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I have recently started reading Clayten Christensen’s new book, Innovators DNA: Mastering the Five Skills of Disruptive Innovators, and the core thesis is extremely powerful – we can learn how to innovate. As you may have gathered from the title of the book there are in fact five skills that make people innovative. This runs counter to the generally held view that innovation is something some people are simply good at, whilst others are not.

The authors arrived at their thesis empirically, after interviewing dozens of “inventors of revolutionary products and services as well as founders and CEOs of game-changing companies build on innovative ideas." They also include what they learned from Steve Jobs, Richard Branson, and Howard Schultz (whom they did not interview) whose innovative thinking has transformed entire industries.

I think the study alone was pretty robust, but, as further evidence that innovation is a learnt skill the authors cite research by Reznikoff, Domino, Bridges and Honeymon which studied creative ability in 117 pairs of identical twins and found that only 30% of performance in creative tests could be explained by genetics. The corresponding figure in intelligence tests was 85%. The takeaway: geniuses are born, innovators are made.

The authors list the five skills of innovation as:

• Associative thinking
• Questioning
• Observing
• Networking
• Experimenting

I nearly titled this post ‘Anyone can learn to innovate’, but I don’t think that is quite true, as to me it seems that one can learn to be questioning, be observant, network effectively and experiment well, but associative thinking is maybe more akin to intelligence, i.e. an ability you either have or you don’t. What Christensen and his co-authors do make clear, however, is that much of innovation can be learnt, and they show us the skills we should focus on if we want to become more innovative.

This work also shows the characteristics startups should look for in new hires if they want to remain innovative, and the behaviours that should be encouraged to maximise the innovative potential of existing staff.

After a long really fun day yesterday at TechStars and StartLabs I wandered over to 34-101 to be on a panel for Joost Bonsen and Joe Hadzima‘s IAP class 15.S21: The Nuts and Bolts of Business Plans. It’s not really a class about business plans rather a class about starting a business and has been regularly modernized by Joost and Joe. On the panel were the two founders of Super Mechanical (creators of Twine) which is an awesome project that used Kickstarter for its initial financing (and that I’m an excited supporter / customer of.) I had a fun day and wish I had found more IAP courses to help teach and participate in this trip.

After the course finished at 9:30, Joost and I wandered over to the Muddy Charles for a beer. When I crawled into bed at 12:30 my head was full of a ton of awesome ideas that came out of our rambling three hour discussion. I’ve been friends with Joost since the early 1990′s when we first met around the MIT 10K competition and have been a huge fan of his ever since.

Among other things we talked about the startup ecosystem in and around MIT and the evolution of Boston as a region. The comments in my post from yesterday titled I’m in Cambridge, Not Boston were great and stimulated additional thinking on this topic, as did Joost’s experience here over the past 20 years. Joost has incredible knowledge and history of the region and of MIT, which occasionally appears in posts like How Kendall Square Became Hip: MIT Pioneered University-Linked Business Parks but is really apparent when you spend extended time with him talking about MIT, how it evolved, what it is today, who has been involved along the way, and the entrepreneurial community that has evolved around it.

About mid-way through the conversation Joost dropped two phrases on me that blew my mind. The first was “Creative Construction.” As we were talking about startup communities and the new book I’m working on, Joost said “How about a play on words on Schumpeter’s “creative destruction” and call your theory about startup communities “creative construction” instead. After I put the exploded pieces of my brain back together and said “that is exactly fucking right” he went on. “Think of entrepreneurship as a tool of mass construction.”

The play on words is just delicious. And right on – we are talking about an awesome positive force in the world and should be using language that represents that. At the core of our conversation was the notion that an entrepreneurial region like Boston is actually a collection of 100,000 person “entrepreneurial neighborhoods” (that’s what Kendall Square is, as distinct from the Fort Point Channel area, or the Leather District, or what’s going on in Davis Square, or …). And the idea that creative construction drives this – and the neighborhoods are part of a broader entrepreneurial community (in the region) is a construct that resonates with me.

I’m off to HubSpot to give a talk, a swing through Venture Cafe at CIC, and then back to StartLabs for the rest of the day. My three weeks in Boston (well – Cambridge) with a side trip to New York is coming to an end. It’s been amazing, enlightening, educational, productive, and a lot of fun.

eMarketer released some new data yesterday with the most detailed breakdown of the mobile advertising market I’ve seen to date. eMarketer have a history of being amongst the most bullish on this market. They were the first company to predict that 2011 mobile ad spend would top $1bn in the US, and they are predicting big growth again for 2012. Their new figures predict US mobile ad spend will reach $2.6bn in 2012, 80% up on the 2011 figure of $1.45bn (which was significantly higher than the $1bn eMarketer had forecast). Moreover, as you can see from the inset chart there is significant growth still to come.

For those of you who are sceptical about analyst forecasts eMarketer published a table which shows how different firms see the mobile advertising market. The eMarketer figures are roughly 2x the lowest estimates.

The new information for me was which companies have the leading market share and how the market breaks down between different advertising formats.

Search accounted for 45% of the market in 2011 ($653m) and the share of search is expected to rise to around 50% in the coming years. Google dominates search with around 95% market share. I’m not sure I’ve ever done a mobile search with a search engine other than Google.

Display was 31% of the market in 2011 ($445m) and the share of display is expected to rise to 37% over the next five years. Google also has the largest market share in display, but at 25% their position is not unassailable. Millennnial Media (who recently filed for IPO) and Apple’s iAd are equal second, each with around 18% market share.

If you’ve been reading this blog over the last week or so you will have seen that DFJ Esprit recently invested in StrikeAd, which plays in the display segment of the mobile advertising market. The interesting sub-trend within that market is the shift towards exchange traded media. As far as I’m aware there are no analysts forecasts for how mobile display splits between exchanges and ad networks but from our work we estimate that around 10% of mobile impressions are currently exchange traded, but we expect that to rise to around 50% of impressions over the next year or two.

Entrepreneurs often turn to economic development organizations or angels for pre-seed or seed funding for start-ups when they're not yet ready for institutional venture capital. A large proportion of these pre-seed or seed financings are structured as convertible debt which is, at first glance, surprising. Looking deeper into this market anomaly provides understanding of why debt is used for early round financings, and also of the strengths and weaknesses of different approaches.

• Apple reclaimed the title of the world’s most valuable company $415B vs Exxon Mobil’s $413B (Yahoo Finance) • The $97.6 billion in cash that $AAPL has is higher than the market value of 448 of the companies in the S&P 500. (Capital IQ) • This was the 2nd highest profit quarter of any company ever. ExxonMobil’s Q3 08 profit of $14.8 billion needed $147 barrel oil and $140 billion in revenue. (WSJ) • Sales rose 73% to $46.3 billion — so much for the law of big numbers working against them (CNN/Money) • In 2009, Apple sold more iPhones than it did in 2007 and 2008 combined. In 2010, Apple sold more iPhones than it did in 2007, 2008, and 2009 combined. Last year, Apple sold 93.1 million iPhones, slightly more than it did in in 2007, 2008, 2009, and 2010 combined (Matt Richman) • Apple’s profit of $13.1 billion was equal to their revenue in Q4 2010 • If Apple was a country, its market cap would make it 29th biggest nation, its annual revenue would make it the 52nd, its cash position 66th, and its earnings 79th, in terms of GDP (Global Macro Monitor) • Apple’s profits ($13 billion) exceeded Google’s entire revenue ($10.6 billion) • Apple has now sold 315 million iPhones, iPads and iPod Touch devices running its iOS software (CNN/Money) • Google would activate 59,653,187 Android-based devices during Apple’s fourth calendar quarter. Apple has said that iPod touch sales make up more than half of all iPod sales. That means Apple sold at least 7.7 million iPod touches. And that number, plus 37.04 million iPhones and 15.43 million iPads, means iOS outsold Android last quarter. (Matt Richman) • Apple sold three times as many iPads as Amazon sold Kindle Fires (Tech Crunch) Credit: Barry Ritholtz

I know I may be dating myself here, but over the past few weeks I couldn't help but think about the movie Fast Times at Ridgemont High and one of the standout characters, Jeff Spicoli.  When asked by Mr. Hand, his teacher, why he keeps coming late and wasting his time, Spicoli answers, "I don't know."

In several meetings with entrepreneurs during the past few weeks, they would have been better off answering like Spicoli rather than giving me some hollow bull shit answer.  I want to make it very clear that I don't expect entrepreneurs to have all of the answers to my questions.  In fact, many questions I have may not have an answer today so "I don't know" will be your best answer. My one caveat is that the "I don't know" is followed by a how might you figure out the answer or a when might you figure it out.  This line of questioning is really just another way to test how you think and determine how our working relationship might be were I to invest.  I would rather have the honest "I don't know but I'll figure it out" then a made-up answer that will never allow you or your investors to really understand what is driving your business.

This chart (data from Comscore, published on Vator.tv) shows that younger people are more ‘ad-blind’ than their elders, as shown by immediate recall. To me this is evidence that advertising works less well than it used to. It is interesting that delayed recall is better for millenials, and I think that probably reflects greater loyalty to brands that have genuinely impressed. Millenials are people born in the 1980s and 1990s, now aged 13-31.

If advertising is less effective then companies will be forced to turn more to product quality and service to build their brands and drive sales. This is clearly good news for us as consumers, but there are a couple of interesting business trends that come too. Firstly there is a call for innovations to improve product quality and customer service, most obviously using social media and leveraging mobile, and secondly there is a call for innovation that will help reverse the decline in advertising effectiveness (better targeting, more relevance etc.).

Two of our recent investments at DFJ Esprit play to these trends. Conversocial helps major brands like Groupon and ITV leverage improve their customer service using social media, and StrikeAd allows for real time targeting and campaign optimisation for mobile ads.

(our portfolio company Conversocial helps h

• Innovative service plays – like Conversocial
• Advertising will have to get more effective – StrikeAd

Over the last three weeks I’ve had numerous people ask me how my trip to Boston has been going. For a while I corrected them and said “I’m mostly in Cambridge” but gave up. Tonight, after hanging out at the TechStars Boston Mentor evening and program kickoff, I got into a long discussion with a Bill Warner and Ken Zolot about Cambridge, Boston, and startup communities. At some point in the conversation I blurted out “I have no idea why we call this program TechStars Boston instead of TechStars Cambridge.” And then something that I thought was important dawned on me.

My entire entrepreneurial view of “Boston” is centered around Cambridge. I’ve been here for two of the last three weeks (I spent four days in New York). I’m staying in a hotel in Kendall Square across from Google and next to MIT. I’ve spent my days walking to meetings at MIT, Kendall Square, Tech Square, Central Square, and East Cambridge including what I refer to as “the old Lotus building”. I’ve had all of my meals in Kendall Square or Central Square. Other than running, I’ve only been physically in Boston four times – first when I arrived at the airport, then when I took the train to New York, then when I returned on the train from New York, and finally when I spent the morning at Fidelity’s FCAT offices at Summer Street.

Now, I know there is plenty of startup activity in Boston. My old neighborhood near Fort Point Channel (I used to live on Sleeper Street in a condo at Dockside Place) is bustling with startup activity. There’s plenty of stuff on 128 and 495. There’s are other entrepreneurs tucked around the city. But that’s not the interesting story, at least in my mind.

The few square miles in Cambridge around MIT is the white hot center of startup activity in the region. One of my basic principles of startup communities is the need for what I call entrepreneurial population density (EPD) which I calculate as the total number of entrepreneurs and employees of entrepreneurial companies divided by the total number of all employees in a region. Then an even more powerful metric is entrepreneurial density, which is EPD / size of region. A large EPD in a small physical region wins.

Part of the magic of Boulder is the entrepreneurial density of the place. And as I wander from meeting to meeting in Cambridge, running into people on the street who I know, or who I met with the day before, or I who I want to know, reminds me of the dynamic in Boulder. For example, I ran into Matt Cutler on my way to Rich Levandov’s office and we walked over together. I bumped into the StartLabs organizers when going to a meeting with Will Crawford. I saw Joe Chung while hanging around StartLabs. I saw 50+ mentors who I knew last night at TechStars and expect to see more today when I’m there. While having breakfast with Michael Schrage at the Cambridge Marriott Joost Bonsen came over and said hello. At Dogpatch meeting with Yesware I saw Dave Greenstein and gave him a hug for his new kid. And the list of moments like this, which happened with 10 square blocks, go on and on. But when I hop on the red line and travel to South Station, the magic disperses.

I remember when the Boston VC community moved from downtown Boston to Waltham. I understood it was an effort to create a “Sand Hill Road” like venture community but the big miss was that an MIT student couldn’t hop on a bike and ride to Waltham like a Stanford student could with Sand Hill Road. And it’s no surprise that downtown Palo Alto, which is even closer to Stanford, is an attractive place for VCs to hang out. The snarky message when the VCs moved to Waltham was that they wanted to be close to their fancy houses and their private golf clubs and the entrepreneurs could come to them. It’s no surprise that many of these firms have relocated to Cambridge, recognizing that they should be in the middle of the entrepreneurial energy.

I’d suggest to the Cambridge and Boston startup communities that they should think of themselves as two separate but related communities. Even within Boston, it seems like there are different startup communities in downtown, 125, and even 495. I think that thinking of it “Boston” is a mistake.

In my world view, the entrepreneurs drive the startup community. Focus on entrepreneurial population density and entrepreneurial density – and make sure your geographic region is small. Over time, linking the critical mass together in a larger region (e.g. Silicon Valley or Boston) is fine, but the real power comes from the startup communities with the largest EPD in small physical regions which are big enough to have critical mass.

The typical "buyout" is a noncontroversial device to descend the ownership of certain assets (held in corporate form) from one set of proprietors to another - a "plain vanilla" deal in today's jargon. The more celebrated transactions are denominated "trophy deals," honoring the heroic risks that the heroically egoed promoters take (albeit with other people's money).

I’ve been at the excellent DLD Conference in Munich for the last couple of days and it’s been a lot of fun. Great content and great networking. My day to day work of making investments and working with portfolio companies is mostly focused on practical matters concerned with the here and now and it is great to take a step back and think about the big picture every now again. It isn’t too much of an exaggeration to say that DLD has been all about the big picture.

The two biggest takeaways for me were:

1. Leading companies are increasingly putting corporate culture at the centre of their efforts to build a sustainable business. Jenn Kim shared more of the inspiring Zappos story.
2. The meme of abundance and scarcity. Technological progress is all about creating abundance where previously there was scarcity. Peter Diamandis shared a story about how in Napoleonic times aluminium was the scarcest metal known to man to the extent that Napoleon gave a banquet in honour of a foreign emperor where the foreign emperor ate with aluminium cutlery and everyone else ate with silver or gold cutlery. Since then the invention of electrolysis has unlocked all the aluminium that was previously unavailable because it was tied up in silicates and a scarcity has become an abundance. When we find a cost effective process for desalination the scarcity of fresh water will similarly turn to an abundance. JP Rangaswami also touched on this meme in his talk about the social enterprise. We now have an abundance of data which is creating opportunity in all sorts of areas, but with that abundance a new scarcity is created – privacy – and we are still figuring out how to deal with that.

Finally, I want to share a video that we saw yesterday. Regular readers will know that I’m a fan of Ray Kurzweil’s work, and in particular his predictions about the evolution of technology. I’m posting this short by Jason Silva because of the brilliant way it makes Kurzweil’s thinking accessible. The money shot comes around 1.45 when Jason describes how the cellphones in our pockets are a million times smaller, a million times cheaper and a thousand times more powerful than a $60m super computer was forty years ago. Think about that for a second and then imagine that progress in miniaturisation continuing. Hopefully it is now much easier to believe that twenty five years from now we will have computers the size of blood cells (running inside our bodies). Enjoy.

IMAGINATION from jason silva on Vimeo.

There are two major issues facing a start-up considering an IPO: how to do it most effectively, and, secondly, whether to do it at all. The second is the threshold question. Will the issuer be able to raise capital cheaply and more efficiently on the wings of an IPO than with any other method, taking into account the long-range consequences of becoming a public company (going public)?

Last May I wrote that  I’m a big fan of Amazon as a business. Since then my admiration has increased – Bezos and his team continue to pick bold strategies and execute them well. The success of the Kindle Fire is grabbing all the headlines but the company is also quietly turning the book publishing industry on its head.

As you may have heard Amazon is now publishing authors directly, in competition with publishers. Just like publishers they offer advances and marketing and distribution services. Seth Godin is one of their authors. And their position vis a vis traditional publishers is strong (from Techcrunch):

Amazon’s publishing arm is surprisingly strong. They have a number of benefits including inexpensive print-on-demand as well as a massive Kindle install base. What do traditional publishers have? Well, Amazon.

There are even allegations that Amazon is consciously trying to force publishers out of business by offering leading authors above market advances that mean Amazon will make a loss on their book. Sarah Lacy explores this point in detail here.

It seems to me that ebooks and the web are changing the rules for publishing in ways that render a lot of the traditional publishing activity obsolete. Authors are able to market direct to their customers using social media and now that we can read authors blogs, book reviews and even download one or two chapters for free the ability the role of gatekeeper is less important. To adapt and survive in this new environment traditional publishers will need to shrink their businesses. In common with many other industries transitioning to digital they are finding that terribly difficult. Step in Amazon.

Six months ago I wrote a post about how I think about competition which included a list of topics that summarizes my philosophy. I covered the first item, Be The First Mover, but then went on to other things, like thinking about competitors every single day. I’m back today with the second topic, “Resegment If You Aren’t In The Top Three.”

If you look at the Foundry Group portfolio, you’ll notice a lot of market leaders. Zynga is the obvious one, but I’ll assert that there are many others, including AdMeld (now part of Google), Cheezburger, Fitbit, Gnip, Makerbot, Oblong, SendGrid, Topspin, Trada, and Urban Airship. After that there is a category of companies who might be market leaders, but it’s too early to tell as they are still very young. And, if you look at some of the successful companies we have had from our previous investing at Mobius Venture Capital, you’d see market leaders like Postini, Return Path, FeedBurner, Rally, Stratify, NewsGator, and Sling Media.

An important nuance is that these companies weren’t unambiguously market leaders when they got started. While some of them created entirely new markets, others entered into existing markets. In some cases, there were only a few players as the markets were new. In other cases, they took the existing market and resegmented it.

Existing markets are wonderful places to go play in especially if they are expanding rapidly. Entrepreneurs are drawn to fast growing markets, which is awesome, but there are many who I see that are simply trying to play a fast follower game. I’ve been there, having invested in “company #17 in a market.” Unless you get lucky, that generally sucks.

I’ve developed a viewpoint that if you aren’t in the top three in your market segment, you should “resegment.” Step back and redefine the market segment you are going after. Change the customer, change a product focus, change the distribution channel, or change the partner dynamic. Sometimes it’s a tweak, other times it’s more radical. But change something so that you are in the top three of the “new market”.

Don’t bullshit yourself about this. I’ve been the investor in many companies who weren’t in the top three that were going to get there with the next release, or a new sales VP, or something exogenous that would happen to the existing market leaders, or a magic trick that no one had thought of yet. This is almost always a losing strategy. Don’t count on luck. Resegment.

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