Institutions + Innovation + Detroit

Business and Society’s Deeper Challenge

It is plain to see that the complex problems faced by business and society this century will be incredibly difficult to solve. Business, for example, is contending with the pressures of hypercompetitive markets, increasingly demanding consumers, and an accelerating pace of technological disruption. Society as a whole has even harder problems – climate change, infectious disease, terrorism, traffic, food security, and economic inequality, just to name a few – that are systemic and global in nature.

These problems are too big for any institution – whether it’s a business, a government, or a non-profit – to solve alone. Take the fight against child hunger as an example. All three sectors must work in concert for the system to change: business must develop new, nutritious foods, government must set policies which bolster food access, and non-profits must work on the ground to ensure aid reaches hungry children.

Of course, child hunger is just one example of the many issues that are solvable only if the public, private, and social sectors collaborate.

Because the world’s most challenging business and social problems are too interconnected and complex to be solved by one institution alone, I believe that we are left with two choices. We can either work in siloes and struggle, or, we can learn to work collaboratively across industries and across sectors to solve the biggest problems humanity has ever seen.

Unfortunately, co-creating solutions across sectors – beyond traditional public-private partnerships that are merely funded or operated jointly – is incredibly difficult to achieve for many reasons. Legal structures for collaboration are nascent and governance structures are hard to create. It’s hard to develop effective incentives for all sectors, especially because the shareholder value model is so pervasive in global markets. To add insult to injury, many business leaders and citizens do not even see the value of cross-sector collaboration or believe it is a viable option.

Moreover, even though learning to collaborate across sectors is not a social issue or business issue on its own, it is a critically important challenge because solutions for so many difficult problems require cross-sector collaboration. For these reasons and many more, learning how to work across sectors to solve complex problems, I contend, will be the greatest challenge for the next generation of business leaders.

The Fading Corporate Dream

Over the past year, I’ve noticed high-talent folks I know start to rebuff the corporate dream they thought they wanted. These folks are the top performers at their firms leaving after a few years or the rockstars that avoid the corporate route altogether. “Why oh why?” sing the corporates, “why are are these talented people leaving?”

Here are all the reasons that I’ve heard and observed:

  • Co-workers / management aren’t competent
  • Co-workers / management don’t actually care about creating value for customers, they care about their own careers
  • Employees aren’t recognized or given opportunities based on merit – it’s about your tenure or ability to network
  • They company isn’t interested in being bold, innovative leaders in their markets
  • The company’s work-life flexibility terrible
  • The organization moves too slow and/or doesn’t take risks
  • Employees can’t chart their own path / you feel like a cog in a machine that does the same thing over and over
  • Employees don’t learn and grow either in formal settings or on-the-job
  • Employees can’t be themselves, they have to act a certain way
  • Employees aren’t value or recognized and/or they don’t see how their work actually has an impact on customers’ lives or the world

The list goes on.

The dissonance now exposed
Most people in this country want to be free. We don’t live in a country with an autocratic system of government, so most people have at least some glimpse of what it means to be free. Think about what being free feels like for a second. It means you’re able to pursue your own dreams and assemble peacefully. It means you’re able to speak freely and have your day be relatively unintruded by the influence of institutions. You are able to be yourself and express yourself. It means you have due process of law if you break the rules or are accused of wrongdoing.

Now think of what life is like in a large corporation. It’s not at all free. Instead of pursuing what you want, you do exactly what your boss tells you to do for fear that you’ll lose your job. You don’t really have the ability to express yourself unless you have a lot of power or authority in the organization. You are constantly bombarded by doing the stuff your boss doesn’t want to do. Depending on who you are or what your connections are you get preferential treatment by authority holders in the organization (you don’t get due process). No, corporate life today is anything but being about freedom. On the contrary, corporate life is all about control.

This is why employees are leaving corporates in droves: they don’t want to be controlled, they want to be free.

Running corporations with a controlling mindset used to fly because employees had no viable alternatives elsewhere in the job market. Small firms didn’t really have as much impact on the world as they are able to now. Small firms weren’t stable and they didn’t provide opportunities to learn and have that learning be viewed as legitimate by other companies. It was difficult to access networks of people, resources, or customers unless you were a big firm. As you can see, even just a few decades ago, smaller firms provided much less value to employees than they now can.

That dissonance – that corporations often operate like autocracies in a society motivated by the pursuit freedom – is now exposed. Not working for a corporation is now a legitimate choice. It’s easier to find smaller firms or start your own business. People now have the capability to tap into global networks of ideas and support which gives them a safety net to lean on if things go badly. People can now move (literally) across the world more freely. Potential employees are no longer stuck. That’s why people with a lot of talent (and even people that aren’t blessed with a lot of pedigree) are doing something different – they don’t really have to work for corporations anymore.

The punch line
The fact of the matter is that corporations that want to recruit talented people won’t be able to operate as autocracies for much longer. Many corporations are already starting to change. But it’s not just about tech sector or startup perks, that won’t be an antidote for long because it’s a superficial change. Corporations instead have to fundamentally change their assumptions about their employees – they’re not robots you program, they are assets that you have to garden and groom to unleash their full potential. Corporations have to stop being autocracies.

If corporations don’t shed their autocratic roots, the corporate dream will continue to fade. And then, things will really get interesting.

Millennials Matter Because Of Their Time, Not Their Money

There’s lots of talk about bringing young people to Detroit. To be honest, I agree with that. But there’s not a lot of talk about why it’s important to bring young people to Detroit.

The story I usually hear is one of income. Young people can pay rents, go to local restaurants, patronize local businesses, and pay taxes to local governments. After all, the story goes, young people make good incomes and have few financial strings attached. Young people also have talent to work in local companies and the smarts to help them grow. In more ways than one, young people breathe life into cities and the ecosystems tied to cities.

All this is true, but I think it’s missing the point. The real value young people give to cities is their time, not their money.

As young people, we don’t really realize this, I think. I, as someone who wants to use his energy for public good for example, often become frustrated that I don’t have the money or influence to affect change in Detroit or elsewhere. What I forget about is how much time I really have compared to other people – especially compared to older people with lots of money and lots of influence.

Young People And Innovation
The resource of time is not trivial, it’s absolutely core to growth in a city. Here’s what time allows young people to do:

Build Networks – developing relationships takes lots of time and energy if done right. There’s really no way around it. Young people have lots of time to cultivate relationships and they do. These networks do not only benefit the young people building them, it makes the city more efficient because thick networks move information and resources across the city more efficiently and with greater results. Young people break silos in ways that older adults cannot and don’t have an incentive to do. (Power players in a network have an incentive to keep silos because it preserves their power. Young people have an incentive to break silos for the opposite reason – it allows them to break up concentrations of power.)

Try New Things – Young people have a lot of time to experiment, which is why it’s common to see innovative startups created by young people – they can blaze new trails easier because they can put in the time to figure out new, complex problems. In any company or city, young people always lead new experimental things because those young people have the time to mess around and learn. Because those learnings add up rapidly, young people can do amazingly creative things faster than people who are older.

Explore Ideas – Young people also have lots more time to “stop and smell the roses.” If they choose to, they can learn and explore and be inspired by new experiences. They can noodle on things and imagine the future because they’re closer to the mindset of children. Young people can be foolish because they don’t have families to feed. They can follow dreams because they have little to lose compared to people who are older.

You’ll notice that these three things: networks, experimentation, and inspiration are three fundamental components of innovation. I don’t think that’s a coincidence.

Intergenerational Collaboration Is The Key
The way I see it is this. Older people have experience, resources, and influence. Young people have the time to build networks, try new things, and explore new ideas. To me this is the perfect match for creating innovation.

I firmly believe that intergenerational collaboration is absolutely essential if we want to innovate successfully, in Detroit. But to be honest, I don’t really see that happening today. I think both sides want to lead the other. Of course, this is my opinion, but I don’t think I’m alone in believing this.

This is also my opinion, but, I think we can do a lot more if we have intergenerational collaboration. The real kind. It’ll just take both sides stepping out of the spotlight and focusing on working together.

Disclosure: I am part of the “young people” so that’s where my biases are.

How the Internet Complicates Democracy

Let me start by first reiterating that the Internet is a wonderful tool. If you are reading this, you no doubt know of its trappings and utilities. I do not mean to discredit that notion in this reflection. There are many reasons that the internet has been a force for good in the world.

However, there are at least a few ways I see that the Internet appears to make democratic societies more difficult to maintain. These four categories are interconnected, but I believe their underpinnings are unique.  I’ve written all of this very casually.

Complications in Decision Making

In a democracy, groups of people have to get together to make decisions on matters affecting the polity. This group of problems outlines how the Internet makes it more difficult to make decisions.

  • The problem of real-time information: Often in the public sphere, governments make plans which take years to implement, maybe even decades. The Internet, however, surfaces new information all the time. Because of the Internet, we are much more able to get a continuous flow of information. That is great when you are managing a problem, but difficult when trying to make decision because it can cause priorities to shift quickly. Pivoting priorities isn’t ideal when trying to do something that requires a long lead time. By extension, the Internet may make it more difficult for long-term projects to make it across the finish line.
  • The problem of crowd validation: Sometimes “the crowd” is very good at making a decision and sometime it isn’t. The Internet makes it much easier to tap the knowledge of the crowd. What’s problematic is that because the influence of the crowd is so strong on the Internet, it could make it much easier to blindly ignore ideas that don’t immediately get traction with the crowd. Many good ideas, more than prior eras, could be left to rot in the annals of the internet instead of being incorporated into a process for making decisions…just because the crowd immaturely rejects them.
  • The problem of convenience: Decisions and ideas don’t get better without tender love and care. Improving ideas takes a special kind of ardor and time, I’d say. The difficulty with the Internet is that it can make it too easy to participate in decision-making activities, which allows people to participate in a cursory way. At some parts of the political process, this is probably fine, but isn’t there some value in having an intellectual cost to participate in a discussion, because it ensures that the people participating are serious about their responsibilities?

Complications of Power

In a democracy, different people can affect the democratic process in different ways, depending on the amount of power they have. This group of problems outlines how the Internet can concentrate power (in a way that’s not desirable) more than in previous eras.

  • The problem of centralized access: Currently, the internet is a centrally organized infrastructure…users connect to centralized websites and centrally managed information technology services. The problem with centralized infrastructure, of course, is that bottlenecked resources have a lot of power. Companies who control access to centralized resources (like the Internet) can charge people a lot of money, and, manipulate people by threatening to withhold access to the centralized resource. That could happen to the Internet…it could be a resource that’s used as a bargaining chip.
  • The problem of signal and noise: There is lots and lots of information on the internet. And, if you’re trying to influence others it’s hard to get your message to “stick”, especially if only a few companies account for the majority of traffic on the Internet. That sort of setup is advantageous for well-resourced interests…they can buy clicks to their websites. By spending generously, they can flood their opponents out of the market for information. On the Internet today, it’s more and more important to be a well-known and influential voice; it’s hard to court a national audience otherwise. It’s easy to speak freely on the Internet, but it’s hard to get people to listen on the Internet, unless you have a lot of cachet or a lot of cash.
  • The problem of anonymity and feedback: On the Internet you can say a lot and not be accountable for the costs. You can spread rumors and lies and do it anonymously. This allows for manipulation, because you could easily slander your opponents without cost (or hire someone to do it for you). In the public sphere you used to take a hit to your reputation if you acted like a bozo or were deliberately misleading. Now, you can very easily devolve conversations by trolling people or blatantly lying, without ever getting caught. This is problematic to democracy, because we may never get over our squabbling long enough to discuss complex or emotionally charged issues.

Complications of Association

In a democracy, groups of people have to associate and find common ground to make decisions. If they don’t, they spend a lot of time arguing. This group of problems outlines how the Internet makes it more difficult for people to “come together.”

  • The problem of shared values: Even though the infrastructure of the Internet is centralized, how information proliferates is not centralized, especially as compared to mass media channels like TV or radio. Because there are so many media outlets, there’s no uniform message that everyone in the country really hears. This, I suspect, makes it more difficult to have shared values across a nation. The logic goes, if you’re receiving different information than the people around you, it’s more difficult to be similar to them. This isn’t wholly a bad thing, but if shared values are a boon to collective action and democracy, the Internet will make democracy more difficult.
  • The problem of trust and empathy: The Internet makes it possible to isolate yourself physically from communities you don’t want to interact with. Lots of micro interactions no longer have to exist. Take getting somewhere you’ve never been before as an example. You used to have to stop and get directions (thereby interacting with a stranger you wouldn’t have otherwise interacted with). Now, on the other hand, you can just use Google Maps and never have to talk to that direction-giving person again. Because of this ability to physically isolate, I suspect it negatively affects building empathy toward people you can now choose not to interact with. In societies empathy is important so we don’t tear each other apart.
  • The problem of self-selecting tribes: This is the intellectual version of the problem of trust and empathy. Basically, you never ever have to read anything you don’t agree with because of the Internet. Researchers are studying this and are finding that folks who consume news in this way tend to be more polarized. Check out this study.

There are also a whole slew of studies about the Internet’s effect on political discourse. (Note, these are really interesting, and a lot of my intuitions are confirmed by these studies).

Complications of Information

In a democracy, political actors and citizens depend on information to make their decisions. This group of problems outlines how the nature of information is changing, and making it harder to execute democratic processes.

  • The problem of transparency: Now, it’s possible to access lots of political information because governments are moving toward transparency. By many accounts this is great. What’s difficult about this is that there’s now more information than any individuals can reasonably process, because the data available is overwhelming. We’re starting to have some tools to make sense of this data, but we still have far fewer tools than we need to de-complicate the volume of data that transparency creates.
  • The problem of quality and veracity: This is simple; you can’t trust everything you read on the Internet. This makes it easy to pass of lies as the truth. It’s hard to trust new information because so much of it can be crap. As a result, a lot of “crap” information influences our judgment.

How can we show our commitment to Detroit’s future?

Detroiters always talk about Detroit – whether that’s in the city limits or an another state, like Robyn and I just did with an expat Detroiter living in New Orleans. I actually love talking about Detroit, but why don’t we talk about deeper things? In fact, what makes anyone want to talk about deeper things like ideas and beliefs?

Our friend Laxmi – also an expat Detroiter –  had an interesting insight into this question because of her experience living in NOLA for the past year. Her logic goes like this, roughly:

An ability to talk about deeper things <— Trust <—- Time to get to know people <—- Demonstrated commitment to the place in which you are living

I’m paraphrasing the lovely conversation the three of us had, but the gist is that an ability to talk about deeper things with folks in your community you have to demonstrate commitment to the place you are living; deep dialogue implies demonstrated commitment. So, how do you do that? Really…what are your ideas?

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Here’s the reason why I present the question. I don’t really know of many ways we demonstrate commitment as Detroiters. What are little (or big) ways we can or already do that? How does one show commitment to a place and an intent to make it better for the long haul?

If we can start to create opportunities for that, I think we’ll eventually be able to have much more deeply connected community in Detroit, because we’ll have more “real talk”. If it’ll take a village to make Detroit into a great, 21st century city, it’ll take deep conversations in the public sphere. Based on the logic above, that starts with demonstrating commitment.

5 ways to look at Detroit – what speaks to you?

In the past few weeks I’ve thought about Detroit myself and have been intrigued by the ways others have looked at our fair city (Detroit). These lenses for learning about, exploring, and understanding the City have been very interesting me so I thought I’d share.

Which ways of looking at Detroit do you find most interesting and engaging? Do you have any ideas to add about these five or any new lenses of your own? I’d love to hear about them!

How Detroit Will Save America (again)*
During the second world war, with its industrial might and capacity to make war, Detroit saved America and even the world. Detroit put the world on wheels and raised millions of Americans out of poverty along the way. That legacy of bold leadership and hard work continues today.

Detroit is a reflection of America and all of its difficulties. Like America Detroit faces gravely serious challenges of economy, race, politics, and, spirituality. Americas greatest challenges all manifest in our city. And as we figure out how to deal with these challenges – swimming through and learning as we go – we will once again be able to lead America forward. That’s why America is rooting for Detroit, if we can solve it here the rest of America can too.

That’s how Detroit will save America (again).

Detroit: The city of -preneurship
One of the great inspirations of Detroit is the ability to create something new and to chart a new path forward. Detroit’s entrepreneurs today are like the cowboys and trail blazers of yesteryear, writing their own destiny as they go.

But it’s not just entrepreneurship, it’s intrapreneurship and social innovation. It’s civic leadership and urban development. It’s tech nerds and corporate juggernauts and community organizers. Detroit is a city of “-preneurship” whether it’s happening at the M@dison building, the neighborhoods, city hall, or at the Big 3. In Detroit, -preneurship is everywhere.

Detroit’s Identity is it’s People*
When you ask a lot of people what they love about Detroit (myself included), they say “the people.” But what is the character of a Detroiter? Detroiters are hard working and gritty. They get things done and do it well. They go hard. They hustle.

At they same time, they are passionate and caring. Detroiters pull together and support each other. They are honest and respectful of others. They are loyal and friendly in the fiercest way possible.

In a way, that’s what Detroit is, a composition of stories about a set of hard nosed, tough, and wonderful group of people. What defines Detroit is its people.

Detroit vs. Everybody, Detroit vs. Detroit
Though it is not polite conversation, one of the ways to understand Detroit is through its interactions with groups outside its borders.

These groups are far ranging and far reaching. It could be Detroit vs. the suburbs, the west side of the state, or Chicago. It could be vs. the federal government or vs. a foreign land. Filling in the phrase “Detroit vs. _________” can lead to any number of opponents or allies.

At the same time Detroit has its own diversity in its many communities. Racially, socially, intellectually, geographically, politically, or religiously, Detroit’s diversity is remarkable and complex. To prosper in the future, Detroit must understand what implications Detroit vs. Detroit could have within its borders as well.

Detroit has conflict and collaboration with all the groups I’ve listed here and more. How Detroit continues to interact with different networks and communities inside and outside its borders will define its future.

We are what’s next
Detroit, as has been widely reported, is the largest municipal bankruptcy in US history. The next chapter in Detroit’s story is being written by as we speak. Post-bankruptcy is Detroit’s next era, because the bankruptcy has left an indelible mark on our course in history.

But the future is not being written for us. We can and we will have to write our own history. How we choose to rebound and how we choose to press forward will be our generation’s unavoidable legacy. We are what’s next and we must, or somebody else will be.

* – These are two ideas that I can’t take much credit for. Two friends (and colleagues and classmates), Nydia and Tiffani, opened my mind to thinking about Detroit this way, phrasing my own thoughts this way, or both. Shoutout to them!

Talent is Detroit’s X-Factor (for entrepreneurship)

For the startup community to succeed in Detroit, our primary goal should be getting the best community of talent that we can. Talented people, not cash, will make or break the startup community in Detroit.

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PART I – TALENT IS ENTREPRENEURIAL DETROIT’S X-FACTOR*

I think of Detroit’s startup community as a school because how both work is similar. In both cases – startups and schools – the fundamental ingredient is the talent of the people in the ecosystem. Here’s an explanation of the analogy:

In a school students take resources (books, stimuli, computers, etc.) and convert those resources into something valuable (knowledge: papers, grades, test scores, projects, etc.) with the help of talented peers (other students) and talented mentors (a teacher).

Startup communities are similar.

In a startup community, entrepreneurs take resources (information, money, space, labs, etc.) and convert those resources into something valuable (products and services: software, hardware, media, algorithms, etc.) with the help of talented peers (other entrepreneurs) and talented mentors (successful entrepreneurs, VCs, consultants, etc.)

The structure of both is the same – In any learning community, like schools or startup ecosystems, agents take resources and convert those resources into something valuable with the help of talented peers and talented mentors.

Notice that people are the critical ingredient. Talented people with few resources produce things that are much more valuable than great resources with people who lack ability. Resources don’t become valuable on their own, people make resources valuable.

In a startup community, talent seems to matter for a few main reasons (I tip my hat to my entrepreneur friends – Stu, Scott, Max, Erik, Reid, Al etc. for helping me understand this over time.)

  • Getting a team - starting a company is really, really hard. You need a good team to do it, and if you don’t have smart people around you, you’re sunk. Moreover, once you get started, you need talented people to work for you. It’s really hard to hire people from across the country, compared to getting good referrals from some friends nearby
  • Getting help – Like I said, starting a company is really, really hard. You need good people outside your company for when you need to solve a problem that nobody inside your company can figure out
  • Getting inspiration – Even getting to the point of a good idea isn’t easy. People get inspired by talking to other smart people and learning things they never knew before

Talent will make the difference for entrepreneurship in Detroit. Indeed, it is our most precious asset.

For what it’s worth, I’m not suggesting that the people here are dumb. There are actually a lot of smart folks, and I’m not so sure about the not so smart people. What I am suggesting is that there aren’t enough smart folks here; we don’t have a critical mass of really talented people.

I’m also suggesting that VC financing, incubators, and the like are NOT our most important assets.

PART II – BUY IT OR BUILD IT

There are only two ways to get talent – buy it, or build it. Detroit should probably do both.

Buying It

The idea here is offering incentives to get stars to come to you. Think of the New York Yankees. Stereotypically, this is what they do. The pay good players insane amounts of money to come to a team of stars. Their salary costs are unreal, but you can expect the Yankees to win games…and they do.

As you can guess, this approach is expensive. The startup community is no different.

To get stars (people with a lot of talent that have a higher chance of success) here, investors would have to take crummy valuations (i.e., take an equity stake in the company at a higher rate than an investor in another geography would have to) on those deals. If they don’t take crummy valuations (or overpay in some other way), those star entrepreneurs will never come, because the talent in our ecosystem isn’t yet as rich as those in SF, NYC, etc.

Here’s the kicker though.

You have to overpay like crazy to get really good people, because kind of good people don’t make a huge difference. If you don’t get really good people into your ecosystem, you might as well have not “bought” that talent in the first place, because those almost-stars don’t make the ecosystem better.

The idea behind buying talent is this: overpay to get star talent -> connect them to other people in the ecosystem -> others in the ecosystem benefit from their talent and get better.

Building it

The idea here is helping average people learn and grow at a hyper accelerated rate. Think of a boot camp exercise class at a gym. You come into it in poor shape and you do lots of reps of lots of different exercises. You, and the group you’re in, get better faster because you learn from each other and push each other harder. Not everyone get better at the same rate, and not everyone gets more fit. But with a sufficiently large sample size and a lot of reps, some people will become beastly fit.

As you can guess, this approach takes a lot of discipline to commit to. There’s a lot of failure and learning that happens. If you’re applying this analogy to a startup community, you can’t expect every company to make it and “get fit.” You have to tolerate a lot of failure in hopes that some people will learn really quickly and become strong pillars for the rest of the community.

Here’s the kicker though.

If you take this approach, you can’t expect results right way. You have to invest in people learning (which means they won’t make money right away, and they may never). And, you also have to stay committed to investing in this learning – even if it takes awhile – otherwise the results will never come.

The idea behind building talent is this: invest in failure and other things that help people learn quickly -> People get better a lot faster -> some people make it and some people don’t -> the ones that do make it will make the rest of the ecosystem better

CONCLUDING THOUGHTS

Here are a few observations and hypotheses for the Detroit entrepreneurial community:

  • Connected Networks Make It Possible - Either approach doesn’t work unless there are connections across the entrepreneurship community and even beyond. These networks don’t form effectively if they’re not open. Which is why incubators kind of throw me for a loop – they’re semi-private communities, and semi-private communities easily become elitist and siloed (if they’re not actively managed not to be). Siloed communities, as we know, are really hard places to learn. I’m a much bigger fan of open meetups a la meetup.com or Detroit Startup Drinks (full disclosure: a lot of the Detroit Startup Drinks folks are friends of mine). Semi-private and open communities are both important for different reasons. I just don’t see as many open communities as I do semi-private ones and that’s kind of unsettling.
  • You can’t have your cake and eat it too – When trying to build talent, I see people falling fool to a fallacy. The people (particularly in the social sector) want to back winners, and fund people who will be successful. That would be sensible, if we already had a robust community of talent in Detroit. We don’t. People investing in the entrepreneurial community here have to encourage failure and reflection, because failure is when the most learning happens. You can’t build talent without failure. We don’t have people who invest in failure (and the learning that comes with it). That’s something we desperately need.
  • Buying talent – We haven’t really tried this, have we? Stik was brought in from SF, and the guy who started D:hive was brought in from Chattanooga. I can’t think of any other examples (please correct me). Why haven’t we tried to buy more stars? Starting VCs and social investment funds are useless for us in Detroit if the capital isn’t being used to buy talent or to build talent. We’re don’t have enough depth of talent to just expect results from our investments. I think we’re wasting our time (and money) if we aren’t investing in the best learning / talent development opportunities. Moreover, I get this feeling that Detroiters think that everything here has to be home grown and that the city can “go it alone” without help from the outside. I think that getting some interesting folks here from other places would be smart, and also pretty cool.

Especially because I’ve taken some strong stances, I welcome your pushback!

*Note – In this post I’m talking about the tech / high growth entrepreneurial community. Fort the most part, I’m not talking about social entrepreneurship / innovation or small service firms like restaurants, coffee shops, yoga studios, dry cleaners, etc.

I’d also like to shoutout to my friend Stu who explained a lot of these points in a way that congealed them in my head. The good ideas in this post are mostly because of him.

The Market and the Middle Class

With regard to the changing winds of the American middle class, I don’t know how we got here (I’m not an economist) or how to get us out of it. What I do understand is how “the market” of businesses creating goods and services will respond. It’s not pretty, and the writing is already on the wall.

My prediction: businesses will chase dollars and more new products and services will serve the upper classes, especially as the size of the middle class shrinks. This will accelerate income inequality as the lower and middle classes have less access to the products and services that they need to maintain or increase their income and productivity.

Here’s an example of what I mean. Imagine all the new products and services launched in recent years. Since apps are a very visible product for readers of this blog, let’s use those as an example. I will make two points, first that entire categories of products are less accessible to the middle class and second that the selection of products in categories accessible to the middle class will wane.

The mobile app market is booming, with revenues that will reach $25 billion this year. The point of category accessibility is a simple one. Unless you can afford mobile devices and data, you can’t afford apps. So, if you are not wealthy enough to have a smartphone / tablet / etc. you can’t take part in a new and very important echelon of the economy. If you can’t pay up front, you can’t play.

I don’t think this is unique to apps, this problem exists in pharmaceuticals, cleantech, or any innovative industry. If you don’t have a certain level of wealth / income to pay the up-front cost of entry to use a new product or service, you can’t even begin to reap the benefits of that new and emerging industry.

Another problem is that the middle class shrinks, less and less versions of a product will be made for them. In apps, what this means is that fewer and fewer quality apps will be at an affordable price for middle class buyers. If you were a businesses wouldn’t you cater your product (and your prices) to customers who could pay more, especially if the amount of middle class people you could potentially sell too was shrinking? In the app world, I think this will mean more and more apps worth downloading will need higher and higher levels of payment.

In the app world, this may seem trivial (even though I’d contend it’s not because apps can increase productivity and therefore affect learning and income). But extend this effect across the economy to clothes, consumable goods, cars, education, healthcare, and others. In aggregate, middle class people will have less and less products they can use to be more productive, educated, or otherwise attractive as employees, putting them at a disadvantage for maintaining or increasing their income. The wealthy will have more and more products developed for them which will allow them to be healthier, happier, and more productive – begetting them more wealth.

But wait, another reason the market effect of product and service selection will perpetuate inequality is because of cultural distance. As income inequality increases, those developing products (who are presumably wealthy and educated, especially in innovation industries) will have less contact with those of lower classes. This means they’ll have less awareness of the product needs (and potential business opportunities) of the lower classes. Because you can’t make a product without knowing what the customer’s need is, the lower and middle classes will have less products made for them which make their life better.

The writing of this happening is already on the wall. Think of all the new businesses you’ve seen get big in the past few years (either from friends, the news, or even kickstarter). How many of those products could a lower or middle class person afford? How many of those products were even catered to the needs of a lower or middle class person? Most of the new stuff I’ve heard about definitely does NOT cater to a lower or middle class person. (I’m not giving examples, because I don’t want to be mean to friends who are launching businesses. I support them wholeheartedly).

I’m a big proponent of entrepreneurship, so I’m not trying to trash entrepreneurs who don’t serve the lower or middle class. And, all of what I’m saying is fair and legal by the law of our land.

What I am pointing out is one, often unrecognized, way that the market will perpetuate and increase income inequality if left to its own devices. I point it out because it doesn’t sit well with me. Because it doesn’t seem right. Because it doesn’t leave our world in a better place then we found it, it seems like it leads to a world with more suffering.

I also point this out because income inequality shouldn’t just be a concern of “poor people” anymore. It’s a very real issue for many more Americans these days and in ways they may have never considered, such as the products and services that are even available to them. As a child of a middle class family, I never thought that income inequality would be such an applicable issue to me. And now it does.

Another interesting tidbit about the middle class from The Brookings Institution. Also, here’s a decent summary.
Has anyone heard of a study examining how levels of inequality affect the types of products and services that launch? I can’t find one.

The Foundation of Innovation Is Empathy

How innovators approach their work is a choice, and this choice boils down to how you prioritize two things: serving customers and making money. Surely, every successful innovator has to balance these two priorities, but sometimes these two priorities conflict, especially in day-to-day operations. Every entrepreneur, every non-profit, every company, every organization, every innovator has some version of this tradeoff.

At the end of the day either your customers or making money take priority. When these interests conflict, which will you choose over the other?

For companies that want to innovate, I think they have to prioritize serving customers over making money because innovation is fruitless without the identification of a real, clear, customer need (which you can’t find out if you don’t prioritize it). In all the innovation work I’ve done, it’s very easy to delude yourself into trying to force a solution on customers which they don’t need because it’s more profitable.

Choosing to prioritize customers over profits is a huge commitment to make, though. What I find interesting is why anyone would choose to prioritize their customers’ needs over making money. I think what’s at the core of it is empathy because empathy gives you reasons to forego short-term profits for long-term value creation.

It’s easy to commit to serving someone if you feel for them and understand what they need. It’s easy if you care about their experiences and what happens to them in life. It’s easy if you value and respect them and constantly put yourself in their shoes. Committing to serving someone – like a customer – is really, really hard to stick with if you don’t empathize with them.

Again, I’m not suggesting that businesses should ignore the need to make money, in fact they must do quite the opposite. But I am suggesting that innovation requires prioritizing your customers’ needs over profits and going to the mat for them sometimes. And that critical ingredient for innovation – commitment to serving your customers’ needs – requires empathy. Empathy is a foundational attribute, I think, for individual innovators and innovative companies.

Innovation cannot exist without empathy. And, I’d say that these days innovation is pretty important.

So, the real quandary is, if innovation is important and innovation requires empathy – how do you develop empathy for customers within companies who believe the shareholder value thesis?

Serving The Long Tail

If you’re working for a company, chances are that your company falls into one of two categories: Business-to-Business (B2B) or Business-to-Consumer (B2C). In the past, the way this normally has worked is similar to the auto industry.

The Original Equipment Manufacturers (OEMs) – think GM, Ford, and Toyota – are the B2C companies selling their product to end consumers. These companies do the final assembly of the car and build consumer brands. The OEMs are supplied by several tiers of B2B companies – businesses that serve other businesses.

Generally speaking, Tier 1 suppliers are big and the companies who supply the Tier 1 suppliers (these are called “Tier 2″ suppliers) are smaller than Tier 1 suppliers. Tier 2 companies are supplied by Tier 3 suppliers who are even smaller then them. You can think of it this way: the OEMs are the biggest fish and they use stuff supplied by smaller fish, who are supplied by smaller fish, and so on. That’s just the way it was back then.

In today’s sort of world, it’s hard to go out on your own (and say, be an independent car maker) because when you’re a big fish you have the benefits of scale. When you’re a little guy you have to do all your own hiring, all your own sourcing, all your own marketing, and so on. In a nutshell, when you’re a little fish, it’s hard to compete because you can’t spread fixed costs out across a big, big business.

This is all changing, now, though. It’s becoming easier and easier to make it as a “little fish”, if you’re in an industry with a long tail.

Serving the Long Tail

There are lots of industries that have a handful of big companies and thousands of small players. In this sort of industry, the thousands of little players are called the “long tail.” As I’ve mentioned above, the companies in the long tail don’t have the benefit of scale to spread out fixed costs. In theory, someone could make a ton of money by providing a service to all the little fish in a long tail industry. This opportunity has existed for centuries.

This is hard however, because it’s not trivial and is often expensive to serve thousands of customers simultaneously if you’re a small company.  Coordination costs make it difficult to serve the long tail.

But all that is changing. Digital technology is making it possible to dramatically cut coordination costs. Thus, it is now more possible than ever to serve the long tail. Lots of companies are now serving the long tail, here are a few examples:

Kickstarter – The market for creative goods (e.g., video games, movies, gadgets, etc.) are often dominated by big players. One obstacle to being an independent player in the creative goods market is the difficulty of finding funds and the difficulty of attracting a customer base. Kickstarter helps independent people making creative products do both.

Amazon Web Services – If you’re a software developer, you need server space and computing power to run an app. This stuff, historically, was only accessible to big companies with deep pockets. Now, Amazon Web Services and other cloud storage and cloud computing providers make it affordable for independent developers and small software companies to get their prototypes off the ground.

Elance – Large companies gobble up talent and do many things in-house. It was hard to be a freelancer (whether it be in writing, publishing, marketing, consulting, etc.) because you couldn’t find clients. Now, Elance is one of the many services that allows talented professionals to find clients, and avoid selling out to big firms (or even small ones). At the same time, small companies now have unprecedented access to skilled professionals, often for short-term jobs.

Castle – There are a few big property management companies. But most landlords aren’t big, and there are LOTS of small property managers who own and manage real estate. The cool dudes at Castle are working on a product to serve these folks. Oh, and, even more awesome…they’re Detroiters!

The Opportunity Of Serving The Long Tail

For a long time independent companies / freelancers have been woefully underserved, because the costs of serving can’t sustain profitability. But now, because of digital technology, it’s suddenly becoming possible. If you’re a clever entrepreneur, one way to be very successful (and feel great because you get to serve an underserved market) is to do the following. I’m focusing on B2B companies in this post. But, the same logic could be applied to B2C companies. Also, if you’re interested in serving underserved companies through business, check out the Base of the Pyramid Strategies work being done at the Ross School of Business. (I’m taking a class on this next term, I’m stoked).

Anyway, follow these steps:

  1. Find a market that has a few large players (because this indicates that there’s money to be made there) but that is also highly fragmented by loads of small or independent players.
  2. Understand the needs of the independent players. How are they being underserved?
  3. Of the needs you’ve identified, pick one that can be addressed with a solution that mitigates coordination or other transaction costs. This is likely a cost that larger players can afford to do in-house and is solvable using digital technology*
  4. Build the product / service
  5. Take it to market

If you start thinking about it, you’ll likely think of many, many, industries which have a long tail AND which have a long tail that can be served via digital technology. Let me know if you make it big.

* – If you’re looking at a solution (like Kickstarter or Elance) you have to consider the needs of anyone interacting with the independent players. In the case of Kickstarter, for example, you can’t just make sure the people making the creative projects are having their needs met, you also have to incorporate the needs of the crowd funders when building the solution.

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