John Greathouse http://johngreathouse.com Hands-on startup advice for emerging entrepreneurs Mon, 24 Aug 2015 12:00:39 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.2 This Hollywood Star Proves Entrepreneurs Should Be Clueless http://johngreathouse.com/this-hollywood-star-proves-entrepreneurs-should-be-clueless/ http://johngreathouse.com/this-hollywood-star-proves-entrepreneurs-should-be-clueless/#comments Mon, 24 Aug 2015 12:00:39 +0000 http://johngreathouse.com/?p=5744 A version of this article previously appeared in Forbes. Sometimes being clueless makes you fearless. This was certainly the case with Hollywood star turned inventor, […]

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A version of this article previously appeared in Forbes.

Sometimes being clueless makes you fearless. This was certainly the case with Hollywood star turned inventor, Hedy Lamarr.

In 1937, Ms. Lamarr abandoned a successful European film career to become a Hollywood star. Although successful, she quickly became bored with the vapid nature of stardom, once saying, “Any girl can be glamorous. All she has to do is stand still and look stupid.”

Unsatisfied with the intellectual limitations of Hollywood, Ms. Lamarr collaborated with an unlikely partner and together they created a fundamental invention which helped secure their lives of hundreds of thousands of servicemen and women. More significantly, their innovation subsequently became the basis one of the most significant products of the past century.

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Bad Boy

George Antheil as an avant-garde composure with a risqué reputation. He underscored his playboy persona by titling his 1945 biography “The Bad Boy Of Music.” During the 1920s in Paris, Antheil partied with intellectuals and artists that included Ernest Hemingway, James Joyce, Ezra Pound, Gertrude Stein, Pablo Picasso, Salvador Dali and Igor Stravinsky.

Among his innovative musical creations during his Paris period was a quirky ode to the mechanized age entitled, “Ballet Mécanique.” The piece was a cacophony of percussive sounds, including 16-player pianos which Antheil never successfully synchronized. His unfulfilled vision was to create a melody that would “hop” from one piano to another. Watching the performance of the piece was intriguing, as it was unpredictable which piano would strike the next note.

Twenty years later, Antheil found himself in the same professional void as Ms. Lamarr, scoring movie soundtracks and utterly bored. The two met in 1940 and quickly appreciated each other’s intellectual curiosity and shared disdain for Hollywood.

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If a movie were made about their collaboration, it would no doubt include a torrid romantic relationship. However, there is no historical evidence to indicate that their intense friendship was anything other than platonic. <Note to Millennials: It’s not always about the hookup.>

Sympatico

During World War II, rudimentary progress was made remote controlling devices, but the benefits of radio control were quickly thwarted by jamming the controlling signal. Even when the signals were periodically changed, the defending soldiers simply scanned the airways, until they found the proper frequency and jammed it.

As a young woman, Hedy was married to a German arms merchant. From overheard conversations, she knew that one of the capabilities desired by the Nazis was to guide missiles and torpedoes via radio signals. Clueless, yet unafraid, Hedy and Antheil set out to design a secure remote control guidance system for the US government.

While exploring potential solutions, Antheil recalled his Ballet Mécanique. The novice inventors conjectured, “What if the frequency was randomly changed while controlling the device?” just as the notes of Antheil’s melody hopped between pianos. In 1945, Hedy and Antheil codified their invention by filing a patent claim. In homage to the piano’s 88 keys, their design hopped the signal between 88 frequencies.

The duo did not allow their lack of business experience to dissuade them. They tirelessly attempted to interest the United States’ Navy in their breakthrough. However, their lack of a technical pedigree and the winding down of the war resulted in their idea remaining theoretical.

However, by the late 1950’s, the cold war spurred the US Navy to explore methods to encrypt ship-to-ship communications. Hedy and Antheil’s frequency skipping technology was rediscovered and deployed across the naval fleet, soon becoming the standard methodology of securing all of the military’s wireless communications.

In the early 1980’s, President Reagan’s administration declassified the technology, making it available for commercial use. The timing was fortuitous, as it was Hedy and Antheil’s frequency hopping epiphany that facilitated the secure transfer of cellphone signals from tower-to-tower, thereby enabling today’s cellular infrastructure.

Clueless = Fearless

Like all successful collaborations, Hedy and Antheil brought complimentary perspectives to the problem they ultimately solved. Hedy understood the utility and challenges associated with securely controlling remote devices, while Antheil had previously envisioned creating orderly music from seemingly random (and unpredictable) piano notes.

Despite their artistic talents, Hedy and Antheil were absolutely clueless regarding how to sell, market or commercialize their invention. If they had realized how derisively the market would react to a technology conceived by a musician and an actress, they may not have pursued their idea. Not only would this have placed hundreds of thousands of soldiers’ lives in greater peril, it’s possible that you wouldn’t be able Tweet a selfie from your smartphone.

The fact that Hedy and Antheil were clueless, made them fearless – two qualities all entrepreneurs should have in abundance.

You can follow John on Twitter: @johngreathouse.

Images: Associated Press

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How To Make (Almost) Anything Go Viral http://johngreathouse.com/how-to-make-almost-anything-go-viral/ http://johngreathouse.com/how-to-make-almost-anything-go-viral/#comments Mon, 10 Aug 2015 12:00:08 +0000 http://johngreathouse.com/?p=5740 A version of this article previously appeared in Forbes. There are two schools of thought regarding how to make anything go viral. In The Tipping […]

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A version of this article previously appeared in Forbes.

There are two schools of thought regarding how to make anything go viral. In The Tipping Point, Malcolm Gladwell emphasizes the importance of the messenger. In contrast, Jonah Berger’s Contagious: Why Things Catch On proclaims that a properly structured message makes the messenger inconsequential. Which approach is correct?

As with most business strategies which migrate from the classroom to the real world, the “correct approach” involves combining the appropriate elements from multiple theories and applying them to your specific situation.

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The Faux Anti-Gladwell

Professor Berger’s publisher, Simon and Schuster, positioned Contagious as the scientific counter to the pop-culture Tipping Point. They hoped that taking a controversial stance against the immensely popular book would help Contagious cut through the clutter of the 11,000 business books which are published annually. Their approach was moderately success, as evidenced by the roughly 3,000 Google hits for the search: “The Tipping Point” & “Jonah Berger.”

When interviewed, Berger took a more diplomatic approach than that of his publishers, complimenting Gladwell, but in the same breath noting that, “I like to say in class, ‘Fifty percent of The Tipping Point is wrong. My job is to show you which half.’”

Igniting A Forest Fire

To make his point that the message matters more than messenger, Professor Berger writes, “…think about a forest fire. Whether it catches or not doesn’t depend on the size of the initial spark. It relies on having lots of trees that are ready to catch that spark.”

This is certainly a true statement. However, an errant spark from a campfire is far less likely to burn down a forest than a lightning strike which causes a large tree to burst into flames. Thus, both the message and its messengers should be considered when crafting a viral marketing campaign.

Gladwell Meets Berger

Mr. Gladwell broadly classifies the messengers which are best suited to help ignite a forest fire as: Connectors (uber-networkers which have a vast number of acquaintances they can influence), Mavens (information gathers who are ‘in the know’) and Salespersons (promoters who tell compelling stories).

Professor Berger breaks down the components of a highly viral message into six facets, using the acronym STEPPS. The description of each of these principles are from this 2013 talk Professor Berger gave at Wharton.

  • Social Currency: “It’s all about people talking about things to make themselves look good, rather than bad.”
  • Triggers: “Which is all about the idea of ‘top of mind, tip of tongue.’ We talk about things that are on the top of our heads.”
  • Emotion: “When we care, we share. The more we care about a piece of information or the more we’re feeling physiologically aroused, the more likely we pass something on.”
  • Public: “When we can see other people doing something, we’re more likely to imitate it.”
  • Practical: “Basically, it’s the idea of news you can use. We share information to help others, to make them better off.”
  • Stories: “How we share things that are often wrapped up in stories or narratives.”

If you craft a message which embodies Berger’s Contagious principles and then entice Gladwell’s Tipping Point messengers to promote it, you may find that both Berger and Gladwell are “correct.”

You can follow John on Twitter: @johngreathouse.

Image credit: Simon & Schuster

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When In Doubt, Let People Think You’re A Fool http://johngreathouse.com/when-in-doubt-let-people-think-youre-a-fool/ http://johngreathouse.com/when-in-doubt-let-people-think-youre-a-fool/#comments Mon, 03 Aug 2015 12:00:26 +0000 http://johngreathouse.com/?p=5731 A version of this article previously appeared in Forbes. The Beatles’ Manager, Brian Epstein, was a 30-yr old, former furniture salesman when Beatlemania hit America […]

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A version of this article previously appeared in Forbes.

The Beatles’ Manager, Brian Epstein, was a 30-yr old, former furniture salesman when Beatlemania hit America in 1964. When he was approached by savvy Nicky Byrne to license the Beatles’ name and likeness for various novelty products and toys, he firmly stated that he would not accept a penny less than 10%.

Nicky had a difficult time hiding his surprise, as the typical range for such licenses was between 30% to 50% of the product’s price. Mr. Byrne quickly signed dozens agreements with merchandisers that subsequently cost the Beatles approximately $100,000,000 in lost royalties. Mr. Epstein later re-negotiated the Beatles’ share to 45%, but by then, Beatlemania was on the wane and the financial damage had been done.

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Get Out Of The Zone

As shown below, every negotiation entails a buyer and seller comfort zone. In order for a deal to be consummated, an intersection of these zones must exist. In the example below, agreement is achievable between $145 million and $185 million. In general, an agreement cannot occur outside of this range, unless new data, coupled with a persuasive argument, are introduced in order to drive the buyer or seller outside of their initial comfort zone.

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Brian Epstein Had No Clue, Let Alone A BATNA

“It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.” Mark Twain

In the case of the Beatles merchandizing, the sophisticated Mr. Byrne would have been extremely happy with any percentage below thirty and likely would have accepted any rate below fifty percent.

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Yet, because he was afraid to appear unknowledgeable, Mr. Epstein blurted out a percentage that effectively moved the negotiations outside of the expected shared comfort zone, costing the Beatles tens of millions of dollars in the process.

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While ignorance may be bliss, it is an awful foundation upon which to negotiate. When in doubt, keep your mouth shut and allow the other party to establish one of the boundaries of the shared comfort zone. If you are unsure of the fairness of their initial proposal, you can then seek additional information to determine where it falls within the expected range.

If a seller names a price at the outset of a negotiation, they effectively establish the upper bound of the negotiations. Once a sale price is communicated, the buyer is then incentivized to negotiate your initial proposal downward.

If you name an outrageously high price, you may scare away the would-be buyer, as they may feel that you do not have a realistic opinion of your venture’s value. If you set an initial price that is too low, you effectively shift the comfort zone in an unfavorable manner.

Without Whom…

Despite his frequent business blunders, the Beatles would have remained an obscure bar band if it had not been for Mr. Epstein’s career guidance and tireless promotion, which led to their recording deal with Decca. This reality was recognized by the Beatles, who appreciated Brian’s contribution to their success and excused his inadequacies. As Paul McCartney once said, “British people didn’t know that stuff at that time. I think he looked to his dad for business advice, and his dad really knew how to run a furniture store in Liverpool.”

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Image credit: Associated Press

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Maximize Your Exit By Not Selling Your Company http://johngreathouse.com/maximize-your-exit-by-not-selling-your-company/ http://johngreathouse.com/maximize-your-exit-by-not-selling-your-company/#comments Tue, 28 Jul 2015 12:00:21 +0000 http://johngreathouse.com/?p=5725 A version of this article previously appeared in Forbes. In 1987, a representative of Michael Jackson approached the modest Sycamore Valley ranch house and knocked on […]

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A version of this article previously appeared in Forbes.

In 1987, a representative of Michael Jackson approached the modest Sycamore Valley ranch house and knocked on the door. The owner of the ranch was shocked by the visitor’s message. He told the homeowner that he represented someone who wanted to purchase the ranch at a substantial premium over its current fair market value. He also indicated that the offer was non-negotiable and the home owner had to respond either “Yes” or “No” in a matter of hours.

Although this is a somewhat unusual real estate transaction, it reflects a surprisingly common scenario in the business world of mergers and acquisitions, with one important distinction.

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My House Is Not For Sale

When someone knocks on your door and tells you they want to buy your house, despite the fact that it’s not on the market, you would not expect the potential buyer to then ask, “So how much do you want for it?” Even the eccentric King of Pop communicated the price he was willing to pay for Neverland.

However, in many cases, acquiring companies behave less rationally than Mr. Jackson. When we sold Expertcity (creator of GoToMeeting) to Citrix, we experienced this awkward, yet common situation. Citrix politely approached us, told us they had an interest in acquiring our company and then asked us, “How much?”

Our response was that there was no “price” as our company was not for sale. We were not rude nor indignant. We simply stated the truth. At the same time, we made it clear that we were flattered and happy to further explore if a reasonable deal could be crafted. We then turned Citrix’s question around, saying, “You knocked on our door with an intent to buy so you obviously have some idea of the price you are willing to pay. What is your price?”

As our negotiations became serious, I realized that we needed to define our Best Alternative to a Negotiated Agreement (BATNA). We boiled our alternatives down to the following:

IPO – To bolster our negotiating position, I engaged an investment bank to explore the public capital markets. This option was not attractive to the management team because the SEC’s onerous regulations would have severely constrained our liquidity. Most importantly, management’s ability to autonomously run our business would have been significantly compromised, as we would have been forced to answer to Wall Street on a quarterly basis.

Run A Sales Process – Establishing an auction was the least attractive option, even though this approach might have driven up the purchase price. We were more concerned with ensuring a cultural fit with our acquirer, rather than squeezing the last dollar out of the deal. Citrix promised to operate Expertcity as a separate division and maintain its offices in Santa Barbara and it was unclear if other potential acquirers would have been willing to make, and keep, similar commitments.

Additionally, we were concerned with our deal becoming shopworn by not initiating a bidding process. There is a well-worn adage in the world of mergers and acquisitions that, “companies are not sold, they are bought.” In other words, the most attractive companies generate unsolicited buyers which can often lead to premium purchase prices. Companies that seek buyers are often viewed as damaged goods which cannot otherwise succeed as self-sustaining entities. Such companies, if they are able to complete a transaction, usually sell at a discount.

Do Nothing – Taking no action was the potent competition faced by Citrix. Due to our revenue growth rate, Expertcity was quickly becoming too expensive for Citrix. Thus, doing nothing became our BATNA, as it encouraged Citrix to expeditiously prosecute the transaction.

We eventually sold Expertcity to Citrix for $236M. I am proud to say that Citrix lived up to all of its commitments and Expertcity, renamed Citrix Online, went on to become one of the largest employers in Santa Barbara county and one of the world’s largest SaaS businesses.

VC Funding Alternative

During late 2006 I helped the CEO of RedMojo sell his company to Novell. Our BATNA to a sale was to accept funding from venture capitalists. Taking fresh capital would have pushed out an acquisition by several years, as the institutional investors would have encouraged management to substantially grow the institutional value of the business before considering a sale.

Our approach was a bluff, as RedMojo’s management was not inclined to accept venture funding, as it would have required the team to work several additional years to generate a return sufficient to warrant the dilution caused by an institutional investment.

Fortunately, there were multiple companies interested in acquiring the company. This competition, coupled with the legitimate BATNA of venture funding, allowed us to sell the company for nearly $10 million, despite the fact that the company’s revenues were negligible and the team was comprised of a handful of people.

Who’s There?

It is impossible for you to fully understand the potential strategic value of your venture, once it is part of an acquiring company’s organization. Thus, a fair response to the question, “How much do you want for your company?” is, “What would our assets be worth as part of your organization?”

Once the potential buyer states the expected value of your assets within their organization, you can then focus your arguments on the combined value the two organizations can jointly create, rather than allowing the acquirer to drive down the standalone value of your company via comparisons with other companies or by assigning a multiple to either your revenue or net income. Attempting to determine the combined value of the entities is a worthwhile exercise because it forces both parties to think through the acquisition and contemplate how the combined company would work together.

When someone knocks on your door and asks how much you want for your company, your response should be, “Thank you, I am very flattered. However, there is no For Sale sign in front of our building. I know what my company is worth to me, but the important question is ‘What is it worth to you?’”

If the potential buyer wants your company as much as Michael Jackson desired the Sycamore Valley ranch, they may be willing to pay you a very, pretty penny indeed.

You can follow John on Twitter: @johngreathouse.

Image credit: Associated Press

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Success, Santa Barbara Style: Patagonian Sexwax With A Side Order of UGGS http://johngreathouse.com/success-santa-barbara-style-patagonian-sexwax-with-a-side-order-of-uggs/ http://johngreathouse.com/success-santa-barbara-style-patagonian-sexwax-with-a-side-order-of-uggs/#comments Mon, 20 Jul 2015 12:00:23 +0000 http://johngreathouse.com/?p=5716   A version of this article previously appeared in Forbes. When you can live where you want to live and make money doing what you […]

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A version of this article previously appeared in Forbes.

When you can live where you want to live and make money doing what you love to do, you are, by my definition, a screaming success.

Six outstanding entrepreneurs have created this sweet flavor of success in one of the most beautiful places on earth – Santa Barbara, California.

Santa Barbara has become a high-tech startup mecca, rivaling cities many times its size. The latest evidence of the city’s dynamic startup ecosystem is the recent announcement by Citrix to investment significant resources in the Santa Barbara Innovator’s Program.

The community is blessed with a temperate climate (average high temperatures between the mid-60's and mid-70's °F), which motivates accomplished people, who can afford to live anywhere, to make Santa Barbara their home. Many of these individuals become restless in their youthful “retirement” and begin investing and advising young companies.

Combine this significant pool of sophisticated Angel capital and expertise with UC Santa Barbara’s world-class entrepreneurial program and throw in a critical mass of entrepreneurs bold enough to build businesses around their passions, it’s understandable how a modest-sized community has produced so many successful tech startups. From Lynda.com’s recent $1.5 billion dollar acquisition by LinkedIn to Bessemer’s substantial investment in ProCore, AppFolio’s recent IPO filing and Sonos’ $130 million secondary, the Santa Barbara tech scene is unquestionably on fire.

However, less obvious is Santa Barbara’s rich history as a hotbed of lifestyle startups, a number of which have generated billions in revenue and garnered worldwide recognition.

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Lifestyle businesses are typically looked upon with derision by investors, as they generally do not have economic metrics that lead to large exits. However, a number of Santa Barbara’s “lifestyle businesses” are anything but small.

As Emmy Award winning comedian Bill Grundfest aptly points out in this video, entrepreneurs should seek the intersection of the things they enjoy doing and the tasks which will make them money. Starving artists pursue vocations which no one will support financially while workaholics labor at jobs which are often lucrative but offer no intrinsic rewards.

6 Entrepreneurs Who Conquered The Magical Intersection Of Money & Fun

image002Flip Flop Millionaire – Most fashion entrepreneurs are happy to have one huge hit. UCSB alum Doug Otto had two. In 1974, he began making flip flops in his Goleta garage and drove up and down the California coast, selling them out of his van for $10 each. According to Doug, “productivity fell dramatically whenever the surf was up.”

The following year, Doug traveled to Hawaii to surf. When not hitting the waves, he sold his flip flops to several surf stores, which locals called “deckas.” Doug morphed this Hawaiian slang and christened his company “Deckers.”

In the mid-1980’s, while on a rafting trip in Colorado, Doug noticed that the guide had modified his sandals with a velcro watchband strap to keep them on his feet when he stepped in and out of the river. This humble innovation resulted an entirely new line of footwear, the Teva sports sandal. Three decades later, it has matured into a multi-hundred million dollar product category.

During the early 1990’s, Doug came across his second huge hit. While surfing in Australia, he noticed that the local surfers wore sheepskin boots to keep their feet warm. In 1995, Deckers purchased the UGGS brand for $16 million. During its 2014 fiscal year, UGGS sales are estimated to have exceeded $500 million, while Deckers’ overall revenue was in excess of $1.5 billion.

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Hot Wax - Dr. Zog, aka Fredrick Herzog, just wanted to surf after he graduated from UCSB. To fund his passion, he began shaping and selling surfboards in 1968 from a small shop. Not satisfied with the quality of surf wax currently on the market, he decided to make his own.

In 1970, Zog closed his surf shop and focused his efforts on formulating a better wax. By 1972, he had refined his product, which he mixed in his garage, packaged by hand and sold to surf shops up and down the California coast, from Santa Cruz to San Diego.

He selected the name “Sex Wax” as an irreverent homage to Madison Avenue’s obsessive use of sex to sell even the most mundane products. His cheeky marketing (“The Best For Your Stick,” “Quick Humps,” and “Dream Cream”) fueled sales and caused High Schools to ban T-shirts sporting the Sex Wax logo. Like all attempts to limit young people’s access to a product, the moratorium had the reverse effect, causing sales of Sex Wax merchandise to explode.

Today, Zog’s wax product line is used by surfers, snowboarders, musicians and hockey players. By following his passion, Zog created a globally recognized brand, in which apparel sales account for over 10% of the company’s total revenue. This is especially impressive, considering that the Sex Wax logo has never been licensed to a third-party.

image004What's SUP? – In the 1970’s, Wardog was an avid surfer and skateboarding. By the 1980’s he added windsurfer to his list of water-based passions. Shortly thereafter, he met a fellow windsurfer, Deb, who became both his business partner and his wife.

Throughout the 1990’s, Wardog and Deb financed their water sport activities by testing surfing products and selling their unique Wardog surf fins. In 2003, they discovered paddle surfing and two years later, they founded Standup Paddle Sports, opening the first retail store in the US dedicated solely to standup paddling. According to Wardog, “We registered the domain www.standuppaddlesurfing.com on October 21, 2005, before the sport was even referred to as ‘standup paddle surfing.’” A decade later, Standup Paddle Sports has become a leading SUP brand, serving customers globally.

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Bones Brigade – George Powell didn't realize he was going to change the skateboarding industry when he began experimenting with polyurethane skateboard wheels, he was just trying to create a better skateboard for his son. From those early tests in his kitchen, Mr. Powell launched the Bones wheels brand in 1977.

The following year he partnered with 19-year old Stacy Peralta. Together they formed the Bones Brigade, which included future skateboarding icons: Tony Hawk, Lance Mountain, Rodney Mullen and Guy Mariano. According to George, “…Stacy (Peralta)… handpicked all the skaters, determining who was going to be the best of the young, just emerging amateurs, and bonded them together into a team we called the Bones Brigade. The key for him was to NOT steal well known skaters from other companies, but to start over completely with a new crew of unknown skaters, to make it fresh and inspiring.”

By 1980, Powell•Peralta Skateboards was the biggest player in the industry. Despite the ups and downs of the skateboarding market in the intervening years, Powell•Peralta remains the world’s largest skateboard manufacturers.

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A Climbing Passion – In 1953, 14-year old Yvon Chouinard fell in love with rock climbing. At 18, he purchased a junked coal-fired forge and taught himself rudimentary blacksmithing so he could make metal piton climbing stakes.

He eventually became proficient enough to produce two stakes per hour, which he sold to his friends and fellow climbers for $1.50 each. He made enough pitons during the winter months to pay his bills during the April – November climbing season. Yvon slowly expanded his craftsman product line to include other climbing gear, but by 1970, pitons still accounted for about 70% of his sales.

A few years later, while in Scotland, Yvon purchased several rugby shirts, in the hopes that their tough construction would be ideal for the rigors of climbing. The reaction from his friends was immediate. He ordered a few more and found that he couldn’t keep them in stock. The rugby shirt soon became a national fashion craze and launched the company’s now extensive clothing line.

Even though 2014 sales have been estimated to exceed $700 million, Patagonia remains a private B corporation, which allows management the freedom to pursue its dual pursuits of profit and philanthropy. (Note: Patagonia’s headquarters are located just down the road from Santa Barbara, in Ventura, California).

Fielding Their Passion – After Co-founding and helping build the leading call intelligence company (Invoca: backed by Rincon Venture Partners, Accel and UpFront), Rob Duva was ready for something that would allow him to spend more time outdoors.

His latest venture, Fin and Field, combines his experience of building great SaaS solutions for big markets with his co-founder’s passion for fishing and hunting adventures. According to Rob, "The thing about creating a lifestyle business in Santa Barbara, is that the lifestyle here isn't cheap. Fin & Field is built to support other lifestyle businesses. It's nice knowing that we're making it easier for small business owners in the fishing and hunting industry to effectively run their lifestyle businesses, while living the life of sportsmen."

Although it’s still early days, Fin & Field is hoping to join the ranks of Santa Barbara’s lifestyle legends, as they tackle a market comprised of over 37 million sportsmen and 25,000+ small businesses.

If you follow me on Twitter (@johngreathouse) I promise I’ll never tweet you about Santa Barbara surf conditions or tell you about that killer burrito I just ate.

Images courtesy of each respective company, all rights reserved.

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Hold On, Congress Is About To Handcuff Online Sellers http://johngreathouse.com/hold-on-congress-is-about-to-handcuff-online-sellers/ http://johngreathouse.com/hold-on-congress-is-about-to-handcuff-online-sellers/#comments Tue, 14 Jul 2015 12:00:03 +0000 http://johngreathouse.com/?p=5710 A version of this article previously appeared in Forbes. Congress' latest attempt to impose an "Internet sales tax" is just another misguided tax grab that […]

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A version of this article previously appeared in Forbes.

Congress' latest attempt to impose an "Internet sales tax" is just another misguided tax grab that will do more harm than good to American small businesses.

The Remote Transaction Parity Act (RTPA), introduced by Representative Jason Chaffetz (R-UT), purports to simplify sales tax collections while also leveling the playing field between brick and mortar businesses and online sellers.

Noble goals, no doubt. Unfortunately, it accomplishes neither.

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Does Congress Think Nexus Is A Shampoo?

As it currently stands, online sellers must collect sales tax in the states where they have, "sales tax nexus." While every state has a slightly different definition of nexus, it is generally defined as, "a physical presence, employee, or products stored in the state." In the state's eyes, merchants with nexus uses state resources like roads, which justifies collecting sales tax from buyers within their state. Sounds reasonable, right?

In theory, the concept of nexus makes sense. However, in the hands of government bureaucrats, the definition of "physical presence" can become farcical, encompassing an independent affiliate which links to your site or a company's participation at a trade show.

Sales tax nexus requires sellers to register for a sales tax permit with every state in which one of their customers resides, which can amount to 12 sales tax payments per year, per state. Successful online sellers, those who are doing well and helping to drive what little growth the US economy has seen over the past six years, have to learn the vagaries of each nexus state's sales tax laws, including those of individual counties and municipalities which levy separate taxes. Online sellers are already awash in sales tax complexity.

If the RTPA passes, the current level of complexity will explode, as e-tailers will be required to collect sales tax from buyers in all 45 states (plus D.C.) which have a sales tax. The complexity of simply knowing what rate to charge each online customer will increase exponentially, as there are over 10,000 taxing jurisdictions within the United States. The RTPA will require online sellers to collect sales taxes, based on the rate applicable tied to the buyer's shipping destination.

Not only would the proposed law require vendors to determine a customized sales tax rate for every sale, it will create a reporting nightmare. Many states require online sellers to break down the taxes they've collected in each taxing district. Imagine doing hundreds or thousands of sales per month and then having to decipher where each sale was made, in order to comply with the new law. This onerous, time consuming burden hardly "levels the playing field."

Congress was clearly influenced by the well-funded retail lobby, which characterizes online sellers as "tax evaders," while describing brick and mortar stores as "mom and pop operations just trying to survive." Nothing could be further from the truth.

While in the past a clothing designer may have opened up a brick and mortar store on Main Street, she now opens her store online and reaches a wider audience. Why punish her for making a good business decision? In addition, most savvy brick and mortar operations also leverage the Internet to broaden their geographic reach and expand their customer base - the world is no longer comprised of exclusively online and offline sellers.

You may be thinking, "Certainly Congress contemplated thresholds that will absolve small companies from such overheated intensive tax calculations." Sadly, this is not the case. The threshold is $1 million per year in gross receipts. That may sound like a lot, until you consider that the metric is gross revenue, not profit. Most online sellers of physical good have low profit margins - due to the cost of sourcing products and transporting and warehousing them. A seller could readily gross $1mm per year and still barely make a living.

Yet, you may still think, "A million bucks is a lot, this won't hurt my definition of a small business." Think again. The RTPA explicitly states that all online sellers, irrespective of their size, which use electronic marketplaces (e.g., eBay, Amazon or Etsy) will be required to collect and remit sales tax in all 45 states. Will small sellers who resell thrift store goods to make extra money be motivated to deal with this regulatory burden? Even online sellers who make their living selling items full time on eBay or Amazon may shut down their operations, once their taxes become 45-times more complex.

The Government To The Rescue

The bill promises an unspecified "electronic solution" for small businesses. As an investor (through my VC firm Rincon Venture Partners) in TaxJar, a company in the sales tax space, I know firsthand how difficult it is to implement an on-the-fly calculation of taxes when 10,000 taxing jurisdictions must be considered. The determination of taxes owed must be made instantly, once the customer finalizes their online cart and is ready to check out. Given the government's stellar record of creating web services (anyone remember the $1 billion spent on the flawed Obamacare website?), it is doubtful small businesses will ever be offered a workable solution, as promised by the RTPA.

The RTPA's intended consequences will be significant, ultimately burying thousands of emerging eCommerce "mom and pop" entrepreneurs under a mountain of expensive and impractical regulations. The unintended consequences will be even more dramatic - equivalent to suddenly slamming the brakes on our sputtering economy.

Follow John on Twitter here: @johngreathouse. I promise I will never tweet about that killer burrito I just ate.

Image: Cynthia Stine

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Oh Yeah, That Powerful Computer In My Pocket Is Also A Phone http://johngreathouse.com/oh-yeah-that-powerful-computer-in-my-pocket-is-also-a-phone/ http://johngreathouse.com/oh-yeah-that-powerful-computer-in-my-pocket-is-also-a-phone/#comments Mon, 22 Jun 2015 12:00:55 +0000 http://johngreathouse.com/?p=5697 A version of this article previously appeared in Forbes. Facebook recently joined Google and Twitter by offering a click-to-call functionality in its ads, giving consumers an option to call businesses directly, versus […]

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A version of this article previously appeared in Forbes.

Facebook recently joined Google and Twitter by offering a click-to-call functionality in its ads, giving consumers an option to call businesses directly, versus emailing them or completing an online form - effectively making the plain old phone one of the most powerful on/offline marketing tools of the coming decade.

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140 Years Old And Still Kicking

Why are the world’s biggest Internet companies investing in a technology created in the late 1800’s? Despite the fact that phone calls have been around for over 140-years, they represent the next tsunami of marketing dollars. People continue to surf the web to gather information when making a considered purchase. However, when they are ready to buy, they now stay on their handheld supercomputer and place their order by initiating a call. This approach of guiding consumers online and then offline (on/offline) through the purchasing process represents the future of commerce, whether it is online to a call or online to an in-store visit.

It’s undeniable that consumers are digesting more online content on the mobile supercomputer in their pockets than via any other modality. So much so that Google recently reported that mobile search has finally overtaken desktop search, and Facebook rolled out a new app called Hello that connects the dots between people’s social and phone contacts.
To shed light on the future of online calling, one of Rincon Venture Partners’ portfolio companies, Invoca, analyzed 32 million phone calls, across 40 verticals. The results were recently published in the 2015 Call Intelligence Index.

Some of the key points I took away from this research include:

  • 54% of all calls stem from engagement on a mobile device; mobile search marketing is the top driver, responsible for initiating 45% of calls
  • 75% of all calls to businesses originate on a mobile phone
  • Non-mobile, online channels, such as desktop search, display ads and review sites drive 30% of calls
  • Offline channels drive just 16% of calls; the phonebook, accounts for just 2% of calls to businesses

The average call duration is 16 times longer than a website interaction, at 4 minutes, 7 seconds

To better understand how this trend is impacting marketers, I reached out to Matt Miller, SVP, Analytics & Technology at the global marketing agency Performics. Matt shared with me a number of interesting insights, including that his firm has, “... gotten pretty good at implementing call intelligence platforms which economically connect brands with their omni-channel marketing strategies. Call analytics are helping (our) clients prioritize (phone) conversations with customers who are more likely to buy, which makes marketing strategies more profitable. The ROI from tools like Invoca are so clear that our clients are asking to extend this across more areas of their organization.”

Though the lines are blurring between online and offline interactions, it is now more important (and challenging) than ever for marketers to clearly understand the return generated by all their customer channels, including phone calls. Companies like Invoca and IfByPhone are uniquely positioned to help online advertisers monetize old-fashioned phone calls.

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Entrepreneurs Who Relish Being Wrong Usually Win http://johngreathouse.com/entrepreneurs-who-relish-being-wrong-usually-win/ http://johngreathouse.com/entrepreneurs-who-relish-being-wrong-usually-win/#comments Mon, 15 Jun 2015 12:00:38 +0000 http://johngreathouse.com/?p=5679 A version of this article previously appeared in Forbes. During my 15-years as a startup executive, I relished being proven wrong. Knowing that I was […]

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image001A version of this article previously appeared in Forbes.

During my 15-years as a startup executive, I relished being proven wrong. Knowing that I was had made a mistake empowered me to make the correct decision. Being wrong is much preferred to erroneously thinking you are right and relentlessly executing a losing strategy. Effective entrepreneurs reject dogmatism and embrace doubt.

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Human Nature Sucks

How can two otherwise intelligent and well-meaning people watch the same political debate and adamantly believe that their candidate won? Confirmation Bias.

Psychologists define confirmation bias as: “A tendency to search for or interpret information in a way that confirms one's preconceptions, leading to errors.” Not only does this proclivity cause us to seek affirming information, once we find it, we tend to value it more highly than data that refutes our beliefs and we can recall confirmatory facts long after conflicting information has been forgotten.

For instance, when the United States Postal Service recently issued a stamp of poet Maya Angelou with a quote from another woman, it reinforced my belief that the federal government is primarily comprised of incompetent, unmotivated workers. Stories which refute my belief careen by me undetected, but the Maya Angelou debacle will live on in my heart for decades to come.

Like most mental shortcuts, our tendency to seek out and believe data consistent with our beliefs fulfills an important role in our psychological makeup. If you questioned your core beliefs every time you came across a countervailing fact, your life would be rather dismal and anxiety ridden.

While this aspect of human nature can lead to mildly amusing behaviors in our friends (and ourselves), when assessing decisions at your startup, such close-minded prejudices can result in fatal mistakes.

Be Tacky

Startups survive by constantly making small mistakes and correcting them quickly. In this regard, CEOs are akin to sailboat captains. Both operate exposed to the elements, and surrounded by a handful of dedicated people who all impact on the company’s / boat’s direction.

Rather than establish an extensive strategic plan detailing how they will reach their destination, the startup crew simply aligns their sailboat with a distant point on the horizon. The startup CEO must then propel the ship forward by tacking the ship’s bow into the wind. This process results in a zigzag pattern as the Captain makes slight adjustments to address the vagaries of the breeze, waves and currents. However, as shown below, the ship’s general direction remains relatively unwavering.

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Confirmation bias is particularly dangerous at startups, as it slows down these vital course corrections. Rather than zigzagging in a relatively straight line, a startup stricken by confirmation bias ignores valid market signals and risks driving toward an errant point on the horizon.

For instance, if the team assumes that a higher price will result in a lower number of customers, it will have a tendency to recall those instances when a customer cancels due to price. At the same time, the team may unconsciously discount data that shows an uptick in sales beyond what could be attributable to a higher price.

I experienced this situation when we raised the price of GoToMyPC from $9.95 per month to $14.95 per month. Despite the 50% price increase, our sales exploded. When we asked our customers what motivated them to purchase GoToMyPC, many of them indicated that the higher price gave them greater comfort that our solution was a business, and not a consumer, product. This price change generated tens of millions of incremental revenue and allowed up to properly position GoToMyPC as trusted SMB solution.

Breakdowns Lead To Breakthroughs

Steven Johnson, author of Where Good Ideas Come From notes that, “Being right keeps you in place, being wrong forces you to explore.” He cites several examples of this phenomenon, including: (i) Alexander Fleming’s discovery of penicillin from a contaminated petri dish, (ii) Louis Daguerre divining analog photography after he stored some silver plates with random chemicals and images ‘magically appeared,” and (iii) Charles Goodyear noticing that sulfur and heat were the missing ingredients of vulcanization after he inadvertently warmed a sulfur-covered piece of rubber on his kitchen stove.

In all of these instances, the potential breakthroughs could have easily been overlooked as unfortunate mishaps. Fortunately, these innovators maintained an open-minded when the interpreted their counterintuitive observations. Unfortunately, most of us are not prone to such clear thinking, which leads one to ponder how many monumental breakthroughs have been thwarted by confirmation bias.

By definition, confirmation bias creates perceptual blind spots, as we only see what we expect (and often want) to see. Wily entrepreneurs proactively mitigate this perilous tendency in a variety of ways, including:

Embrace Your Bias – As with any recovery program, the first step is to admit you have a problem. Confirmation bias is not a sin, just a sign that you are human. By acknowledging its existence, you increase your odds of countering its potentially negative effects.

Seek The Truth (Ignore Who Is Right) – Strive to prove your assumptions wrong, just as a scientist tests the veracity of a hypothesis by trying to disprove it.

Separate Personalities From AnalysisPsychological studies consistently confirm that the loudest, most repeated opinions have the greatest influence on group behavior. This effect can be tempered by de-personalizing discussions so that aggressive members of your team feel less obligated to prove themselves right.

Make Cross-Disciplinary Decisions – Small teams of believers and dissenters often result in intellectually honest outcomes. It is also an effective way to mitigate the outsized influence of a forceful personality.

Discard Beliefs, Cultivate Assumptions – People tend to fight for beliefs, while assumptions are rarely personalized.

Encourage Diversity Of Thought – A heterogeneous team’s divergent backgrounds and experiences enhance its creativity and ad hoc problem-solving abilities. Such varied perspectives also reduce the overall impact of cognitive bias, as it is less likely teammates will share common preconceptions.

Cultivate (Thoughtful) Devil’s Advocates – Bad decisions are often the result of group members respecting each other. Yes, you read that correctly. Mutual respect reduces authentic dissent and increases the propensity for flawed decisions. If you have a natural cynic in your group, ensure that his or her voice is heard (to the extent it doesn’t become disruptive). If you lack a healthy dose of dissention, assign one or more people to aggressively challenge a proposed course of action.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet you about cupcakes or that killer burrito I just ate.

Image: Takao Umehara from the Noun Project

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Attention Startup Accelerators: Your Job Is Not Over After Demo Day http://johngreathouse.com/attention-startup-accelerators-your-job-is-not-over-after-demo-day/ http://johngreathouse.com/attention-startup-accelerators-your-job-is-not-over-after-demo-day/#comments Tue, 09 Jun 2015 12:00:24 +0000 http://johngreathouse.com/?p=5688 A version of this article previously appeared in Forbes. With top-ranked accelerators Lauchpad LA closing its doors and Y Combinator rebranding itself as a seed […]

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A version of this article previously appeared in Forbes.

With top-ranked accelerators Lauchpad LA closing its doors and Y Combinator rebranding itself as a seed fund, it seems fair to ask the question, “Are Accelerators Dead?”

Good news: a quick review of TechCrunch’s March 2015 List of Top 20 U.S. Accelerators, which includes two LA-based accelerators in the Top Ten (Mucker Lab and Amplify LA), proves that the overall health of the Accelerator landscape is sound.

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The TechCrunch team was judicious in its determination of qualifiers, insisting that the accelerators be, “fixed-term, cohort-based, with educational and mentorship components, culminating in a public pitch or demo day.” In addition, quantitative measurements included participants’ valuations, fundraising success, exit valuations and survival rates. Note: for purposes of this article, I am using the term “accelerator” to include incubators, startup labs and all other organizations geared to facilitating a startup’s early maturation.

Yet to be a truly effective accelerator, the work must continue the momentum beyond Demo Day. Obtaining funding is a key milestone, but equally important is helping fledgling companies build institutional mass once they leave the relatively safe confines of an accelerator.

To better understand how the accelerator world has matured beyond Demo Da, I sought out Jason Denenberg, former partner at Angel Capital Group, and current Director of Entrepreneurship at Launch Tennessee (LaunchTN). I previously wrote about LaunchTN’s second-phase master accelerator class called The TENN, which has a proven track record of helping startups thrive after graduation from an accelerator.

One member of the LaunchTN network of nine regional accelerators, ZeroTo510, in the Greater Memphis Accelerator Consortium, was listed in TechCrunch’s accelerator ranking. In addition, something interesting in happening in Tennessee, with the advent of hands-on venture firms like the Lamp Post Group and innovative ventures, such as PriceWaiter. My Forbes co-contributor Geri Stengel concurs that something is happening in the Volunteer State, writing last month about that state’s emerging women entrepreneurs.

In advance of LaunchTN’s flagship conference, 36|86, June 8-10 in Nashville, Jason shared with me the following three ways an accelerator should add value beyond demo day. Savvy entrepreneurs - seek out programs which incorporate these post-graduation activities.

  1. Convert Graduate-Founders Into Mentors

According to Jason, “Every experience is also a learning experience. Bringing an accelerators’ graduates back as mentors provides value to the next class, certainly. But to the graduates, it provides an opportunity to grow as leaders. It also provides a way for graduates to learn about ideas, opportunities and technologies about which they might not have been aware while focusing on building and scaling their own startup. This builds a strong alumni base; an element of significant importance to an accelerator’s value as well. If a mentorship seems like too large of a commitment, bring them back as a judge in the next cohort’s finale or demo day.

  1. Provide High Impact Exposure Beyond Your Hometown Press

One unique aspect of LaunchTN is that each master accelerator class is taken on investor and media tours of Silicon Valley and New York. Per Jason, “In some cases, media meetings and introductions don’t generate immediate results. However, by providing a simple note to a journalist, or sending an e-mail to the graduate with a writer’s contact information, the graduate’s funding announcement often garners exposure without much effort.”

Such was the case with Chattanooga-based Feetz, the self-described “digital cobbler” and graduate of The TENN. Feetz earned coverage in the Wall Street Journal following The TENN’s 2015 West Coast trip for their innovative 3D printed shoes.

  1. Adopt A “Whatever It Takes” Mentality

Accelerators should demonstrate (with actions, not just words) a “Whatever It Takes” mentality when it comes to helping graduates hit their post-demo day milestones. To this end, Jason noted that, “If a graduate needs a curated list of 55 development targets in a particular geographic area in order to get from a $1M revenue run rate to a $3M revenue run rate, we’ll provide it. If one of our TENN team companies needs legal advice to support negotiations with a large global brand, we’ll leverage our relationships, call in a favor or two and get it done.”

Although post-graduation support is key, Jason also made it clear that the ultimate responsibility for success lies with the startup team. In his words, “Following the demo day, startups must continue sell like there is no tomorrow to generate revenue and show traction in the marketplace. No program can work miracles. If the sales aren’t there, it might be time for the entrepreneurs to either pivot or seek out a new venture.” Even in the world of accelerators and post-demo day programs, some things never change. Just like in the “old days,” sales still solve all problems.

If you follow me on Twitter (@johngreathouse) I promise I’ll never tweet you about Santa Barbara surf conditions or tell you about that killer burrito I just ate.

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Your Startup Team Should Have Unlimited Vacation http://johngreathouse.com/your-startup-team-should-have-unlimited-vacation/ http://johngreathouse.com/your-startup-team-should-have-unlimited-vacation/#comments Mon, 01 Jun 2015 12:00:06 +0000 http://johngreathouse.com/?p=5674 A version of this article previously appeared in Forbes. It sounds crazy to offer unlimited vacation time to your startup employees. Something to the left […]

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A version of this article previously appeared in Forbes.

It sounds crazy to offer unlimited vacation time to your startup employees. Something to the left of socialism. Yet that is exactly what Richard Branson announced this past Fall. According to Branson, “We should focus on what people get done, not on how many hours or days worked. Just as we don’t have a nine-to-five policy, we don’t need a vacation policy.”

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They Wouldn’t Do That At RCA

It’s one thing when a wild-eyed billionaire like Richard Branson sings the praises of unlimited time off. It’s quite another when a pragmatic industry veteran like Jim Zarley echoes similar sentiments.

Jim spent nearly two decades at RCA before embarking on a serially successful Internet career, culminating in his long-time role as CEO and Chairman of ValueClick. He surprised me during a recent Local Market Launch Board meeting by suggesting that the company stop accruing vacation and allow employees to take as much time off as they need.

I was a bit shocked to learn that ValueClick implemented this seemingly radical policy during 2014. Yet Jim’s wise and reasoned support of the policy opened my mind to its advantages. In Jim’s words, “Our approach with our employees was, ‘If you get your job done, everything else takes care of itself.’” This enhancement of ValueClick’s benefits seems to have been well received by its employees, as evidenced by several positive references to the change on Glassdoor.

Eager to learn more, I had a sidebar conversation with Jim, in which he shared with me several advantages of not capping employees’ vacations, along with some cautionary advice for companies rolling out a similar policy.

Better, Not Worse – Employees are naturally skeptical whenever a major change is made to their benefits. ValueClick was proactive in assuring its team that this change was not intended to reduce their vacation, but to provide them with more flexibility and less stress should they unexpectedly need to take time away from work.

Historical Status Quo – All vacation which had accrued prior to the policy change remained in place and was paid whenever an employee left the organization, just as it would have been before the policy shift. The treatment of legacy vacation was a challenge for ValueClick to communicate properly, which prompted Mr. Zarley to note that, “The most challenging aspect of the change was the implementation. Thus, the earlier in the company's growth cycle unlimited vacation is granted is, the better.”

Company Benefit – Organizations which allow employees to take “as needed” time off, are not required to accrue the associated payroll liability, which increases the health of both their balance sheet and income statement. In addition, no lump sum payments need be made to employees because they have no “banked” vacation time due them upon their departure. Although this is certainly not the primary reason to implement an unlimited vacation policy, it is a real corporate benefit to be considered when evaluating a more liberal vacation policy.

Heads Up Required – Unlike Netflix, which does not force employees to obtain approval prior to taking time off, ValueClick asks employees to obtain such authorization. However, Jim noted that this approval requirement is not used to limit time off, but rather to ensure proper communication between employees and their managers which reduces potential disruptions during an employee’s absence.

Universally Applicable?

Most startups offer unlimited vacation time by default, as they lack the infrastructure, time and personnel to properly track employees’ vacation. More importantly, it is a moot point, as six-day work weeks are seldom conducive to taking extended Holidays.

For instance, when I joined Expertcity (creator or GoToMeeting, sold to Citrix) as one of its first business executives, the European Founder granted me three weeks’ vacation, citing the deplorable few holidays that most Americans take. The extra week of vacation proved to be nothing more than a nice gesture, as our team consisted of less than 10-people and we worked 6-days a week, including most major holidays, for nearly 18-months.

The irony was that we touted the extra week of vacation when recruiting talent, but none of the core team members took time off for a major hiatus, let alone an extended vacation. When we grew to about 50-employees, we began to make an effort to track vacation time, but our “policy” (though unwritten) was essentially the same as ValueClick’s – “If you need time off, take time off. If there is a risk you won’t meet your goals, shout and we’ll find the resources to help you.”

As Mr. Zarley noted, “If you hire the right people with a results-oriented work ethic, the amount of vacation time they take is irrelevant.”

Will Virgin Go All The Way?

It’s interesting to note that despite the broad attention Richard Branson’s comments received on the subject of unlimited vacations, only applying the policy a relatively small number of its employees (about 150).

In September of 2014, the infinite vacation policy for Virgin’s “parent company” was announced on its blog, along with the following promise: “Assuming it goes as well as expected, we will encourage all our subsidiaries to follow suit, which will be incredibly exciting to watch.” It will be interesting to see if Virgin goes all the way and tells all of its 50,000 employees, “take as much leave as you need.”

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet you about my lack of vacation time or tell you about that killer burrito I just ate.

Image: Jonathan Daniel/Getty Images

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