On Engineering
I'm a frequent contributor to The-Common-Sense-Party.org and a classically trained engineer in software engineering. When in school in the late 1980's, other engineering disciplines laughed at those of us training to be software engineers. When they designed a bridge or a building, they designed it, planned it, executed on the plan, and they got what was envisioned generally on-time and on-budget. However, software projects, more often than not, failed entirely or failed to be delivered on time and on budget. Our excuse was the rapidly progress in computer hardware and software tools. It would be like building a bridge from a new and unknown material each and every time. However, a fair degree of the cause was a lack of experience and methodology. Like many home projects, say building a new deck, if you've never done it before it's easy to miscalculate the amount of time and effort involved or to take a misstep that may cause you to backtrack or have to start over. Professional deck builders have, over time, created a methodology - a repeatable process - to building a deck. More often than not, these methodologies vary from expert to expert since they are formed through experience and aren't written, rather passed from expert to intern and between experts. In our case, over time we software engineers began to get our act together with greater experience and more rigid methodologies. These days, software is more often than not delivered on time and on budget.
We've all done project planning at one time or another. Take a camping trip. Using experience, perhaps from camping trips with our parents, we have acquired a general knowledge of the materials needed and the steps to be done. When we arrive at our destination, we might direct our fellow campers to unload the car, and then split up with some people helping to setup the tent and others collecting firewood. These steps have obvious dependencies: You can't setup the tent until the car is unloaded or build the fire without firewood. Although there may not be a written project plan, there is a mental one. Most of these types of projects are relatively simple, with the risk of failure being minor: in both discomfort and time. Putting up a tent in a gully, for example, would mean flooding if it rains. Relocating the tent maybe annoying and time consuming: but no more than a minor annoyance. Hopefully, this will be filed in the "experience" category and the mental checklist updated to pick a more suitable spot for the tent in the future. Sure you could learn by reading a book on camping, having a checklist and project plan - but most of us don't. And because we've had so much success completing projects like this by the seat-of-our-pants, we tend to fall back into that mode when faced with even some of the most complex tasks. As an early programmer, when assigned a project my first instinct was to start writing code. Almost always, half way through the project, I'd realize that I would have been much better off if I had designed it a different way. Often I'd code myself into a corner and have to trash perfectly good code to backtrack to a place where I could make different choices to complete the assignment. I've witnessed a lot of junior programmers and project managers in the same position. Perhaps they know they should be doing a system design and project plan. But when complete it, they check it off the list, and then fail to refer to it again. They revert to the 'seat-of-their-pants' methodology and start cranking out work assignments and code. It is through experience that engineers learn the value of a project plan, a methodology, and to adhere to both.
Recently I was pitching a business idea to a Venture Capitalist, and he stated that my venture didn't have a high enough return. I realized that they are looking for the next Google or Facebook - and my realistic projections weren't stratospheric enough. They wanted home runs, not hits. Why? Because nine in ten venture capital funded companies fail. So, if they invest $1m on 10 projects they need at least one to cash out at $10m, just to get their money back. What they really want is for it to cash out at a multiple much higher. And every now and then, they do invest in a Google or Facebook.
So I asked myself, why do so many businesses fail? According to the Small Business Association using Census data 69 percent of new employer establishments born to new firms in 2000 survived at least two years, and 51 percent survived five or more years. Of these, the hardest hit (most failed) type of business is a restaurant. But clearly there are many very successful chains. So what factors make the difference in between a local coffee shop that goes bankrupt and the chain coffee shops that are so successful?
I began to think about the factors that could go wrong. Mostly I thought about an independent that created a coffee shop using their gut and instinct vs. a chain coffee shop that uses a stringent methodology and project plan when opening a new location.
Let's take a hypothetical situation of a coffee shop near a metro stop in Washington, DC. The rent is fairly high, but the location seems to be a prime spot. So what happens next? The independent owner might jump on opportunity without delay. However, the chain might survey the neighborhood for competition, count potential customers, and interview those customers. Suppose the chain store found out that most customers in the morning are on the way to the metro, and since the metro doesn’t allow food or drink, they would be disinclined to stop at the coffee shop. As an independent, wouldn't that be good to know before you sank your life savings into the shop? Now take planning and design. The independent may create a huge menu, with everything made to order because that's what he'd look for in a coffee shop. The chain, however, has a limited menu with many items prepared earlier that morning and ready to go. Let's say it takes five minutes an order for the independent and two minutes an order for the chain store. During the peak two hours of business: the morning commuter rush hours, the independent store owner fills 24 orders while the chain store fills 120. At (say) $10 and order, the independent realizes $240 in revenue, while the chain gets $1,200. Who’s going to survive and profit, and who is going out of business?
In software, there is something called the Capability Maturity Model (CMM), which detail six levels of software methodology evolution within an organization. These are:
| Level 0: | No methodology used or in place. |
| Level 1: | Ad-hoc. Perhaps one or two people on the same project use their own methodologies. Not universally applied within a project or across projects. No single methodology is sponsored by the organization. |
| Level 2: | Managed. Processes exist, sponsored by the organization, but usually used reactively when things go wrong and not universally applied. |
| Level 3: | Applied. The organization has a methodology and process that is used proactively on all projects. |
| Level 4: | Measured. The methodology is used and measured. |
| Level 5: | Optimization. The measurements are used to improve the process, creating a feedback loop. |
Based on a software development firms' CMM level, is a fairly good indicator if they are going to be able to deliver a project on-time and on budget. I began to question, what would happen if a Venture Capital firm applied engineering philosophies to the businesses they manage. I know they put great value on a management team that includes experienced entrepreneurs. You can see millions thrown at people who have started successful prior businesses. Why? Probably because they believe these people are closer to having a business development methodology. The experienced entrepreneur might be able to say to himself, "last time I was at this juncture, this is how I handled it and it either worked or didn't". Often the VC firms want to be integrally involved in the firm's management, hoping to impart their wisdom and experience to help the budding business.
If you speak to a VC, they'll tell you about the various "external factors" that play into every business that causes the success or failure of a business. But it is my guess that most businesses either don't follow their business plans, or the plans are written as marketing documents, not a real business plans. Many of the business plans I've viewed speak loftily of paradigm shifts, epic breakthroughs, massive industry adoption, and customers banging down their door to get the next great thing. But more often than not, these "pie-in-the-sky" predictions fail to come true. And the plans often skim over the fundamentals of building a business. Do the business plans lay out in their financials who they are going to hire and when? Does it show the revenues and cash flow at points over time? Does it lay out a R&plan with milestones? If not they, should. And the VC should be able to meet quarterly and ask to meet each of the new hires that exist in the plan, ask to see the revenues to see if they match, and view the R&D progress to date. If there are "external factors" that affect the delivery schedule detailed in the project plan, ahem, excuse me, business plan, then these should be reviewed, corrective action take, and projections updated.
A guy by the name of Bill Gross1 create a company called IdeaLab! At the height of the .com boom, the company was worth billions. However, mismanagement and several shareholder lawsuits concerning the co-mingling of funds by Mr. Gross have left the company a shell of its former self. However, the basic premise of the company seems solid. The idea was to create a repeatable process for start-ups. They say firms are equal amount inspiration as they are perspiration. Several firms have tried incubator facilities with varying degrees of success; however, most of these are nothing more than glorified shared office space with a few extra offerings. Obviously, the key to any start-up is a good idea. But what if a firm were to fund those ideas, could one create a repeatable methodology to take that idea from conception to success? What if business plans were actually project plans, and if firms added expertise as necessary to ensure successful execution of these business plans? What if the VC firm looked for ideas that weren't necessarily the "next Google" (of course, you'd fund those too when you came across them), but solid business plans with solid management? Too often VC firms a sold a bill-of-goods. The founder may be charismatic, have the right credentials, know the right people, and the business plan comes across with the right adjectives and seemingly endless revenue stream. Take a company like marchFirst, a roll-up during the dot-com boom of several IT integrators. Millions were thrown at the firm, which managed to spend $8 for every $1 in revenue: a feat of mismanagement of epic proportions. Where was the metrics? Where was the oversight? Where were the financial backers who should have been asking about meeting milestones? Additional examples are numerous, but perhaps the most iconic of the era was Pets.com, an online vendor of pet food. From February 1999 and to November 2000 the company managed to raise $300 million in investment and blow it all. What did their business plan look like? Surely the investors must have seen early signs of the firms' trajectory. I get the feeling that rather than using science and data, VC firms tend to make decisions from their gut. Rather than following a methodology they use faith. Hope is not a strategy.
The idea would be to create a stable of reliable horses that you know will be moderately successful, and maybe roll the dice on a good idea or two. You double your chances of success. Perhaps the coffee shop that looks like it might have no more than a reasonable return turns into Starbucks and is a grand slam? Alternatively, someone might have a good idea on how to cure cancer and it might turn out to be a dead-end or it might be the drug breakthrough of the century. Rather than swing for the fences all the time and settle for occasional hit, why not bat for hits and accept the occasional home run? Perhaps, this is the revolutionary idea for Venture Capital firms - or aren't they in the business of reinventing their own industry?
As a bonus to our readers I will provide a business idea I have, not the one I was pitching to the VC in this article, but still a pretty good one. One of the goals of negotiating is to have better information that your opponent. If you are buying or selling stocks, it helps to have more and better information that your opponent. For example, say you think a specific stock is worth $20/share and they think $21/share. How did they reach their conclusion? Do they have information that you don’t have? Or did they make different assumptions in their costing model? If you do have hard information, say something that is about to be announced but isn't public (inside information), than you can make a better determination than others. This is precisely why it illegal for company insiders to share information except through specific public venues.
This idea centers around an opportunity to capitalize on a disparity of information. If you look at an industrial plant, a train yard or a gas station, you'll like find that years of use means that chemicals have leaked into the soil. The owners may be aware of that some contamination has likely occurred, but don't know the extent. If they were to have the soil tested, and understand the extent, they would be liable for the clean-up and workers might be able to sue saying the companies had knowledge of contamination and failed to protect their workers from it. The companies often want to get these liabilities off their books, but are unsure how to do so. My plan was to raise a fund which would purchase these lands. We would target derelict industrial parks, train yards, gas stations, and the like. We would test the soils keeping the results to ourselves. With the knowledge of the extent of the contamination, you would have an upper hand when negotiating with the companies to purchase the land.
The idea is that with this lopsided information we could get the land for well less (sometimes the owner may even pay us to take the land and clean it up) than the land value plus remediation costs. The difference would need to be substantial enough to account for risk (in case the area is more contaminated than first tests showed). So, when a reader makes their first million dollars from this idea, be sure to keep the non-profit The-Common-Sense-Party.org in mind!
1 Tnot the bond guru and PIMCO co-founder (http://en.wikipedia.org/wiki/William_H._Gross).
