Where human intelligence outperforms AI

Where human intelligence outperforms AI

With every new trend comes a counter-trend. And so despite the current excitement over the wonders of artificial intelligence, one company is betting that humanintelligence can still deliver solutions for businesses that AI cannot hope to match.

Article One Partners (AOP) is a crowdsourced network of over 42,000 researchers in 170 countries — 42% of whom have graduate degrees in a variety of science, technology, and engineering specialties. The firm got its start uncovering patent-busting prior art for defendants in high-stakes patent infringement suits, where it quickly earned a reputation for finding invalidating prior art in hidden corners of the globe that Google search could never reach — an unpublished Korean-language PhD dissertation, a rural Norwegian library, even in a New York City pawn shop. Their work often found that a “novel invention” wasn’t so novel after all.

But in recent years, AOP’s sleuths have begun to make a name for themselves as an all-purpose “human search engine” that can help businesses solve challenges that algorithm-based search engines cannot, especially in the development and marketing of innovative new products.

Earlier this year, for example, a small manufacturer based in Europe needed to develop a pipe system that could move highly-volatile and abrasive hydrocarbons like solvents and metal cleaning agents safely over long distances. Hydrocarbons tend to destroy everything they touch — park your car in a puddle of gasoline and your tires will swell and eventually rot. So the company needed to invent a new type of material for the pipe works that would be resistant to organic chemical reactions from the liquid passing through it at varying pressures — and yet still be deformable (i.e., able to swell up to twice its width but then reform to its original shape).

A well-formulated search engine string could certainly point to materials already developed, and research already published. But to find a truly novel yet cost-effective solution, the company felt it needed human insight and expertise in multiple scientific and engineering disciplines. So it retained the British-based innovation consultancy The Moon on a Stick, which in turn called upon AOP for help.

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According to The Moon on a Stick’s managing partner Sean Warren, the results were impressive. “AOP’s research crowd came back with 142 possible solutions or compositions that would enable the pipes to withstand the volatile hydrocarbon material and perform as needed,’ Warren noted.  “I was quite surprised by the depth and relevance of the technical approaches they uncovered, some of which the client had never even imagined.”

These included a novel approach using nanotechnology, as well as some little-known new research underway at U.S., European, and Asian universities.

AOP also works with large enterprises, even those with vast internal resources like the telecom giant AT&T and the $30 billion technology giant Philips, the latter of which initially retained AOP to assist with its patent function. But as Brian Hinman, the firm’s retiring chief intellectual property officer, explained, the relationship soon expanded. “We now use AOP to identify manufacturing and distribution channels for certain goods, as well as to explore new trends in particular technology domains.”

One new tech area where Philips was considering expanding its R&D effort was Visible Light Communications (VLC), which uses a band of visual light between 400 and 800 THz to send data such as ads to in-store consumers (or potentially, instant replay video to spectators in a football stadium). Philips deployed AOP experts to start digging for everything they could find — products, companies making products, and new cutting-edge research in VLC — that would help the company make a business decision on whether, and how, to invest in VLC or not.

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This is where the distinction between algorithms and human judgment becomes crucial. A search engine query can quickly tell you a lot about VLC, its history, a few of the major players, and some published research in the field. But to make a business decision about whether to invest tens of millions of dollars in developing and marketing VLC products, Philips needed the experi8ence, insight, and business judgment of human experts who could assess the size and scope of the market opportunity as well as the best “white space” innovation areas for the firm.

Bet-the-company decisions like that should not be left to an algorithm, said Philips’s Hinman. “AOP produced actionable intelligence that enabled us to make informed decisions regarding innovation focus, invention generation, and potential acquisitions.”

To be sure, the robust AI systems now being designed and implemented do more than simply answer search queries. They can also manage systems, conduct operations, and take action. But fundamentally — at least so far — these are differences mostly of degree, not kind.

In any event, for challenges that quite literally require boots on the ground, even the most advanced AI system won’t be able to compete with a network of human sleuths. AOP’s CEO Peter Vanderheyden offered one example:

“We were engaged by a global licensing organization for one of the world’s biggest consumer products,” he recalled. “They asked us to find out where unlicensed devices were being sold around the world. Now, Google could point to all kinds of articles about counterfeit products in China or in India. It could also give you estimates of the losses due to counterfeit product sales. But that only tells this licensing organization what they already know, right?

“So we asked our researchers to go out and actually knock on doors,” he continued. “We had them go into their local stores, in whatever country they were located, and take six pictures of every box containing a device that featured this advertised consumer technology — one photo of each side of the box. The goal was to see if the package displayed the proper license label.”

To no one’s surprise, AOP sleuths produced photos of quite a few unlicensed products around the world. “And mind you, this was unbiased, third party, time-stamped evidence,” he added. “Very admissible in court. Which you better believe this licensing organization made sure to mention when it contacted those unlicensed vendors.”

Vanderheyden claimed that AOP’s work helped the licensing organization collect millions of dollars in new licensing revenues, though he declined to be more specific. “We also helped identify ways to improve their licensing control practices to reduce problems,” he added.

AOP’s latest bet on human intelligence was the launch last month of a new TalentSource service, offering qualified expert technologists from its crowd on a contract basis to companies. The aim here is to fill a growing need within companies for expertise in new or adjacent technologies outside their core R&D competence that industry convergence is increasingly forcing them to contend with. TalentSource enables these firms to bring in the talent needed to explore these new technological areas without having to invest yet in hiring full-time staff.

What’s unique about TalentSource compared to traditional technology consulting firms in the industry? AOP’s Vanderheyden claims it’s the depth of its bench of subject matter experts — again, 42,000 experts, almost half of whom have advanced degrees — as well as the flexible on-demand nature of their availability.

Whatever happens with Article One Partners and its various ventures in HI (human intelligence), it does seem clear that despite the enormous promise of AI,  there will always be some challenges that require human judgment, expertise, and insight to deal with effectively.

Where human intelligence outperforms AI

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How to Manage Your Star Employee

How to Manage Your Star Employee

Managing your star performers should be no sweat, right? After all, they’re delivering results and exceeding targets. But don’t think you can just get out of their way and let them excel. They require just as much attention as everyone else. How do you manage someone who is knocking it out of the park? How do you keep stars excited about their work? And what risks should you watch out for?

What the Experts Say
Having a supremely talented employee on your team is a boss’s dream. But it can be a real challenge, too, according to Linda Hill, professor at Harvard Business School and coauthor of Being the Boss: The 3 Imperatives for Becoming a Great Leader. You need to make sure your star has enough on her plate to stay fully engaged — but not so much that she gets burned out. And you need to “offer positive feedback” — but not in ways that are counterproductive to the person’s growth and development. Group dynamics are another concern when you have a standout performer on your team, says Mary Shapiro, who teaches organizational behavior at Simmons College and wrote the HBR Guide to Leading Teams. “Real resentment can build, due to the perception that the boss is favoring the rock star,” she says. Whether your star performer has just joined your team or has been working for you for a while, here are some tips on how to manage her.

Think about development
One of the hardest things about managing a supremely competent and confident employee is making sure he’s sufficiently challenged in the job. The antidote to this problem is “classic talent development,” Shapiro says. First, “ask your employee, ‘Where do you want to go next, and what experiences do I need to give you to make sure you get there?’” Then, find opportunities to help the person acquire new skills and sharpen old ones. Hill recommends that you help the employee get “exposure to other parts of the organization” that will “broaden his perspective.” And, of course, “don’t neglect the B players,” Hill adds. Otherwise, you’re not building the capacity of the team, and “over time, people become de-skilled.” Everyone on your team “deserves to be developed.”

Offer autonomy
Another way to ensure your star employee stays engaged and excited about coming to work is to “give her more autonomy,” Shapiro says. “Demonstrate trust by delegating authority and responsibility” over certain projects and tasks. And don’t micromanage. “Give her discretion in how she does the work.” If a formal promotion is not possible, or your employee is not quite ready for one, think creatively about ways to sharpen her leadership skills. “Give her training responsibilities,” she adds. “Ask your rock star to work with other people on the team to mentor them and develop them.”

Don’t go overboard with positive feedback
Generally speaking, “stars tend to be very needy” and require more praise and reassurance than your average employee, Hill says. But you don’t want to “get into the habit of feeding an ego.” She recommends giving your stars “the appropriate amount of feedback” by “acknowledging their contributions.” If your star executed a project beautifully or made a stellar presentation, say so. But you needn’t go overboard. “Help him learn to monitor himself,” she says, “and to acknowledge the contributions of other members of the team who are helping him be successful.” Shapiro agrees, noting that some stars don’t expect or want constant praise. “Don’t assume you know what motivates them.”

Manage your star’s workload — and everybody else’s
An important part of your job as a boss is making sure the work is divided fairly. This can be a challenge when you’re managing someone who is head and shoulders above everyone else. “You want to give [all] the tasks to the rock star, because you know the rock star will get the job done,” Shapiro says. But while “it’s convenient for you,” overwork will lead to burnout. To keep that from happening, she recommends doing “a careful analysis of what’s on [your star’s] plate” to identify tasks and projects that can be removed “to make capacity for other projects.” It’s likely that your “rock star will be reluctant to let anything go,” but you must hold firm. “Be explicit and say that you want to give her more bandwidth so that she has the brainpower, energy, and time to be at her best.” And beware of team burnout, Hill says. “Superstars are known as pacesetters,” she says. “It can be exciting and inspiring for other people to work with them, but often others can’t keep up.” You need to “make sure the workload is reasonable” for everyone.

Be mindful of group dynamics
Superstars can generate team tension. Perhaps they expect performance equal to theirs from others, or peers are jealous of their abilities and treat them differently than everyone else. You can’t control others’ emotions, but you do have a say in the way they act. First, and most important, “don’t play favorites,” Hill says. Next, talk to your team members about group dynamics and their individual behavior. Your goal is to “make sure they’re treating [the star] appropriately.” Shapiro agrees: “You need to have one-on-one conversations with everyone. Ask, ‘What motivates you and how can I help?’”

Encourage your star to build relationships
You’ll need to talk to your star, too. Many high performers have trouble developing trusting relationships, Hill says. “They’re quick studies, so they don’t ask questions and don’t try to build bridges — mostly because they don’t have to.” It’s your job to encourage them to network and to “help them develop their capacity to engage with others and learn the power of collaboration.” Explain that “to contribute to organizations today, you need to be able to work with other people in different functions.” Then “be a partner in helping the person integrate with the group.” Demonstrate “how his work benefits from other points of view.” And use role-play to teach him how to successfully work with peers.

Don’t be selfish
No one wants to lose a superstar employee, but when you’re dealing with someone who’s very “competent and capable,” it may be a “signal that she’s ready for more than you can offer” in a particular role, Shapiro says. Don’t lose her to another company, though. Consider the priorities of your entire organization and whether there’s a fit for her outside of your team. Be prepared “to fight battles on two fronts,” Shapiro adds. “Talk to your boss about finding your star a position in the company so that she moves up, while also making sure she’s replaced” with someone who will succeed in the role. It’s a “common trade-off and management dilemma,” adds Hill. “But you can’t hoard talent.”

Principles to Remember

Do:

  • Offer praise and reassurance, but also encourage your star to acknowledge the contributions of others.
  • Demonstrate trust by delegating responsibility over certain projects and letting your star decide how she does the work.
  • Make sure the team’s workload is reasonable. Superstars are pacesetters and not everyone can keep up.

Don’t:

  • Overload your star employee — otherwise you risk burning him out. Analyze what’s on his plate and identify which projects can be removed.
  • Neglect the rest of your team. Find ways to develop each of your direct reports.
  • Hoard talent. If your employee is ready to advance, you must advocate for her promotion.

Case Study #1: Encourage your star to seek out learning opportunities both inside and outside your organization
Jon Stein, the CEO and founder of Betterment, the online financial adviser, says that he’s been “lucky to have a number of stars” on his team over the years.

Laura*, in particular, stands out. She joined the New York City–based company as an executive assistant five years ago. She lacked experience but “she showed a lot of promise and drive,” Jon recalls.

During their weekly meetings, Jon gave Laura “positive feedback on the things she had done well” but also made sure to talk about areas where she could improve.

The two often discussed different ways for her to take on more. It wasn’t always easy to find “new challenges for her,” he says. “We would set the bar ever higher with stretch goals, and it would soon become clear she could deliver.”

So Jon encouraged Laura to think about her long-term prospects, “painting multiple potential career paths” for her: One day she might manage learning and development at the company, or maybe she could lead the facilities group. He then directed her to experiences that would prepare her for each of these possible roles. “I wanted to give Laura the opportunity to try new things,” he says.

At the same time, Jon coached Laura on networking. He encouraged her to “build a solid peer group of more experienced people outside of the company” to accelerate her learning. “Now, whenever she has a question, she can find an answer relatively quickly. People come to her with questions, too. She has done a lot to lead and expand her network.”

Giving Laura more responsibility for various corporate functions was “gradual,” Jon says.

Today Laura manages a team of 15 employees and has responsibility over facilities and human resources, among other areas. “She’s done a great job,” Jon says.

And yet he says he is always mindful about not giving Laura special treatment. Weekly one-on-one meetings between managers and direct reports are standard practice at the company. And regular employee feedback is part of the Betterment culture. “I don’t play favorites,” he says. “I don’t want to give her opportunities that others don’t get.”

Case Study # 2: Find out what motivates your star, and empower her to advance
Jay Schaufeld, senior vice president of human resources at ownerIQ, the Boston-based digital marketing company, says that managing star performers is a “great luxury” but comes with “some added challenges” too. “There is no playbook,” he says.

A few years ago Jay ran the HR department of an independent boutique consultancy. There, he supervised Rose*, “an absolute rock star” who excelled at her job. “She was a few years out of school; she had high aspirations and was high potential,” Jay recalls. “I saw a lot of her in me and me in her.”

When Rose first started working for him, Jay did everything he could to “publicly recognize” her accomplishments and include her in executive-level meetings. “I loosely assumed that Rose wanted a lot of fanfare and exposure to the leadership team,” he says.

It wasn’t until he finally asked her “What motivates you?” that he realized the error of his ways. “Rose told me that while she appreciated it, all the meetings were killing her,” he says. “What she wanted instead was air cover to be more involved in corporate initiatives that moved the organization forward.”

Together, they brainstormed possible projects for Rose. He then gave her the autonomy to implement those plans.

Jay also inquired about Rose’s professional goals for the future. “Internal advancement was very important to her, so we established career goals and milestones at the organization,” he says. “We also talked about other paths.”

One possible option for Rose was to become a certified HR professional. The certification would allow her to work as a billable consultant as opposed to working in corporate HR.

“Selfishly, I wanted Rose to stay in our organization,” says Jay. “But I also recognized that gaining the certification would open up new career opportunities for her. I wanted to demonstrate that we were investing in her and that I was committed to her advancement. That was important for her to see.”

After a Fortune 10 company acquired their organization, Jay moved on. Rose, who now has the certification, is still there, working on the integration. “I would absolutely love to work with her again in the future,” he says.

How to Manage Your Star Employee

Flat is the new up

Flat is the new up

The startup ecosystem has a painful year ahead. Nearly half of Series C fundraising rounds were down or flat in 2016. Series B startups are next in line to feel the pain. [A] flat [round] is the new up [round]. If you really need another venture acronym, call it FITNU.

The market correction will not stop at Series B. If you’ve raised a Series A and need more capital in 2017, what I’m going to share might save your company. If you’re at the seed stage, this article might save you a lot of trouble.

Wait, what happened?

According to some investors, 2017 was supposed to be the turnaround year. Didn’t U.S. venture capital funds raise a record $42 billion in 2016? Didn’t we get past the notorious bubble?

Not quite. The bubble broke in 2015 when the tourist VCs driving unicorns in so-called private IPOs got spooked. They pulled back. This ratcheted down the VC food chain. The system couldn’t support the wild number of seed deals and high valuations. To protect itself, the system concentrated more money into fewer deals.

PitchBook found that the number of U.S. seed rounds declined 43 percent, from 1,537 deals in Q2 2015 to 872 in Q4 2016 — a four-year low. Early-stage financing (Series A and B) followed along. Deal volume tanked from 830 in Q2 2014 to 524 in Q4 2016.

Meanwhile, deal sizes swelled. Indeed, 42 percent of seed rounds were between $1 and $5 million in 2016, the highest proportion PitchBook has recorded over the past 10 years. Almost 50 percent of the early-stage money went into rounds worth $25 million or more in 2016.

Corroborating PitchBook, Redpoint Venture’s Tomasz Tunguz points out that the median seed round tripled, from $272,000 to $750,000 between 2010 and 2016. His analysis of Crunchbase data also shows that the median A round climbed from $3 million to $6.6 million over the same span, and the median B leapt from $10 million to $15 million.

So why the flat rounds?

In the bubble, more startups received seed funding because so many new seed venture firms entered the business. But the number of Series A firms didn’t grow much at all — they just raised bigger funds. Thus, Series A firms started writing bigger checks to meet the needs of their business.

Unfortunately, few seed startups qualify for $10 million to $20 million “Super-Sized” A rounds. As a result, the seed-to-A graduation rate plummeted. Series A follow-on investments dropped from roughly 25 percent in 2012 to less than 10 percent as of midway through 2016, says PitchBook. Over time, a lot of the seed-funded companies get extensions, so the graduation rate is probably closer to 20 percent. This is well below what it used to be, at 45-50 percent.

Plenty of companies took premature, massive A rounds and guzzled capital all the way to Series B. They became the source for all those flat and down C rounds. As I said, nearly half of C rounds were down or flat in Q3 2016.

Let me illustrate why. At the Series A, let’s say an investor buys 25 to 30 percent of a company and puts in $10 million. That defines the value as $33 million to $40 million post-money. B-round investors want to see at least a twofold increase from the post-money A to pre-money B. If not, they calculate they’re better off waiting for the C round.

In bubbly conditions, getting the 2x increase in valuation was easy. Startups hit their B. Then the market correction began, so they went flat or down at C. The flat and down rounds will sweep down from Series C to B to A to seed. In other words, winter isn’t over, Mark Suster.

Reseeding

In 2017, Series A companies will struggle to get their pre-money valuation high enough for the B round. If you take a flat or down round, it’s time to “reseed.” Effectively, you need to cut costs until your company resembles a post-seed startup.

Many founders think it’s “death” to take a flat or down round. They believe that partly because of equity dilution and partly because of signaling.

No company ever went bankrupt because of dilution. The real signal is what a company looks like after a flat or down round. Did it restructure to match the new reality? If so, it’s a more attractive company. The down round isn’t the problem as long as the company adopted a leaner, more sustainable model.

The capital structure is the hardest issue to solve because there can end up being too much preference from the Series A. Imagine you do a $2 million seed, and the investor has $2 million of preferred stock. Then you raise a $10 million Series A, and the A-round firm has $10 million in preference. You have a total $12 million in preference with a debt component that has to be paid back.

Sane investors don’t want $12 million in preference ahead of them at post-seed values. Even worse is getting the B round and having to reseed. You now have to deal with $25 million or more in preference. Take care of it. Do whatever it takes to reduce preferred stock in the capital structure when you reseed. That’s a harder problem to solve than your burn rate.

Next to bat

“Flat is the new up” is one way to describe the post-bubble correction. Star companies of 2014 and 2015 took flat or down rounds for their Series C. Startups that raised, say, a $1 million seed and $10 million Series A are now going through it at the Series B. Many will reduce employees and restructure their cap tables until they resemble post-seed companies. Reseeding is better than going down in flames. And, paradoxically perhaps, you might find that you grow faster with fewer employees and less internal contention. Maybe the premature Big A wasn’t such a good idea after all.

Seed startups, beware: FITNU is coming to you next.

Flat is the new up

Buying Your Way into Entrepreneurship

Buying Your Way into Entrepreneurship

Many aspiring leaders take conventional routes to the top in business: They get on a C-suite track at a large company, climb the ladder to partnership at a consulting or investment firm, or launch their own start-up. But there is another career path that has become increasingly popular in recent years: buying and running an existing operation—or what we call acquisition entrepreneurship. A record number of such transactions occurred in the United States during the first three quarters of 2016, according to BizBuySell, an online small-business marketplace.

Every year, we teach a course at Harvard Business School on this kind of entrepreneurship, which dozens of students—and others—pursue. Among them are Tony Bautista, who did stints in investment management and business development before taking the helm of Fail Safe Testing, a company that tests equipment for local fire departments; Greg Ambrosia, who served as a U.S. Army officer before acquiring and leading City Wide Building Services, a commercial property window-cleaning specialist in the Dallas/Fort Worth area; and Jennifer Braus, an engineer-turned-MBA who now owns and runs Systems Design West, which manages billing for ambulances and other emergency service providers near Seattle. (Full disclosure: We are investors in and directors of all three companies.) Other students of ours have gone into home health care, exotic travel, musical instrument rental, specialized software, and manufacturing.

Whether acquisition entrepreneurship is right for you depends on your preferences and temperament. But most of the individuals we’ve taught, advised, and tracked have found it to be personally, professionally, and financially rewarding.

Perhaps the biggest benefit is instant impact. Instead of navigating a corporate bureaucracy or toiling away on business plans and prototypes, you’re immediately in charge of a living, breathing organization and making decisions that have consequence. That was appealing to Braus. “I’m someone who craves responsibility,” she says, “so I didn’t really like being a worker bee. I saw where I wanted to go in terms of leadership, and now I’m there.”

Another plus is having a more flexible lifestyle than might be possible at a fledgling start-up or a large firm. When you’re running a stable operation, you rarely need to work nights and weekends, and as the boss, you set the rules: If you want to leave early for a family or community commitment, you can.

But small-business acquisition and management is not without its challenges. That’s why you need to make sure you’re suited to it and then approach your search, deal negotiation, and transition to leadership in a systematic way. Through our research on multiple companies and their buyers, we’ve developed a road map for tackling all of these steps.

Reflection

To succeed at acquisition entrepreneurship, you of course need basic management skills: an understanding of finance, a knack for leading and managing others, and an aptitude for decision making. But you need other attributes, too.

Confidence and persuasive ability are key; the job requires you to reach out and project optimism to people you don’t know—business brokers, investors, sellers, and the employees and customers you inherit. City Wide’s Ambrosia says he felt instantly comfortable with that part of the role, thanks to his military experience, which involved leading different groups of soldiers (including many who were older than he was) on combat missions in Afghanistan.

Acquisition entrepreneurship means instant impact. You’re immediately in charge.

Persistence—what Bautista describes as “thick skin and grit”—is crucial, too. When seeking a business to buy, you might find a great prospect, reach agreement with the owner on price and terms, and work for months to close the deal—only to have it fall apart at the last minute. You need the fortitude to bounce back. And once you’re an owner, it will be up to you to drive the company forward and ensure that it recovers from setbacks.

Additionally, and perhaps most importantly, you should be an enthusiastic learner. Throughout your search, you’ll have to quickly get up to speed on unfamiliar industries, sectors, and companies. When you find an interesting target, you’ll need to become knowledgeable about the business. And as an owner and CEO, you must be able to develop expertise across functional areas, stay curious, and recognize that you can and should grow into the job. “Nothing can prepare you for owning a company other than owning a company,” Bautista comments. “No day is boring.”

It’s also important to reflect on the trade-offs that all entrepreneurs make in choosing to go out on their own: Do you value what you’ll gain more than what you’ll lose? For example, you’ll have professional independence and the ability to make unilateral decisions, but that comes with a great deal more pressure. You’ll be giving up the comfort of working in a larger, more structured organization where you have greater access to capital, a better-known brand in which to take pride, and the support of peers, bosses, and functional groups such as HR and R&D. Yes, your pay will be directly linked to your performance, with every positive move you and your employees make benefiting you and your investors. But there is a negative flip side: Inevitable mistakes and down cycles will hit you harder than they would if you were a cog in a corporate machine.

 

“You and the company become one, so you take both the good and the bad,” Bautista says. Ambrosia describes the job as “exhilarating” but also “stressful”—sometimes even more so than his time in the army. Leading troops, he alternated between periods of extreme challenge and rest, he explains. But in his role as CEO, that “feeling of responsibility to get it right”—for customers, employees, and investors—“doesn’t stop.”

So carefully consider what you’re in for. If, after all this thinking, you determine that you have the skills and the appetite to become a small-business owner, you’re ready to begin your search.

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The Search

Although would-be entrepreneurs often worry about making mistakes once they take over a business, it’s actually much earlier that many falter. According to research by a team at Stanford University, about a quarter of acquisition searches end without a successful purchase. In other cases, people let emotion or a desire for expediency lead them into buying bad businesses (or the wrong ones for them) or overpaying. We’ve focused on avoiding these outcomes in our work advising former students and in making investments ourselves. Here’s what we suggest.

Whether you’re working alone or with a partner, you need to commit to searching full-time for six months to two years. This may sound extreme, but an extended period is necessary to raise funds from investors, identify potential acquisition prospects, thoroughly vet the best of them, negotiate with sellers, and, eventually, find one that agrees to sell at a reasonable price. Then it will take at least three more months to perform due diligence and complete the transaction.

Establishing a search fund is the most popular way to raise enough capital for out-of-pocket expenses and your cost of living during this time. The process involves approaching potential backers (wealthy individuals in your network or those in the small-business-acquisition community) and offering them a first look at investing in an eventual acquisition at favorable terms. Bautista, Ambrosia, and Braus all went about their searches this way. Their aim was to acquire not just money but also advisers who could help them through the deal process, since none of them had M&A experience.

An alternative is to self-finance. To make this realistic, you should try to keep expenses down—one of our students spent only $25,000 over his 14-month search, in part because he was able to live with his in-laws—and limit the number of prospects you consider. The advantage of this route is that you can strike a better deal with investors when you raise money at the acquisition stage.

The search begins by sourcing and filtering prospects. We recommend focusing on companies with annual revenues of $5 million to $15 million and annual cash flows of $750,000 to $3 million. In this range, there are high-quality small businesses available for prices low enough that you and your investors can earn an excellent return even if the business grows only slowly. Forget rapidly evolving start-ups and risky turnaround opportunities; you should look for steady (often unglamorous) enterprises that are profitable year after year and likely to remain so—what we call enduringly profitable. While these are strong businesses, you can still add a lot of value by applying best management practices that the current owners might not know about or have the energy to pursue.

In a typical search you’ll encounter acquisition prospects every day—through referrals from your network or brokers or through your own direct outreach to business owners. These prospects might total in the thousands over a year or two, so you will need to dismiss most of them very quickly. We recommend that you evaluate each using five criteria:

  • Is it profitable?
  • Is it an established business?
  • Are its revenues and cash flows in the desired range?
  • Do you have the skills to manage it?
  • Does it suit your lifestyle (location, hours, need for travel, and so on)?

If you can answer yes to all of the above, ask two additional questions that take a bit more time to investigate:

  • How enduringly profitable is the business?
  • Is the owner serious about selling it?

Markers of enduring profitability include a steady, loyal customer base; a strong reputation; deep integration with customers’ systems; large switching costs; and few or no competitors. Examine the financials carefully and look for strong margins and low customer churn. (For more details, see our HBR Guide to Buying a Small Business.)

 

Over a 12-month period, Ambrosia considered approximately 7,500 businesses, from a slaughterhouse to a confectionary company. He indicated interest in 26 and received favorable responses from two before he entered into exclusive negotiations with the seller from whom he eventually purchased his company. Bautista looked at hundreds of prospects (often pestering brokers for details on promising ones), created a short list of 15, and visited five or six before settling on his target. As for Braus, she acknowledges that she “came across a lot of garbage” before finding one candidate that “stood out.”

If a business owner has engaged a broker, it’s a good sign that he or she is ready to sell. But it’s not uncommon for people to back out at the last minute. To counter this risk, spend time with potential sellers as early as possible to investigate their motives. Are they retiring? Have they had a life change that requires them to give up the business? Are they just testing the waters? Consider their expectations: What price do they want? Are they just looking to turn a big profit—or perhaps get rid of a bad apple? And be sure that you’ve talked to all the owners; someone else with a share may be less interested in selling than the person with whom you’ve been dealing. Even as you dig more deeply into businesses that make it past your initial filters, you should continue to review new prospects in case your desired deal falls through.

Negotiating a Deal

You may have spent only a day or so on the prospect thus far, but if it’s still of interest, you should now devote substantially more time to preliminary due diligence: a focused period of rapid learning in preparation for making an offer. This is when you’ll test the seller’s initial claims and verify the information that has made the business appealing to you. You believe the company has many devoted customers because it reported a low churn rate—but are those customer businesses themselves healthy? You think cash flows are steady—but what did the books look like during the last recession? And how sound are the company’s current business practices (regarding quality control, billing, refunds, pay, and benefits)? You’re looking for any reason that you might not want to acquire this business.

Use the company’s historical financial data to project future earnings and your return on investment. These calculations will allow you to value the firm as accurately as possible—and thus to arrive at an offer price, typically between three and five times the current EBITDA. Visit banks and approach your investor network to raise money for the acquisition. You should be prepared to provide information about the business and its industry, details on the due diligence that you’ve done, your financial projections, and the deal terms that you are proposing.

Especially if you’re competing against other interested parties, this is also the time to persuade the seller that you are the right buyer. Bautista was up against private equity funds willing to spend more money on Fail Safe than he and his investors were, but he won out by emphasizing that he really cared about the business and would continue the owner’s legacy.

If your offer is accepted—or accepted after negotiations—you’ll enter a period of confirmatory due diligence in which the company’s records will be fully open to you. You will typically have around 90 days to work with your accountant and attorney to check for any inconsistencies and red flags. (It’s a good idea to wait until this stage before bringing in these outside professionals so that you don’t have to pay them should the deal fail, as is more likely earlier in the process.) This can be an extremely nerve-racking time for both the buyer and the seller, so it’s important to be patient and calm.

“I was always trying to communicate that progress was being made,” Ambrosia recalls. Braus’s seller threatened to back out when the company signed a big new client 10 days before their deal was scheduled to close, but she and her investors pulled the seller back by renegotiating some of the terms. “Living with the uncertainty during that period was a difficult thing to do,” she says, “but we weren’t willing to lose the business over it.”

Transitioning into Leadership

After closing the sale, you should focus on four tasks: introducing yourself to all your managers and employees, meeting with external stakeholders, communicating the transition plan to everyone, and taking control of your cash flow.

The most common trouble for small firms under new owners is running out of cash.

As you meet your new colleagues, reassure them that they won’t see any immediate changes. Instead, share your overarching goals for the company—for example, excellent customer service, commitment to quality, a satisfying work environment—and encourage people to stay focused on their work. Also give them an opportunity to ask you questions, but don’t feel as if you should have definitive answers for everything: “I want to learn more about that issue before I make a decision” is a fine response.

On the day Ambrosia announced his purchase of City Wide, he stood up in front of his 50 or so employees and delivered a three-part message: He’d bought the business because it was already a great one, everyone’s job was secure, and he looked forward to learning from them. He then met with his managers, laying out his expectations for them (mainly codifying existing responsibilities) and telling them what to expect from him. He also made sure to “lead from the front” in his first few weeks—rolling up his sleeves to clean windows with both day and night crews.

You’ll need to take the same proactive approach with customers, suppliers, and your new community. All these stakeholders will want to meet the new boss, and many will offer useful ideas about how to improve your offerings. Two other acquisition entrepreneurs we know made a point of visiting every major customer as soon as they could; they told us that all their new product and service ideas in the subsequent months came out of those early meetings.

If you have a management transition arrangement with the former owner, be clear with both employees and customers about how it will work. Explain how decisions are now going to be made and whom to approach with certain types of questions or requests.

Along with relationships, cash flow should be a top priority. The most common trouble for small firms under new owners is running out of cash; after all, they are likely to have acquisition debt to service. So set up a process whereby you approve all payments before they go out, and review your accounts-receivable balances at least weekly. You should also implement a 90-day rolling cash-flow forecast.

The weeks after closing will be exciting, busy, and filled with learning. You’ll be pulled in more directions than even an extended business day can accommodate. “It’s a shock to everyone,” Bautista explains. “You’re afraid all your employees are going to quit, and they’re all worried you’re going to fire them. And you’re responsible for everything right away. I remember thinking ‘I’m a 28-year-old now running a 50-person company.’”

Ambrosia and Braus also admit to unexpected early challenges. In the first few months of their tenures, both senior and junior employees left, voluntarily and not, in part because the new owners were bringing more discipline and accountability to their companies. Bautista says he had to drop a few longtime customers that were not actually profitable, and the company experienced a payroll snafu that upset both him and his staff.

But these types of growing pains are inevitable. If you have approached the acquisition process thoughtfully and begun to apply good management, things will soon settle down. And then you’ll be able to focus on growing your small business into a successful medium-sized—or even large—one.

A version of this article appeared in the January–February 2017 issue (pp.149–153) of Harvard Business Review.

Richard S. Ruback is a professor at Harvard Business School and a coauthor with Royce Yudkoff of the HBR Guide to Buying a Small Business (Harvard Business Review Press, 2017).


Royce Yudkoff is a professor at Harvard Business School and a coauthor with Richard S. Ruback of the HBR Guide to Buying a Small Business (Harvard Business Review Press, 2017).


5 Things You Need To Know To Successfully Sell Your Business

5 Things You Need To Know To Successfully Sell Your Business

Someday, you might sell your business.

You may have planned for this all along, using a business sale as your exit strategy or wealth building plan. In other cases, the prospect of selling your business can be a surprising or even emotional issue.

If you’re in business, you’ve done plenty of selling. You’ve sold widgets. You’ve sold your services. You’ve sold potential employees on the idea of your company. You’ve sold investors on the potential of your business.

But are you prepared to successfully sell your business? Here are some things that you should be aware of as you prepare to sell your business.

1. Know your business value.

If you don’t know your business value, you’re going to go into the sales process blindsided.

The first logical step for selling a business is figuring out what buyers are looking at when they consider purchasing a business. There are three main approaches to determining a business’s valuation.

  • Asset Approach – Add up all your business assets and liabilities. What number are you left with? This is the asset valuation of your business.
  • Income Approach – The income approach to valuing a business is a simple assessment of the net present value of the business’s income stream. There are technical methods for determining this sum, but they are not necessary to calculate at early stage.
  • Market Approach – The market approach of a company involves analyzing similar companies to see how much they’re worth and/or their selling price.

Select whichever of the above methods gives you the best (highest) valuation. When you have a ballpark figure of your business’s value, you’re ready to go to market.

Even though you’ve got a rough idea of your business valuation, this is only a number to guide you in your consideration. You’ll still need to get an accurate valuation in order to  enter the market.

2.  Know the best brokers in the business.

Unless you’re an expert business broker or M&A advisor, I advise hiring a broker to help you sell the business. A broker is especially valuable in the later stages of a purchase process — negotiation, due diligence, and the final sale.

3.  Know your why.

Potential buyers are going to have a lot of questions when they entertain the idea of purchasing your business.

They’ll want to know the size of the business, the history of the business, the valuation of the business, and legion other details that you are prepared to answer.

But one question that always comes up is why. Why are you selling your business?

The way in which you answer this question can make or break the deal. The why question is an invitation for you to pitch the value and appeal of your business.

You’ve got to know exactly why you’re selling your business, and be able to articulate this reason. If the reasons are “personal” (e.g. a divorce) or obvious (retirement), then you can simply say so. Even so, you should provide a motivating angle that will sustain the buyer’s interest.

4. Know the perfect time.

Selling a business is all about timing.

The difference between selling your business at the right time and selling it at the perfect time is the difference between a major loss a life changing windfall.

What’s the “perfect time?” As unsatisfying as this answer is, it all just depends on the ebb and flow of your particular industry and the economy as a whole. Just as real estate and commerce has its seasonal trends, so the business acquisition industry has its highs and lows.

Here are some times you shouldn’t sell your business:

  • When you’re burned out. Burnout is part of the entrepreneurial game. Don’t sell your business during a personal low. You’ll lack the energy and determination to fight for a fair price, and will end up regretting the sale later.
  • When the company faces a catastrophe or disaster. Some buyers are eager to scoop up distressed companies, but generally speaking, this isn’t the best for sale strategy.
  • When you just want a huge lump of cash. Lump sum buyouts are an appealing part of any purchase, but this shouldn’t be the driving motivation for selling your business.

Here are some times you should consider selling your business.

  • When you are ready for a lifestyle change — retiring, spending more time with your family, enjoying independence, etc.
  • You’re enjoying expert management. Business buyers aren’t just buying a soulless entity. They are buying people. The more capable your management team, the more appealing the purchase.
  • During an upswing. If you’re on an upward trajectory, your business will be far more compelling to purchasers. Three years of profit is a great rule of thumb.
  • When the economy is good. A great performing stock market and low interest rates are the easiest way to tell if the “economy is good.”
  • When the company is performing well within an underperforming industry.

Conclusion

Selling a business is a big deal. It involves major life changes, huge sums of money, and a whole lot of time.

The final feature to keep in mind is that a business sale will radically change your life. Whether or not you remain as an active participant in the business, there will still be significant shifts in the way that you view the business and function in it.

In some cases, you may receive a huge sum of money from the sale of the business. Large sums of money force you to decide what you’re going to do with your life (not to mention what to do with the money). Before you sell — before you even think about selling — consider your goals and visions for your future.

5 Things You Need To Know To Successfully Sell Your Business

Leading Clever People

Leading Clever People

Franz Humer, the CEO and chairman of the Swiss pharmaceutical giant Roche, knows how difficult it is to find good ideas. “In my business of research, economies of scale don’t exist,” he says. “Globally today we spend $4 billion on R&D every year. In research there aren’t economies of scale, there are economies of ideas.”

For a growing number of companies, according to Humer, competitive advantage lies in the ability to create an economy driven not by cost efficiencies but by ideas and intellectual know-how. In practice this means that leaders have to create an environment in which what we call “clever people” can thrive. These people are the handful of employees whose ideas, knowledge, and skills give them the potential to produce disproportionate value from the resources their organizations make available to them. Think, for example, of the software programmer who creates a new piece of code or the pharmaceutical researcher who formulates a new drug. Their single innovations may bankroll an entire company for a decade.

Top executives today nearly all recognize the importance of having extremely smart and highly creative people on staff. But attracting them is only half the battle. As Martin Sorrell, the chief executive of WPP, one of the world’s largest communications services companies, told us recently, “One of the biggest challenges is that there are diseconomies of scale in creative industries. If you double the number of creative people, it doesn’t mean you will be twice as creative.” You must not only attract talent but also foster an environment in which your clever people are inspired to achieve their fullest potential in a way that produces wealth and value for all your stakeholders.

That’s tough. If clever people have one defining characteristic, it is that they do not want to be led. This clearly creates a problem for you as a leader. The challenge has only become greater with globalization. Clever people are more mobile than ever before; they are as likely to be based in Bangalore or Beijing as in Boston. That means they have more opportunities: They’re not waiting around for their pensions; they know their value, and they expect you to know it too.

If clever people have one defining characteristic, it is that they do not want to be led. This clearly creates a problem for you as a leader.

We have spent the past 20 years studying the issue of leadership—in particular, what followers want from their leaders. Our methods are sociological, and our data come from case studies rather than anonymous random surveys. Our predominant method consists of loosely structured interviews, and our work draws primarily from five contexts: science-based businesses, marketing services, professional services, the media, and financial services. For this article, we spoke with more than 100 leaders and their clever people at leading organizations such as PricewaterhouseCoopers, Electronic Arts, Cisco Systems, Credit Suisse, Novartis, KPMG, the British Broadcasting Corporation (BBC), WPP, and Roche.

The more we talked to these people, the clearer it became that the psychological relationship leaders have with their clever people is very different from the one they have with traditional followers. Clever people want a high degree of organizational protection and recognition that their ideas are important. They also demand the freedom to explore and fail. They expect their leaders to be intellectually on their plane—but they do not want a leader’s talent and skills to outshine their own. That’s not to say that all clever people are alike, or that they follow a single path. They do, however, share a number of defining characteristics. Let’s take a look at some of those now.

Understanding Clever People

Contrary to what we have been led to believe in recent years, CEOs are not utterly at the mercy of their highly creative and extremely smart people. Of course, some very talented individuals—artists, musicians, and other free agents—can produce remarkable results on their own. In most cases, however, clever people need the organization as much as it needs them. They cannot function effectively without the resources it provides. The classical musician needs an orchestra; the research scientist needs funding and the facilities of a first-class laboratory. They need more than just resources, however; as the head of development for a global accounting firm put it, your clever people “can be sources of great ideas, but unless they have systems and discipline they may deliver very little.”

That’s the good news. The bad news is that all the resources and systems in the world are useless unless you have clever people to make the most of them. Worse, they know very well that you must employ them to get their knowledge and skills. If an organization could capture the knowledge embedded in clever people’s minds and networks, all it would need is a better knowledge-management system. The failure of such systems to capture tacit knowledge is one of the great disappointments of knowledge-management initiatives to date.

The attitudes that clever people display toward their organizations reflect their sense of self-worth. We’ve found most of them to be scornful of the language of hierarchy. Although they are acutely aware of the salaries and bonuses attached to their work, they often treat promotions with indifference or even contempt. So don’t expect to lure or retain them with fancy job titles and new responsibilities. They will want to stay close to the “real work,” often to the detriment of relationships with the people they are supposed to be managing. This doesn’t mean they don’t care about status—they do, often passionately. The same researcher who affects not to know his job title may insist on being called “doctor” or “professor.” The point is that clever people feel they are part of an external professional community that renders the organizational chart meaningless. Not only do they gain career benefits from networking, but they construct their sense of self from the feedback generated by these extra-organizational connections.

This indifference to hierarchy and bureaucracy does not make clever people politically naive or disconnected. The chairman of a major news organization told us about a globally famous journalist—an exemplar of the very clever and skeptical people driving the news business—who in the newsroom appears deeply suspicious of everything the “suits” are doing. But in reality he is astute about how the company is being led and what strategic direction it is taking. While publicly expressing disdain for the business side, he privately asks penetrating questions about the organization’s growth prospects and relationships with important customers. He is also an outspoken champion of the organization in its dealings with politicians, media colleagues, and customers. You wouldn’t invite him to a strategy meeting with a 60-slide PowerPoint presentation, but you would be wise to keep him informed of key developments in the business.

Like the famous journalist, most clever people are quick to recognize insincerity and respond badly to it. David Gardner, the COO of worldwide studios for Electronic Arts (EA), knows this because he oversees a lot of clever people. EA has 7,200 employees worldwide developing interactive entertainment software derived from FIFA Soccer, The Sims, The Lord of the Rings, and Harry Potter, among others. “If I look back at our failures,” Gardner told us, “they have been when there were too many rah-rahs and not enough content in our dealings with our people. People are not fooled. So when there are issues or things that need to be worked out, straightforward dialogue is important, out of respect for their intellectual capabilities.”

Managing Organizational “Rain”

Given their mind-set, clever people see an organization’s administrative machinery as a distraction from their key value-adding activities. So they need to be protected from what we call organizational “rain”—the rules and politics associated with any big-budget activity. When leaders get this right, they can establish exactly the productive relationship with clever people that they want. In an academic environment, this is the dean freeing her star professor from the burden of departmental administration; at a newspaper, it is the editor allowing the investigative reporter to skip editorial meetings; in a fast-moving multinational consumer goods company, it is the leader filtering requests for information from the head office so the consumer profiler is free to experiment with a new marketing plan.

Organizational rain is a big issue in the pharmaceutical business. Drug development is hugely expensive—industry-wide, the average cost of bringing a drug to market is about $800 million—and not every drug can go the distance. As a result, the politics surrounding a decision can be ferocious. Unless the CEO provides cover, promising projects may be permanently derailed, and the people involved may lose confidence in the organization’s ability to support them.

The protective role is one that Arthur D. Levinson, Genentech’s CEO and a talented scientist in his own right, knows how to play. When the drug Avastin failed in Phase III clinical trials in 2002, Genentech’s share price dropped by 10% overnight. Faced with that kind of pressure, some leaders would have pulled the plug on Avastin. Not Levinson: He believes in letting his clever people decide. Once or twice a year, research scientists have to defend their work to Genentech’s Research Review Committee, a group of 13 PhDs who decide how to allocate the research budget and whether to terminate projects. This gives rise to a rigorous debate among the clever people over the science and the direction of research. It also insulates Levinson from accusations of favoritism or short-termism. And if the RRC should kill a project, the researchers are not only not fired, they are asked what they want to work on next.

Roche owns 56% of Genentech, and Franz Humer stands foursquare behind Levinson. Leading clever people, Humer told us, is especially difficult in hard times. “You can look at Genentech now and say what a great company,” he said, “but for ten years Genentech had no new products and spent between $500 million and $800 million on research every year. The pressure on me to close it down or change the culture was enormous.” Avastin was eventually approved in February 2004; in 2005 it had sales of $1.13 billion.

Having a leader who’s prepared to protect his clever people from organizational rain is necessary but not sufficient. It’s also important to minimize the rain by creating an atmosphere in which rules and norms are simple and universally accepted. These are often called “representative rules,” from the classic Patterns of Industrial Bureaucracy, by the sociologist Alvin Gouldner, who distinguished among environments where rules are ignored by all (mock bureaucracy), environments where rules are imposed by one group on another (punishment-centered bureaucracy), and environments where rules are accepted by all (representative bureaucracy). Representative rules, including risk rules in banks, sabbatical rules in academic institutions, and integrity rules in professional services firms, are precisely the ones that clever people respond to best.

Savvy leaders take steps to streamline rules and to promote a culture that values simplicity. A well-known example is Herb Kelleher, the CEO of Southwest Airlines, who threw the company’s rule book out the window. Another is Greg Dyke, who when he was the director general of the BBC discovered a mass of bureaucratic rules, often contradictory, which produced an infuriating organizational immobilisme. Nothing could be better calculated to discourage the clever people on whom the reputation and future success of the BBC depended. Dyke launched an irreverent “cut the crap” program, liberating creative energy while exposing those who had been blaming the rules for their own inadequacies. He creatively engaged employees in the campaign—for example, suggesting that they pull out a yellow card (used to caution players in soccer games) whenever they encountered a dysfunctional rule.

Letting a Million Flowers Bloom

Companies whose success depends on clever people don’t place all their bets on a single horse. For a large company like Roche, that simple notion drives big decisions about corporate control and M&A. That’s why Humer decided to sell off a large stake in Genentech. “I insisted on selling 40% on the stock market,” he told us. “Why? Because I wanted to preserve the company’s different culture. I believe in diversity: diversity of culture, diversity of origin, diversity of behavior, and diversity of view.”

For similar reasons, Roche limits its ownership of the Japanese pharmaceutical company Chugai to 51%. By keeping the clever people in all three companies at arm’s length, Humer can be confident that they will advance different goals: “My people in the Roche research organization decide on what they think is right and wrong. I hear debates where the Genentech researchers say, ‘This program you’re running will never lead to a product. You are on the wrong target. This is the wrong chemical structure—it will prove to be toxic.’ And my guys say, ‘No, we don’t think so.’ And the two views never meet. So I say to Genentech, ‘You do what you want, and we will do what we want at Roche, and in five years’ time we will know. Sometimes you will be right and sometimes we will be right.’” Maintaining that diversity is Humer’s most challenging task; there is always pressure within a large organization to unify and to direct from above.

Companies that value diversity are not afraid of failure. Like venture capitalists, they know that for every successful new pharmaceutical product, dozens have failed; for every hit record, hundreds are duds. The assumption, obviously, is that the successes will more than recover the costs of the failures. Take the case of the drinks giant Diageo. Detailed analysis of customer data indicated an opening in the market for an alcoholic beverage with particular appeal to younger consumers. Diageo experimented with many potential products—beginning with predictable combinations like rum and coke, rum and blackcurrant juice, gin and tonic, vodka and fruit juice. None of them seemed to work. After almost a dozen tries, Diageo’s clever people tried something riskier: citrus-flavored vodka. Smirnoff Ice was born—a product that has contributed to a fundamental change in its market sector.

It’s easy to accept the necessity of failure in theory, but each failure represents a setback for the clever people who gambled on it. Smart leaders will help their clever people to live with their failures. Some years ago, when three of Glaxo’s high-tech antibiotics all failed in the final stages of clinical trial, Richard Sykes—who went on to become chairman of Glaxo Wellcome and later of GlaxoSmithKline—sent letters of congratulation to the team leaders, thanking them for their hard work but also for killing the drugs, and encouraging them to move on to the next challenge. EA’s David Gardner, too, recognizes that his business is “hit driven,” but he realizes that not even his most gifted game developers will always produce winners. He sees his job as supporting his successful people—providing them with space and helping them move on from failed projects to new and better work.

Smart leaders also recognize that the best ideas don’t always come from company projects. They enable their clever people to pursue private efforts because they know there will be payoffs for the company, some direct (new business opportunities) and some indirect (ideas that can be applied in the workplace).This tradition originated in organizations like 3M and Lockheed, which allowed employees to pursue pet projects on company time. Google is the most recent example: Reflecting the entrepreneurial spirit of its founders, Sergey Brin and Larry Page, employees may spend one day a week on their own start-up ideas, called Googlettes. This is known as the “20% time.” (Genentech has a similar policy.) The result is innovation at a speed that puts large bureaucratic organizations to shame. The Google-affiliated social-networking Web site Orkut is just one project that began as a Googlette.

Establishing Credibility

Although it’s important to make your clever people feel independent and special, it’s equally important to make sure they recognize their interdependence: You and other people in the organization can do things that they can’t. Laura Tyson, who served in the Clinton administration and has been the dean of London Business School since 2002, says, “You must help clever people realize that their cleverness doesn’t mean they can do other things. They may overestimate their cleverness in other areas, so you must show that you are competent to help them.” To do this you must clearly demonstrate that you are an expert in your own right.

Depending on what industry you are in, your expertise will be either supplementary (in the same field) or complementary (in a different field) to your clever people’s expertise. At a law firm, the emphasis is on certification as a prerequisite for practice; at an advertising agency, it’s originality of ideas. It would be hard to lead a law firm without credentials. You can lead an advertising agency with complementary skills—handling commercial relationships with clients, for instance, while your clever people write great copy.

A man we’ll call Tom Nelson, who was the marketing director of a major British brewer, is a good example of a leader with complementary skills. Nelson was no expert on traditional brewing techniques or real ales. But he was known throughout the organization as “Numbers Nelson” for his grasp of the firm’s sales and marketing performance, and was widely respected. Nelson had an almost uncanny ability to quote, say, how many barrels of the company’s beer had been sold the previous day in a given part of the country. His clear mastery of the business side gave him both authority and credibility, so the brewers took his opinions about product development seriously. For example, Nelson’s reading of market tastes led to the company’s development of low-alcohol beers.

If you try to push your clever people, you will end up driving them away. As many leaders of highly creative people have learned, you need to be a benevolent guardian rather than a traditional boss.

Leaders with supplementary expertise are perhaps more commonplace: Microsoft’s Bill Gates emphasizes his abilities as a programmer. Michael Critelli, the CEO of Pitney Bowes, holds a number of patents in his own name. Richard Sykes insisted on being called Dr. Sykes. The title gave him respect within the professional community to which his clever people belonged—in a way that being the chairman of a multinational pharmaceutical company did not.

But credentials—especially if they are supplementary—are not enough to win acceptance from clever people. Leaders must exercise great care in displaying them so as not to demotivate their clever employees. A former national soccer coach for England, Glenn Hoddle, asked his star player, David Beckham, to practice a particular maneuver. When Beckham couldn’t do it, Hoddle—once a brilliant international player himself—said, “Here, I’ll show you how.” He performed the maneuver flawlessly, but in the process he lost the support of his team: The other players saw his move as a public humiliation of Beckham, and they wanted no part of that. The same dynamic has played out many times in business; the experience of William Shockley is perhaps the most dramatic, and tragic, example (see the sidebar “The Traitorous Eight”). How do you avoid this kind of situation? One highly effective way is to identify and relate to an informed insider among your clever people—someone willing to serve as a sort of anthropologist, interpreting the culture and sympathizing with those who seek to understand it. This is especially important for newly recruited leaders. Parachuting in at the top and accurately reading an organization is hard work. One leader we spoke to admitted that he initially found the winks, nudges, and silences of his new employees completely baffling. It took an interpreter—someone who had worked among the clever people for years—to explain the subtle nuances.• • •

Martin Sorrell likes to claim that he uses reverse psychology to lead his “creatives” at WPP: “If you want them to turn right, tell them to turn left.” His comment reveals an important truth about managing clever people. If you try to push them, you will end up driving them away. As many leaders of extremely smart and highly creative people have learned, you need to be a benevolent guardian rather than a traditional boss. You need to create a safe environment for your clever employees; encourage them to experiment and play and even fail; and quietly demonstrate your expertise and authority all the while. You may sometimes begrudge the time you have to devote to managing them, but if you learn how to protect them while giving them the space they need to be productive, the reward of watching your clever people flourish and your organization accomplish its mission will make the effort worthwhile.

Leading Clever People

18 Habits That Will Make You Smarter

18 Habits That Will Make You Smarter

Cultivating smart habits is the key to unlocking your potential.

To be smart is great, but it doesn’t happen overnight. If you want to become smarter, you have to create habits that will groom your intelligence and nourish your mind.

Some people are born smart, but most smart people do daily rituals to maintain their smartness. Whether they do it in leadership, business, the arts, or a different field, they push and challenge themselves daily.

Here are 18 habits that can help you become your smartest self:

1. Question everything. Don’t assume anything or subscribe unthinkingly to the conventional wisdom. Keep your eyes and mind wide open. The greatest enemy of knowledge is not ignorance but the illusion of knowledge–and questioning and curiosity are the key to overcoming it.

2. Read as much as you can. Many years ago, I started the habit of reading a book a day, and the wealth of knowledge I accumulate every week is priceless. Make reading a habit–serious reading, not celebrity gossip and lists on the web. Even if it’s just part of a chapter each day, stick to your reading schedule and your intellect will be enriched.

3. Discover what motivates you. Find a topic that keeps you interested and dive in. It’s easier to stay engaged with a topic you find stimulating. Find a format that stimulates your mind, too, whether it’s a podcast or a newspaper. Feed your mind well with things it will enjoy.

4. Think of new ways to do old things. To be innovative means making creativity more important than the fear of being wrong. Even in the things you do every day, you can be inventive and experimental. When you take risks, make mistakes, and have fun instead of slogging through the same routine. You’ll have a daily reminder that imagination and creativity can change the world.

5. Hang out with people who are smarter than you. Smart people have interesting things to talk about. They know how to expand their mind and feed their brain, so spending time with them is good for you on multiple levels. Seek them out at work, in service organizations, and socially.

6. Remember that every expert was once a beginner. When you have an opportunity to learn something new, you become smarter. Make a point of continuously and consistently acquiring new skills, because life will never stop teaching if you’re willing to learn.

7. Make time to reflect. We’re all so distracted, it’s easy to dash from one thing to another without pausing to consider what it means. Make time to pause and reflect–reflection is an important part of the learning process.

8. Exercise your body. As you’re caring for your mind don’t neglect your body. Build discipline in doing what you need to do in terms of diet, exercise, and sleep.

9. Push yourself to become more productive. Being busy and being productive are two different things. The future you want is created by what you do. Smart people make the most of today.

10. Come up with new ideas daily. Carry a journal to jot down ideas when they come to you. Push yourself to be creative and to think in new ways. Review your ideas weekly and edit them as you go.

11. Do something that scares you. Facing your fears makes you braver, smarter, and better able to withstand what life throws at you. Sometimes the greatest rewards in life come from doing the things that scare you the most.

12. Replace TV with online learning. Devote your break time to something more productive than social media or binge watching TV. The internet is filled with awesome learning tools. It’s a small habit but a big win if you can nourish your brain and advance your career and life at the same time.

13. Be mindful of what you are absorbing. Everything you take part in is either uplifting or detrimental to your mind. It’s important to silence inner and outer negativity–once you do, you begin to play a role in shaping your mindsets and beliefs, which in turn guide your actions.

14. Read something you normally wouldn’t. Every day, look online and in other media for topics, interests, or other sources that fall off your usual path. When you do, you absorb wisdom you would never have been able to access otherwise.

15. Share what you know. Learning something new is important, but sharing that knowledge makes what you’ve learned actionable and meaningful.

16. Apply your new knowledge. There really is no point in learning something if it doesn’t make you smarter or inspire you to improve. The smartest people apply what they know not to become a person of success but rather to become a person of value.

17. Keep a journal. It turns out that journaling is an important way to become smarter. Taking a few minutes each day to reflect in writing has been shown to boost your brain power. Smart happens when you learn from your experiences.

18. Be selective. Intelligent people tend to have fewer friends than the average person–at least in part because the smarter you are, the more selective you become. Who you spend time with reflects who you are.

Start building smart habits today and see what happens to your thinking tomorrow.

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18 Habits That Will Make You Smarter

This Type of Exercise Can Make Your Brain Healthier

This Type of Exercise Can Make Your Brain Healthier

Even more proof that exercise is beneficial

Researchers from the Wake Forest School of Medicine found that aerobic exercise appears to boost thinking skills and brain volume in adults diagnosed with mild cognitive impairment, a condition that sits in between normal age-related memory decline and more serious dementia. Stretching routines also increased brain volume over a six-month period, but had no noticeable impact on brain function.

The study was presented today at an annual meeting of radiologists in Chicago, and hasn’t yet been peer-reviewed or published.

Researchers used a new MRI technique to measure both volume and shape changes in specific areas of the brain, which are both important indicators for tracking the development of dementia.

At the start of the study, the researchers performed MRI scans on 35 people with mild cognitive impairment, which is a risk factor for Alzheimer’s disease. The participants were then divided into two groups and assigned to four weekly sessions of either stretching exercises or aerobic activity—walking on a treadmill, cycling on a stationary bike, or training on an elliptical machine. After six months, the researchers did a second MRI scan and compared the two sets of scans.

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Both groups showed increases in most gray matter regions of the brain, including the temporal lobe, which supports short-term memory. But those increases were greater in the group that walked, pedaled, or spent time on the elliptical.

“Even over a short period of time, we saw aerobic exercise lead to a remarkable change in the brain,” said lead investigator Laura D. Baker, PhD, associate professor of gerontology and geriatric medicine at Wake Forest, in a press release.

People in the stretching group had less total brain volume increase, and their brain scans also showed signs of “directional deformation”—shape changes possibly related to volume loss—within the brain’s white matter. The researchers believe these hard-to-detect signs could be early indicators of dementia. “Directional changes in the brain without local volume changes could be a novel biomarker for neurological disease,” co-author Jeongchul Kim, PhD, said in a press release.

In an abstract presented at the conference, the researchers concluded that aerobic exercise “could preserve or possibly even improve brain volumes” in people with early cognitive problems.

What’s more, the researchers also reported that over a six-month period, participants in the aerobic exercise group improved in tests that measure executive function—a set of thinking processes that include working memory, reasoning, and problem solving—while the stretching group showed no change.

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That doesn’t mean stretching didn’t help in some way, the authors say, especially when compared to completely sedentary behavior. It does suggest, however, that aerobic activity may be a better bet for overall brain functioning.

Plenty of previous research has tied exercise to better brain outcomes in older adults; a 2014 Canadian study, for example, found that brisk walking (but not resistance training, balance exercises, or muscle toning) was associated with enlargement of the hippocampus. Aerobic exercise may have some competition when it comes to brain health, however. Last month, an Australian study found that women who lifted weights regularly had better cognitive function than those who did regular stretching and calisthenics.

This newest study, although small and preliminary, is in line with previous research suggesting that “any type of exercise can be beneficial,” said Kim—good news for older adults who perhaps can’t get out and walk, ride, or otherwise break a sweat. However, he added, “If possible, aerobic activity may create potential benefits for higher cognitive functioning.”

This Type of Exercise Can Make Your Brain Healthier