idea how. And while the Detroit area spawned new businesses — Compuware, Pulte Homes, Rock Financial (which took the name Quicken Loans during a brief stretch when it was owned by Intuit) — they were all creatures of the suburbs. To an extent unparalleled in any other major American metropolis, private economic activity in metro Detroit came to almost completely bypass the actual city. This was very much a racial divide; whites avoided the city, while blacks gravitated toward the government jobs that were the best things on offer within the city limits. The result was a city governing class clueless about and to a certain extent disdainful of economic reality and a regional economic elite with few ties and little loyalty to the region's main city.

Among America's ten biggest cities in 1950, two others — Cleveland and St. Louis — suffered population drops similar to Detroit's. They've also been troubled, and Cleveland even defaulted on some bank loans in the late 1970s. But on the whole the cities themselves weathered the demographic shock far better than Detroit. St. Louis even gained population last year (just 103 people, and that's just a Census Bureau estimate, but still, it's something). That's partly because they're older cities with smaller land areas to manage. But it's also because they remained central to regional economic life. Lots of businesses and other important economic institutions stayed in the cities, and the racial polarization between city and suburb was never as absolute as in Detroit.

So what do you do about that all that? Last fall, I paid a visit to the Creative Class island within depressed Detroit for the Techonomy Detroit conference at Wayne State University, and I can attest that people there are well aware that urban rebirth will take a lot more than a few downtown restaurant openings. I can also attest that they don't really know what it will take. I moderated a panel titled "Is Detroit the Next Berlin?" and the general consensus was that no, the huge inflow of federal money and artsy types from all over that converted the once-depressed German capital into a global hotspot was not going to be replicated in Detroit — although a few artsy types were already there and some federal money sure would be nice. So here are some other paths:

Immigration. New York Mayor Michael Bloomberg made headlines two years ago by arguing that Congress ought to "pass a law letting immigrants come in as long as they agree to go to Detroit and live there for five or 10 years, start businesses, take jobs, whatever." That apparently isn't going to happen, and recent immigration, while surely a positive for Detroit, hasn't been on the scale that has helped revitalize big cities nearer the coasts. In fact, the city has so far attracted far fewer immigrants than its suburbs — which does indicate that there's opportunity for improvement.

Shrinkage. Not long after NBA Hall of Famer Dave Bing became Detroit's mayor in 2009, reports surfaced that he was thinking of bulldozing a quarter of the city. Reality has turned out to be less dramatic, but the city is definitely working to reduce its footprint — to abandon some neighborhoods in order to focus on making others thrive. That could help with cutting costs and improving services, but — groovy urban farms aside — it's not what you'd call an entirely positive development.

Policy innovation. The most thought-provoking thing I've read about Detroit in the past week was a blog post by The Century Foundation's Jacob Anbinder sketching out four possible government policy fixes: (1) let property owners (about half of whom aren't paying their taxes at the moment) choose what their taxes are spent on, (2) make city workers live in Detroit (less than half do, and this is something Mayor Bing has already been talking about), (3) let wealthier municipalities temporarily take over parts of Detroit for economic development purposes, which is allowed under Michigan law, and (4) do away with the region's ridiculous public transit divide in which the suburbs and the city run separate and disconnected bus systems. Are these the right prescriptions? I don't know. But bold experimentation certainly has to be part of the picture.

Bankruptcy. I'm guessing Chapter 9 has been inevitable for Detroit for a while, but the timing and specifics of it were forced on the city by Republican governor Rick Snyder, a former business executive (at Gateway Computers; remember them?) and venture capitalist. Snyder seems like a pragmatic guy who genuinely wants to enable an economic rebirth for Detroit, and his decision has been welcomed by the city's new entrepreneurs. Bankruptcy is, after all, a way to get out from under past commitments that they had nothing to do with. But a lot of those commitments were to municipal workers, who (the ones who actually live in the city, at least) make up much of the Detroit's remaining middle class. The most surprising elements of the city's bankruptcy filing have been the claims that Snyder-appointed Emergency Manager Kevyn Orr has made about the dire state of the city's pension funds; there's widespread suspicion that he's overstating the problem. That's got to be at least partly a negotiating tactic, but it's a dangerous game Orr is playing. It's not that city pensions should be untouchable — they definitely won't be, now that a bankruptcy judge is likely to be calling the shots. But the great tragedy of Detroit over the last half century has been an inability to share responsibility and opportunity across racial and municipal lines. If the bulk of Detroit's bankruptcy costs are borne by a bunch of (mostly black) city workers for the benefit of a bunch of (mostly white) entrepreneurs and corporate workers, what kind of restart will that be?

Money. In a much-debated New York Times op-ed a few days ago, Steven Rattner — who managed the Detroit automakers' successful bankruptcies in 2009 — argued that the only feasible way forward is for the state of Michigan (and to a lesser extent the federal government) to help Detroit out. Michigan has had a pretty awful decade, but it's still in much better shape than Detroit. And it seems like many of the state's leading businesspeople, and its governor, have come around to the idea that the state can't thrive again until its biggest city is on the comeback trail. There are limits to what money can do, and I imagine that anything that could be labeled a "bailout" would spell political suicide for Snyder. But hey, maybe he's itching to go back into the VC business so he can invest in Detroit.

Entrepreneurs. The downtown Detroit boomlet is to a remarkable extent the work of one wealthy risk-taker, Quicken Loans chairman and co-founder Dan Gilbert. According to the blog Detroit Unspun, Gilbert and his firm Rock Ventures now own or control more than 30 properties downtown, totaling 7.5 million square feet. That's a huge bet on a far from sure thing, and while sometimes I think entrepreneurship gets oversold as a cure for economic ills, it's hard to think of anything that would do more to get Detroit going than the presence of a couple more Dan Gilberts, and a few hundred or thousand mini-Dan Gilberts.

Does all this add up to a formula for fixing Detroit? No — and you may have noticed that I completed avoided the topic of fixing Detroit's schools, which is clearly crucial yet diabolically hard. But to a certain extent the lack of formula is the point. A fresh start for Detroit means entering uncharted territory — and that's exciting.

Can Crowdfunding Solve the Startup Capital Gap?

No matter what industry it's in or what product it's selling, the absolute best way for a startup to obtain the capital it needs to grow is to generate revenue and reinvest profits.

Of course, it's easy to say that and very hard to do it.

That's why many entrepreneurs turn to friends and family for funding. These types of investors do not bet on the business so much as they bet on the person. And more often than not, these bets do not pan out, leaving angry family members and broken friendships at their wake.

More recently, crowdfunding is being considered as a potential solution.

Made popular by KickStarter, crowdfunding primarily works on a 'donation' model, whereby the 'crowd' of investors funds projects, including causes like liberating Egypt. Typically, incentives include discounted early access to products, or the opportunity to be a part of something significant.

Currently in the United States, only the 'donation' model of crowdfunding is legal. In Europe, equity crowdfunding is also possible.

Of course, the entire industry is waiting for the JOBS Act to become legal, which will allow crowds of investors to not only donate money, but actually invest via traditional equity models. Earlier this month, the SEC approved a portion of the Act that allows startups to advertise for investors. And of course, peer-to-peer lending has been around for a while, and some of it has been trickling over to startup financing.

For the most part, the impact of crowdfunding on startup financing is still minimal.

There are, however, some significant opportunities that I see ahead:

First, Angels and VCs are only interested in businesses with a clear path toward an exit, and those focused on rather large market opportunities. This leaves 99% of the businesses outside the realm of their framework. These 'Other 99%' businesses are often excellent niche businesses. They can be profitable, cash-generating concerns, quite capable of paying dividends to their shareholders. However, the dividend model of investment is pretty much missing in the angel/VC industry. Crowdfunding could plug into this gap.

Second, today even angels (let alone VCs) are looking for validated businesses. However, if you need $50,000 to $100,000 to get to adequate validation to raise the follow-on $500,000 in seed money, there is a massive gap. So pre-seed, pre-incubation or incubation stage companies are areas investors participating in CrowdFunding could look into as well. One caveat: These deals are difficult to assess, and unless savvy experts screen and rate them, the likelihood of success will be low, and we will have a lot of angry investors. Too much of that will kill the industry altogether.

Finally, working capital financing is one of the key requirements of all small startups. Today, banks take notoriously long to approve minimal amounts of credit. If that pain can be addressed via crowdfunding, that would massively lubricate small businesses, unleashing tremendous amounts of growth.

One of the reasons crowdfunding is promising is that there are opportunities of bridging these capital gaps once it becomes possible for a larger number of investors to play in the early stage startup financing market with more flexible models.

Nonetheless, early stage investment is a very risky affair, and I will be the first to say that there is no guarantee that a certain investment will pan out.

That's why the real success of crowdfunding for startups will depend on the screening and rating infrastructure that comes together to tackle non-financial heuristics in determining fundability at scale.

Note, scale is the operating word here. Without that, like venture capital, crowdfunding will remain a cottage industry, addressing less than 1% of the small businesses out there.

This, then, brings us to the real gap: knowledge and expertise.

This gap exists on multiple fronts. Friends and family do not have the expertise to gauge the viability of a business they are about to fund. Rank and file investors don't either.

On the other side of the coin, first-time entrepreneurs also lack the knowledge and expertise to make the right business decisions.

As a result, capital often gets wasted. Limited amounts of cash, soon, dry up, adding to the infant mortality pool.

The margins for error are small. A few mistakes — often, common mistakes — smash an entrepreneurial dream to pieces.

Capitalism 2.0 will make its greatest mark if this knowledge gap can be bridged.

Family Business: How to Spot a Problem Patriarch

Sometimes it's the most successful leaders who sow the seeds for the downfall of a family business.

Carl was one of the most talented leaders of his generation. When he took over the family business, it was a struggling $10 million automotive parts distributor. Now after thirty years of being at the helm, Carl has developed a $2 billion company that is a leader in logistical services to hospitals in Europe, and also owns four other distribution businesses. At one point, Carl had 48 direct reports and had personally hired each one. At the same time, he cared deeply about his family and made sure that everyone was well taken care of.

But there was a darker side to Carl's success.

Although his first act was one of the best ever, he became a "problem patriarch," a very hard-driving alpha leader who hired superb talent within the family and the business — and then consistently undermined that talent.

He drove his sister out of the company by placing her in a succession of dead-end jobs. His uncle resigned from the board saying that he wouldn't be part of a "paper board," in which Carl effectively made all the key decisions. Carl responded by maneuvering to buy most of his uncle's shares. In the process, he created a leadership vacuum that threatened the very legacy he had worked so hard to build.

When he had a heart attack at 64, Carl's doctors cautioned him to slow down. Worried both about his health — and about the prospects for the company — family members strongly advised Carl to step aside. Not surprisingly, he selected a relatively inexperienced CEO he knew he could control. People in the organization had no doubt about where the buck really stopped.

Now Carl is 70, the company has not grown since the Great Recession, and the current CEO is leaving for another opportunity. There are no strong internal candidates for the position, and the board is divided about the strategy and future direction of the company.

It's important for family members and owners to recognize that problem patriarchs don't rule by fiat so much as use a combination of other strategies to attain and maintain control over the current and next generation. You know you have encountered a Carl when you find yourself entangled with someone who:

Divides and conquers by playing one group of siblings or one branch against another
Buys off the majority by providing benefits (such as dividends) in exchange for obedience
Infantilizes the next generation by denying access to information about the business or relevant experiences
Creates a cult of personality around the patriarch/matriarch that makes it difficult to imagine anyone else leading

In many business families, we see these dominant leaders use these strategies in such a way that gravely endangers the transition of power to the next generation. One family patriarch, for example, doled out "allowances" to his children even into their 50s, keeping them so dependent that they never learned to make decisions autonomously.

Another client patriarch deliberately set out detailed rules for his descendants to follow, trying to lead them even from the grave. These rules were well-intentioned, but they hamstrung the ability of the family business to adjust to things that could not be predicted — even by someone so smart as the patriarch.

Yet another client appointed a son-in-law to run a failing $20 million business when the task at hand was to grow a $2 billion company into a $4 billion company. She was setting up the next generation to fail.

Often the reason given by such leaders for their vise grip on power is that the next generation is not good enough to provide the same quality of leadership that they have. Such thinking has an element of self-fulfilling prophecy to it. Those who are beat down rather than built up are far less likely to be successful.

What's more, it is often a mistake to assume that the business needs the same kind of leader going forward to succeed. The traits and skills required to get a business off the ground, or to drive it to great heights, are quite different from those needed to build on that success and meet the next set of challenges.

Those who are left to take over from such powerful, mythic patriarchs, must realize the ways in which people's development has been stymied (even if with the best of intentions). Awareness is the first step towards action.



It is also important to understand that while things may be better once the controlling patriarch is no long on center stage, the organization will still embody some negative aspects of his legacy. Reorienting and rebuilding the family business will take time. Without new, collective leadership, the transition process is likely to be extremely challenging — or unsuccessful.

At this point, family business owners have a choice: they can try to find another benevolent patriarch, or they can let multiple leaders bloom. We call these the "one-for-one" versus "one-for-many" strategies. One-for-one happens when families try to find a replacement for Carl, another patriarch who can do it all. By contrast, one-for-many strategies come into play when the family realizes that what worked before cannot be replicated going forward.

The best patriarchs recognize that different people, different styles of leadership, probably multiple leaders, are needed to fill the vacuum left by his passing or stepping down.

The choice between a sole, benevolent patriarch and multiple leaders in the organization is not either/or, and the best patriarchs realize this. We have one client patriarch, who developed talent up, down, and across the family and the organization.

This patriarch was empowering in that he put his people in leadership roles; he also cultivated and celebrated their talent. Knowing that time was approaching to transition power to the next generation, the patriarch appointed and created a heavy-hitting board that included two of his daughters. He prepared and gradually transferred responsibility to his son.

This patriarch did an outstanding job of developing talent. That's no small feat. Setting the stage for a great second act is what real leadership is all about.