Watching the latest inflationary hype-value cycle taking place in the Valley, I find myself feeling that we've all gone nuts... again. The folks at Path saying no to a $100m buy-out from Google might be the high water event... Time will tell whether or not they've pulled a Digg/Thelma & Louise.

In my repeated private conversations with professional investors, reporters, big company execs, and entrepreneurs, everyone acknowledges that things are out of whack. Amongst the warning signs are the following:

1. Valuations for early stage companies are way too high for too little value

2. Acquiring companies are throwing out rational valuation models in favor of highly suspect 'strategic' models

3. Investors of all stripes are over-competing for deals with less and less diligence

4. "Me-too" ventures are seeking funding in record numbers

5. Founders/Investors are making historically anomolous decisions regarding valuations and passing on 10x exit opportunities.

6. Rationales as to why "it's different this time" start to circulate. This time: "social/mobile/local (or whatever) is a utility for the new web".

Here's what I predict starts to happen in the next 12-24 months when the inevitable exogenous economic variables cause a direct or indirect correction in Silicon Valley valuations. It doesn't even matter what that economic factor is, but the result will be the same. Fear will cause a retreat from this untethered bullishness, like it always does. The results:

-A large chunk of recently funded startups are not going to get more professional financing. They never should've received money in the first place, so this is good news. The companies fold. The good employees find new jobs or the companies get "acqui-hired" by larger companies. Founders got some great experience and the smart ones will modulate for their next ventures.

-A smaller group of good companies who show market traction will merit subsequent financing, but will have to endure flat rounds.This will be considered a big success just to stay flat... just like it was last time around in the early 2000s. Of course, when liquidation preferences on top of the outsized dilution are taken into consideration, those rounds won't really be all that "flat" from a founder/employee perspective.

-A larger group of survivable but not thriving companies will face the difficult situation of taking a down-round in order to continue. Based on how this plays out historically, even when you take that down-round, the founding team and culture of the company will never be the same, and most of these companies statistically fail, anway. It's just not pretty.

-Bright spot: The robust angel investing infrastructure of the Valley could play an interesting role this time around in a correcting environment, providing entrepeneurs with a "snap-back" capability that has not historically existed. They are best suited to adapt quickly to new funding signals and team up with founders to give them "cockroach funding" to either keep a good company alive or bootstrap new ideas at sane terms/valuations again.

How can you avoid this pain? The easiest way, which is not available to most folks, is to not take outside funding. But, if you are taking funding, do yourself a favor and don't overshoot your valuations. Trading up on a never-never paper valuation is worthless in the long run. It just is. Seems hard to believe sometimes, but it's true. Find sane, adult investors who actually give a shit about you and your long-term non-bubble success (this presupposes that you and your team truly care about long-term success, obviously.) Most importantly, don't get too greedy... if a big company offers you a lot of money for your young company, really examine that offer in a historical context, NOT your current bubble context. It is always your call, and there's always more than money at stake, but think hard about this in a grander scheme of things. The good times never last. Fact of life.

A lot of younger entrepreneurs have not seen this "movie" the first time around. Those of us who have owe those who have not the benefit of our prior learning. I'm not convinced this has happened, and that's a real shame. In that respect, things seem to have changed around here...

How good are you at actually spotting what's not possible for your company? In a world where we like to say "if we can dream it, we can do it," focusing on what you cannot do is not popular. That said, I believe exploring what's reasonably impossible for your business is a critical, mature skillset for any entrepreneur. Keenly -even privately- knowing what you cannot realisitically accomplish is critical to defining what is truly possible for your team. You owe it to them and yourself to call flat-out BS on irresponsible visions before you drive everybody off a cliff. The line between blue sky vision and a hijacked company/product strategy can be extremely hard to discern if the boundaries of the impossible have not been identified. There are simple ways you can create clarity, however: Ruthlessly identitfy what aspects of your vision are not merited by present circumstances. That will show you where your wishful thinking resides. Prune the vision until there is a buttressed potential path. Do it again and again. It will eventually take you to the right answer and make you much more fearless.

There is a potent concept in biology called "the adjacent possible." Steven Johnson, reknowned science writer, explores the concept in his latest book, Where Good Ideas Come From, and in his recent Wall Street Journal Article about The Genius of Tinkerers.

Simplified, the concept is as follows: Complex biological systems -both individuals and species- will explore the frontiers of a given landscape. It makes no difference if we're talking about amoebas, fish or humans, we are all riding and defining the boundaries of what is "novel yet possible" at any given time. A fish species might feasibly adapt its eyesight to better suit a new deepsea environment, but it is not going to feasibly develop wings or a vocal language. Neither wings nor a vocal language are adjacent to the fish's present state of biological expression, thus they are not possible.

Whether in fish or human culture, it follows that the more you pull together present state possibilities, the more new future possibilities are also realized. In society, we can see how the adjacent possible is broadened by urban centers where multiculturalism, education, competition and expertise all comingle. It can be messy, but it is undeniably powerful (e.g. Silicon Valley for Tech and New York for Finance). In short, our possible realities "next door" are vastly enhanced when we have more stuff going on around us. I doubt there is any other place on the planet that can top Silicon Valley in its overt obsession with the adjacent possible.Our collective quests to build the "next big thing" are precisely this evolutionary/cultural impulse expressed through entrepreneurial outlets. Our boosterism for innovation is a kind of secular fanatacism... and it works.

But, what benefits are we overlooking by not asking ourselves what we cannot accomplish? What about the adjacent impossible?

It is one thing to dip one's toes into the big sea of the adjacent possible and "dream the big dreams" (easy), but it is another to cup that dream in one hand, pour some out, refine it, then execute the brilliant next possible step to make it real (very difficult). It's harder still to toss out a big dream that was not possible after all... Privately admitting what is not possible for a company is not engaging in negative or defeatist behavior. On the contrary, I view it as applying a very advanced and responsible mental model to the team's operations. After identifying something in the future that is not possible for a company, following up with a series of "why?" questions usually leads to the tactical insights that inform the next steps. It's entirely possible you can find out that what you thought was impossible is possible after all, if the adjacent steps to its realization are changed.

So, what can't your team do?

At my current company, we have a list of things we know we cannot become and a set of skills we cannot reasonably incorporate to our team. It is fairly non-controversial, and we routinely talk in our staff meetings about not becoming these things in our future. I have a shorter more sensitive list of things that I believe are "mirage goals"... they are tempting but still not reasonably possible. I update that list from time to time, and it keeps me honest. I'm well aware that some of these mirage goals could become adjacent possible in our future. At that time, they will become concrete issues for discussion, but they aren't today.

Keep it to yourself, but make your own list of adjacent impossibilities. It'll make you better.

Any apparent concerns about 'too much growth' are actually just concerns about how challenges to growth are to be navigated thereby allowing higher growth to take place.

This is all well and fine. But, in the natural world, that kind of uni-dimensional view of growth has a different word associated with it: metastasis. The exponential growth of a cell without limits ultimately destroys the systems of the organism. We call it 'cancer' once its recognized. It’s a non-systemically aware feedback loop that cannot stop itself.

Interesting that we all desire a runaway feedback loop of growth when it comes to our businesses, but nowhere else in our lives. Obviously, we don't want runaway cell replication, climate change, or compounding of public debt... Are we missing anything here? An entire class of economics called Environmental Economics or “steady-state economics” addresses these issues. Be warned, these theorists are glum folks and they aren’t free market mavens. And they don’t write columns for the Wall Street Journal or Fortune. They talk about stuff like “market failures” and unaccounted externalities that contain the hidden costs of our runaway obsession with growth. Even if one rejects the conclusions, the perspective is enlightening.

When we are honest with ourselves, the default setting for entrepreneurs today is this: Growth is the only game. We celebrate the best emerging companies that post 300-500% growth year over year… Sure, we do expect that rate to begin leveling off (but not too much!) as they scale into their eponymous “growth” status many years down the line as public companies. As we all know, Wall Street reinforces this worldview in an extremely orthodox manner via quarterly earnings discipline and analyst ratings.

But, what would a startup culture that valued something on equal footing with growth look like? Could there be anything else?

Its actually not a speculative question, and its been answered by millions of businesses around the world for hundreds of years. We just don’t like the answer in Silicon Valley… The businesses that are run this way are typically (often disparagingly) called “lifestyle businesses.”

What I see and admire in so-called lifestyle businesses is that they have brought other values to bear besides growth. Often because they’ve executed into the natural limit to what they can make in their operating environment relative to potential organic growth. They find homeostasis. What else do they value? Many choose to value their roles in a community, or as employers of great people, or their historicity, their educational or non-profit involvement, and their overall contribution to quality of life.

While this lifestyle business culture is well accepted in many industries, we don’t really like it very much in the tech world. There's no time for that because we're doing the "real work" of changing the world... In reality, its our M&A/IPO focused exit strategies that preclude their serious consideration. It seems to run counter to our deepest assumptions about what a tech company should be: high growth with a liquidity event.

But, things are changing. I think you can have both growth and a sense of operational latitude to become something else of intrinsic value.

I would call a tech company that truly appreciates growth in the context of other values  a "Growth Lifestyle Company" They certainly exist... I think I might be the CEO of one right now and I know of others. For us, our intrinsic value is creative latitude. We treat it like a real currency. It expresses itself in many ways that I know wouldn't be so easily allowed in a traditional software company, from product design to employee free-time, to the kinds of customers with whom we engage.

I will try to work up some definitional points of what a growth lifestyle company looks like. But, the current economic environment combined with the increasing ease with which one can bootstrap a tech startup ensures that we'll see many more of them in the future.

Is philosophy relevant to entrepreneurs? Hell yes. It can provide the conceptual framework that allows you to notice or ignore an entire approach to solving a problem.  

I've been re-reading one of my favorite philosophers recently. His name is Gilles Deleuze, and unless you are really into philosophy, his name probably does not ring a bell. He passed away in 1995, but he was a very radical thinker, seemingly bordering on crazy... But crazy like a fox.

I think Deleuze is insanely relevant to entrepreneurship... My friends in academia would likely throw up a little bit upon reading this, but they don't read this blog anyway... And the joke is on them, because I have a very reasonable hunch that Deleuze himself would both laugh and applaud the unintended cut/paste of his ideas into an apparently market-based activity like making new kinds of software... He was a person who saw past convenient dichtomies like capitalist/anti-capitalist, at a time when that very distinction was the obvious battle line in both society and certainly within western philosophy... He was a true conceptual renegade, a bull in a china shop. His work is an ideational time bomb going off in slow-motion as global culture catches up to the approach to reality he expounded. 

Viewed from one perspective, reconsideration of boundaries can be used as a phrase to describe the entire point of Deleuze's life's work, especially once he began to undo the edifice of orthodox society and thinking in his main works.

 Be warned, Deleuze and his collaborator Felix Guattari are not an easy read. Their works are a puzzling Gordian knot of ideas, definitions that intentionally change, play with boundaries, re-arrange themselves, encourage the reader to get lost, to depart and return again. They will mess with you. The density of their work is alien-level detailed, then pulls back into completely straightforward prose... In short, their work is designed to reflect the worldview their texts describe. Check out these illustrations that a great artist named Marc Ngui did that capture the concepts of their collaboration better than anything I've ever seen.

The rhizome (the plant) is a common theme in their work. When they wrote about it in 1980, it was a major innovation to think about an abstracted, anarchic, non-linear organic network of nodes without leadership. Reading it now, it seems eerily comfortable in many ways: Its the very worldframe of our internet-based reality.

So, what's "in it" for entrepreneurs? Since 99% of readers here are not going to read a lick of their work, here are a few "riffs" that are relevant, and in my own words. I do encourage anyone interested to order a copy of A Thousand Plataeus and let it play with you. Just having it around to remind you that you CAN jam an entire system (or die trying) is in and of itself a useful totem, especially if your goal is to change the world. It also makes a great present for friends when you just want to mess with them.

A few ideas from Deleuze and Guattari to consider:

1. Let what you are be your line of escape. Artistic expression (like building a company) can take place in a ground of repeating old patterns with slight modifications and innovations, or it can attempt to rip the world apart with its very novelty. It can do this by taking what has been and completely moving away from it by sheer virtue of the new thing that becomes. In doing this, the novel thing cannot help but bring along  "old ways" for the ride, and -low and behold- it changes them in the process. This creates a bridge to novelty that other people/systems can use to cross to where you are now. Yes, your radically novel approach will be so alien that it will at first confuse and anger many, but that is the price of deep novelty. How much do you need?

2. Hardenings and Softenings. As systems of nature get established (e.g. geology, organs, politics, companies), there are parts that will crystallize and even calcify. They can be very productive, very powerful, and they may seem permanent, but they never are. They are temporary stasis points resting amidst the flows... Outside of those hardenings, there are even more powerful smooth spaces, where the crystallized system is destroyed or reconsumed into a frictionless flow... think lava, bodily regeneration, political revolutions, corporate growth and acquisition. View your work through that lense for a bit. What changes? What has hardened, what systems are flowing in the background that you're actually depending on? Can you co-opt them and harness their free-form to work for you to solve problems (even literally: crowdsourcing, user communities)

3. Embrace Opposition. Don't fear and resist the thing that is your opposite. The idea itself of an established and constant "opposite" is merely a temporary stance taken for your own advantage at that particular time. Its okay to have the enemy, to know the thing you are not, to identify boundaries, but accept that what is in opposition to you is not an eternal constant. Change -always beyond your control- is already in play and turning the wheel into a new position, a new relationship of parts. There is no privileged perspective from which you can somehow avoid this. The answer? Embrace your apparent opposition. Understand it, feel it. Know why it is, and move through fear or the unknown realizing that you may live to see yourself actually become that opposite, and then move through even further to something new yet again.

Those are a few of the hundreds of great nuggets that can be deduced from Deleuze and Guattari. I hope Mssr. Deleuze is enjoying a chuckle as I bastardize his brilliance. It is, after all, exactly what he described would happen.

With mild regret, I will be uninstalling Foursquare from my iPhone tonight. I've been using the app for several months now, with the explicit goal of determining if it added anything useful to my life. My current answer: No. And I'm kind of bummed about that. I anticipate and hope there will be a reason to re-install it in the future, but this is a post about why it doesn't work for me today.

As a disclaimer, I think the app is well designed and incredibly creative... It just doesn't help me, at all. I don't think I'm the target user profile.

Here are the major reasons behind my 'checking out' of Foursquare:

1. Echo Chamber. Many of my friends are on the app, but my Foursquare social network is seemingly too inactive and anemic for me to ever use the app to successfully find anyone. At a recent industry conference, I was able to locate a friend and find out that he was there at the same time. I get it at venues like that, which would also include bars, concerts, clubs, etc. But I don't go to bars and I don't live in SF... So, not my everyday scene. Sure hope Sheri is at Whole Foods again soon, we almost were there at the same time once... What would've I done if we were? Does that matter?

2. Accumulated Indifference to Information. I don't care that an acquaintance of mine just arrived at the Ferry Building... congrats on another successful morning commute from Marin, John. So, I'm pretty sure John doesn't care that I'm at the dry cleaner, either (I'm the mayor of mine. Woot.) Its a schism in my social expectation that somebody I only know through business keeps going to the same taqueria in the Mission. Some folks might find that entertainingly voyeuristic... which it is for maybe a week... then after that it's just useless information. 

3. Weak Reinforcement. In psychology, there is a concept of variable reinforcement, wherein you vary the reward schedule for doing a given task, which makes you do more work to achieve it. Foursqaure badges work on this premise, but they're way too variable. I unlocked a ton of badges early on, then I got nothing for a long time. Nada. Forget for a moment that badges themselves are useless... the point is that if you are going to use a badging system to reward behavior, it needs a stronger reinforcement system to be effective. It must be resilient to many usage profiles. And beyond badges, you have the Mayorship reinforcement... which became a diminishing return for me. I have 18 friggin' mayorships. I didn't even try to get them. I just checked-in everywhere I went (primarily in Berkeley where I live) to see what happened. Here's what happened: I got a bunch of mayorships. Some I cared about because I like the venue (Books Inc. on 4th Street, Zushi Puzzle, etc.)  But I can tell you, the 17th mayorship is not exciting. I don't care anymore. You can have them, I'm not defending them anymore.

4. It's Work. I eventually became mad at myself for bothering to take the time to check-in at places for the sole reason that I was using an app that measures actions by "checking in". Am I really standing here checking in with an iPhone app while I wait for my latte?... The definition of crazy... The past few weeks, I've really resented the self-imposed location fascism that I allowed myself to fall into with this damn thing. It's work to open the app, wait for the connection, check-in... and then have nothing else happen: Location registered. Friends notified. Null.

Maybe I'm just not the target user: I'm a late 30s non-partying guy in Berkeley who apparently wants you to know that he goes to bagel shops, vegan restaurants, bookstores and his dry cleaners with great regularity. Yawn. On the flipside, I'm a forgiving early adopter evangelist with a robust social network... I should care, but I don't care about this app anymore, except in the vague intellectual way that I admire the entrepreneurial effort behind it and I hope the team can figure it out. They've got a smart small team and smart money behind them.

What will get me back? Not sure. Economic incentives might work, but that seems far off. Obvious and deeper integration with my "base" FB social graph would help... But my FB updates, which I can already do easily from my iPhone, satisfy that requirement.

For now, this is my Foursquare check-out... That means that Clean Living Dry Cleaners on Solano Ave has an uncontested mayorship up for grabs, if you care.

I'm sitting here at a cafe, thinking about the interplay of narcissism
and utility in the context of social applications... That's how lame my Friday nights are :)

Fun personal exercise... Draw an X/Y graph, with Narcissism as the Y
and Utility as the X, and map how you personally feel about various
social apps out there.

There is no objective measurement here, but I find that the apps I
have a "hard time with" are low on utility (for me) and and least
moderately narcissistic.

There is a magic zone where high narcissism is twinned with utility
and creates a great feedback loop. I think Facebook and Twitter
dominate that realm right now.

Just a rough idea, but thought I'd throw it up here, literally on the
back of a napkin.

I was talking to an aspiring young entrepreneur last night at a party. She's in the early stages of founding her first company and asked if I'd be willing to help her out. Her company is not in my strikezone, but I know I can help with some block and tackle basics, so I instantly said "yes". Then this morning, I just got off the phone talking to another early stage veteran who politely took my call to help me hash out a challenge at a new venture I'm working with... In 12 hours, I was on both sides of the kind of interaction that makes Silicon Valley what it is. I sometimes wish it were more explicitly acknowledged, so here's my swing at it:

Rajeev's Rule

 "When any sincere individual or group of people asks for my assistance in pursuit of their business dream, I will strive to help them in any way that I can, be it small or large."

So, who is Rajeev?

This open ethos of collaboration was perfectly embodied in the late Rajeev Motwani, Stanford professor and advisor to countless hundreds of Silicon Valley entrepreneurs, including most famously, a couple guys named Larry and Sergei. He was taken from the world far too young, but like many others, I had the opportunity to collaborate with Rajeev successfully several times over the last 10 years... I don't think I ever saw Rajeev say "no" to helping an entrepreneur: listening to their ideas, making a quick helpful introduction, meeting for coffee to hash out a problem, answering their emails with humility and promptness.

Much has been written since Rajeev's passing about his One-of-a-Kind role in Silicon Valley, and rightly so. But while his uniqueness as a historical personality is indisputable, his generous spirit has no scarcity bounds and we should all strive to emulate his ideal.

 I think its fitting to refer to this generosity amongst entrepreneurs as "Rajeev's Rule" in his honor.

When I co-founded my most recent company back in 2007, my partner Steve and I shook hands on a commitment to bootstrapping this one with 100% self-funding. This decision was made not because we have anything against venture money, as both of us have had and currently enjoy positive experiences with venture-backed firms. We simply hypothesized that we had a capital efficient business model that could work as a self-funded play. We knew that if we could run hard to profitability on our own funds, we'd enjoy huge flexibility in how we run the firm, in perpetuity. We both agree today that it was absolutely the right call: We turned profitable in our first 12 months in the market and now we're growing very strongly into 2010. The gambit worked for us. This is the first time I've done a startup without any outside funds, and looking back now on the first 2 years, I have some insights that might help other entrepreneurs as they struggle with the very real question of growing organically (that is, your own money, or that of your friends and family that comes without institutional structures) or taking outside angel or VC money. It really comes down to a few variables around what you're capable of doing in your first year...

These are 5 questions to ask yourself if you're thinking of bootstrapping with modest funds:

1. Can you start selling quickly? If your initial business model requires an unspecified development or R&D period before you can even think about customers and a pricing model, its going to be almost impossible to self-fund your company to profitability unless you have really deep pockets and don't mind revising your spend plans every step of the way (not recommended.) We build software, but we also knew what we were building and exactly how long it would take -right down to the week- (thank you, Agile development methodologies!) in order to deliver a complete offering to our first paying customers.

2. Will customers pay you quickly? Its one thing to know you can build something you can sell quickly, but do you know if people or businesses will actually pay you? Seems obvious, but find out before you start. We actively interviewed prospective buyers of our software service before we wrote the first lines of code. We showed them detailed product mockups and how it would be used. We added capabilities they wanted. We talked to all kinds of users involved in the purchasing process. Doing that, we confirmed that if we built it, a handful of awesomely wonderful "believers" would buy it from us. Most importantly, we confirmed our payment terms. We pursued this as a collaborative process, and we came up with a pricing model that worked for them and us. Consumer and B2B plays have different paths to this knowledge, but you need to follow that process.

3. Can you build only things you can sell? Brutal discipline in offering design is non-optional. There is very little room for hunches about product acceptance when you're building on a shoestring. If somebody won't buy it, don't even think about building it or adding it, no matter how cool. We made this mistake at a feature level in our software a couple times in the first year... We allowed our desires to supercede direct market feedback. Those features are now long dead, but the cost of lost development cycles taught us a key lesson: You cannot be too obsessive about confirming that every aspect of your product is both desired and supportive of your revenue model  (confirmation = people who don't work for you saying that they want it and will pay for it.)

4. Can you commit to a true hiring process? As there is so little room for error in the first year of a bootstrap, you need to eliminate the possibility of an expensive dud hire. The way to do this is by having a true process. If you can work with folks you've worked with in the past, that's your best bet -get "the band" back together. If you have to hire strangers, then don't settle for less than total rockstars. Really dig deep on all potential hires. Take your time to get it right. If they are developers, demand to see some new work from designers, make back-end developers do real code challenges (our policy is that if a developer candidate whines about a code challenge, move on, no matter how talented they are) Give market or customer facing candidates personality tests (again, if they whine, move on), conduct background references, do brainstorming sessions to see how they work... Leave literally nothing to chance, or you will suffer for it financially and operationally. Of course, even if you do all of this, you'll still likely screw it up... We did all of this and we made one hiring mistake in our first year, but we solved it quickly, which is the next point.

5. Are you willing to cut a loss before its an actual loss? Here, a "loss" could be a non-productive hire, a bad product decision, a demanding customer, a recurring unneeded expense... literally anything that your gut is telling you COULD become a problem, lose it now, no matter how much your brain is telling you that your gut might be wrong. Your gut is probably right, but even if you're just being paranoid, you have to keep this raft afloat to profitability so you must execute with uncomfortable certitude.

In short, product, operational and fiscal paranoia is the fuel of the bootstrapped business in its first year. The paranoid self-funders who survive their first year in business can aspire to become well-adjusted entrepreneurs when they turn profitable.

Happy to hear any other perspectives on this.

Just had an interesting insight with an entrepreneur friend of mine over the weekend. Alex is a technologist I'm working with on an early stage company just getting off the ground. We were colllaborating on an issue throughout the weekend. In the spirit of levity, I made an offhand comment about this weekend being heavily tilted towards the  "work" side of the "work vs life" balance.

But, Alex made an interesting retort with total sincerity, "I disagree. The notion that there should be balance between work and life is the problem itself. Its all just life flatspace with different nodes of activity. The more connectivity and intensity amongst the nodes, the more robust and novel the life."

Alex is right. It seems small, but its a useful reframe of mental model, especially if you are burning really long hours per week and fighting this sense that your "out of balance"... Instead, one can consider that you have a flatspace that is your entire life of activity. Some things you fill it with are professional, some are recreational. Some take lots of concentrated effort, some are relaxing. Some are stressful, some are blissful. Combining all of them creates novelty and robustness for all of your life's activity. The emphasis then becomes one of shaping an aggegrate quality of experience, regardless of whether it might be have been parochially defined as "work" or "play".