Wednesday, December 01, 2010

Why does Minnesota Suck? Reaction to the Kaufman Index of Entreprenurial Activity

the Kaufman Foundation released the Annual Report on Entrepreneurial Activity this week and, once again, Minnesota was WAY down toward the bottom.

Bad news... we fell off a cliff on "Entrepreneurial Activity," which is broadly defined as "The adjusted number of entrepreneurs starting new businesses."  

So I have a few things that I need to get off my chest. 

To Investors that are reading this...It is 2am on a Sunday morning, during Thanksgiving weekend. I am up working on my company, because this is what we do, this is the life we choose when we start a company. We live it every minute of every day. If you aren't up too, looking for the next great Minnesota company, what ARE you doing?
As for the stupid Kaufman report... If ONLY we had access to investors who would put money into pre-revenue companies we could stop whining about our crappy showing with regard to entrepreneurial activity. 

2008 Rank
2010 Rank
Immigration of Knowledge Workers
Manufacturing Value-Added
Job Churning
Fastest Growing Firms
Entrepreneurial Activity
Health IT
Scientists and Engineers
Non-Industry Investment in R&D
Hold on to your socks...Dag is going to blow!
Without REAL early stage investment, what the hell do people expect? There are hardly any investors that will get into companies at an early stage around here. This problem is NOT caused by a lack of ingenuity or folks with good ideas and the ability to make them happen. This issue is strictly and completely at the feet of the so-called ANGEL/SEED investment community here in Minnesota. More to the point, there are almost no REAL angels or seed capital investors here at all.

But every ^%$#%^# investor will point to studies like this and say "This is why I don't invest in "Ideas... because there aren't enough good ones. Minnesota doesn't produce good ideas and it doesn't have enough entrepreneurs to invest in" That is patently Bull$#!+. There are TONS of good ideas and even more folks who would love to start companies, but they can't because there are no investors out there who will even speak to them without revenue flowing first.
I am sick of hearing people with money talk about how there is "plenty of money out there", because they all have friends that TALK about investing and the companies that they have invested in. What they never tell you is that they could have made 20 times more if they had been the first in, but because they were too gutless to support the company when it really needed the money, it couldn't hire the right people, couldn't market itself, couldn't iterate, couldn't meet with customers and, ultimately, grew at a much slower rate. These "investors" have steadily pushed Minnesota into a self-perpetuating cycle of anti-entrepreneurial sentiment and they are the reason that it takes an act of god to get early stage funding around here.

Not every Start-up should HAVE to go through an accelerator to get early funding. Sometimes $20K isn't enough, even if you are one of the lucky few that actually get into an accelerator. I would like someone to tell me when was the last time they invested in a good idea, with a solid team, that had no IP issues, had a solid legal foundation, an experienced entrepreneur at the helm, tons of research and voice-of-the-customer data, a solid marketing plan and well developed message, deep target-market industry experience and a financial model that made sense. Seriously, WHEN? Is it because there aren't any companies here in Minnesota that have all of these characteristics? NO

Instead, those entrepreneurs hear "what's your revenue?" As if that were the only criteria for gauging whether a company could become hugely successful in the future.

I am a 41 year-old, married, father of two, with a mortgage. I also have tons of experience getting companies off the ground and helping other people's Startups get their footing. I am passionate enough and sure enough about my company that I am risking everything that I have to make a go of it; and I am not alone...There are lots of us out there. So I can't fathom, with all that we have riding on the success of our companies, why an investor would look at us and say that we aren't a good bet. We have way more to lose than the investor does. That alone should be reason enough to take that chance. Investors should realize that we aren't going into this with some idealistic idea that this is going to be easy. We know exactly how hard this is, but we are doing it anyway, because we know it can succeed and we know how to make it happen. If we didn't, we would just get a frickin' safe day-job and cash checks every two weeks and go on vacation and put money into a 401k and work 1/3 as much as we do.

Are there seriously no investors smart enough to discern a good idea form a bad one? Are there no investors with enough experience to help entrepreneurs work through whatever issues may be holding them back? Also, what is so damn magical about 10X over 3 years? I honestly want to know. When folks invest at later stages there is no way they are seeing 10X returns, so why the hell does every investor use that as a benchmark? Every SaaS company will tell you that the only way to get the doggone thing off the ground is to do a land grab; Get as many customers as quickly as possible then watch the cash flow in as the company matures.

The recurring revenue streams that subscription model, SaaS, companies produce take a little longer than three years, but their upside is so much higher. Their services are sticky, their customer attrition is low and their costs as a percentage of revenue always go down. But Minnesota investors are just positive that existing revenue is the only thing that matters.

So, I say to all the investors that look at the Kaufman report and don't like what they see when it comes to Minnesota's entrepreneurial activity ranking: THIS IS ON YOU! It is your fault were are where we are and we will never get out of it until you figure out that you have to work as hard as we entrepreneurs do, to find companies, like mine, that are worth the risk. Then, like Cem Erdem, you have to put your money where your mouth is; You have to invest in them early so you can be instrumental in helping them succeed.

What can we DO about it?

With that said, I am committed to trying to help other entrepreneurs in any way that I can.  Because I spend so much time bitching about how hard it is to build a start-up, here in Minnesota, I might as well try to change the world…Or at least my world.  Right now, being involved in Project Skyway gives me the best opportunity to do that.

Being a part of the Project Skyway Selection Process committee has allowed me to sit in a room with a whole bunch of awesome, committed, individuals and hear their opinions on what characteristics make a great entrepreneur; what kinds of mentoring every entrepreneur needs; what every entrepreneur should know.  Most of all it has completely restored my belief in the entrepreneurial community here in Minnesota.  It has shown me that there are lots of people, just like me, who are just as sick and tired of whining about the entrepreneurial climate here and want to actually DO something about it.

3 months ago I could not have imagined that I would sit in a room with Cem, Brad Lehrman, Tom Kieffer, John Roberts, Joy Lindsay, Ernest Grumbles, Rob and Aaron (and hopefully Ryan) Weber, Kevin Spreng, John Montague, Casey Allen, Justin Peck, Scott Davis, Sarah Young, Gopal Khanna, John Littman, John Dahl, Kim Garretson, Jeff Pesek, Graeme Thickins and the dozens of others who have said they want to be part of something cool that helps entrepreneurs.  Can you imagine starting something if you had this group of frickin’ rock-stars on your team?  There is no way you could fail.

Now imagine what our combined networks could offer to an entrepreneur.  Imagine if you invited just one person, who you know has something valuable to pass on to a start-up, to come and talk to the project Skyway Participants for an hour or two.  (I’m getting chills just thinking about it.)

To that end I am trying to live up to this creed:

As a member of the Project Skyway Fraternity and in the spirit of innovation; We pledge to invest in people, not just ideas.  We strive to remove barriers to success from the paths of exceptional people with dedication and a passion for excellence.  (Are you weeping yet?)

It all starts with Cem Erdem, and his vision and commitment to this endeavor, but I am thankful that I get to be a part of it and I am grateful anyone who wants to help.

Other stuff from the Kaufman report

Study: MN Best in Midwest in the "New Economy"
Minnesota ranked 13th among states according to the 2010 State New Economy Index, which assesses each state's capacity to successfully navigate the challenges of economic change.

Minnesota is among the best 15 states in the nation-and the best in the Midwest-in meeting the challenges of economic change in the "new economy," according to a report released last week by the Information Technology and Innovation Foundation (ITIF) and the Ewing Marion Kauffman Foundation.

The report, called the 2010 State New Economy Index, uses 27 indicators to assess each state's fundamental capacity to address the challenges of economic change.

Minnesota ranked 13th overall with an index score of 67.5 out of 100. The state fared well in several areas, with top 10 rankings in the following categories: IT professionals (6); managerial, professional, and technical jobs (8); workforce education (8); high-wage traded services (5); investor patents (9); online population (7); health IT (4); and scientists and engineers (8).

The state's worse performance was in the entrepreneurial activity category, where it placed 42nd. Minnesota also performed poorly in the non-industry investment in R&D (39) and alternative energy use (31) categories.
  Regionally, the Northeast, mid-Atlantic, Mountain West, and Pacific regions appear to be tackling challenges, as 13 of the top 20 states are in those four regions. On the other hand, 18 of the 20 lowest-ranking states are in the Midwest, Great Plains, and the South. 

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Darren Cox

Darren Cox
Founder and Chief Evangelist - CaSTT - Commerce and Search for Technology Transfer