Welcome to American colleges and universities, which are both the envy of the world and ripe for disruption. It’s a big business (about $350 billion in the US alone) and a really soft target. It is, after all, run by tenured scholars whose idea of competition is a snarky jibe in the faculty lounge. The dons have allowed their costs to not only rise faster than family incomes, but faster than health care costs, which ain’t easy. That they have lasted this long is due to the monopoly they enjoy on certifying talent. As Kevin Carey noted in a recent New Republic article,

The historic stability of higher education is remarkable. As former University of California President Clark Kerr once observed, the 85 human institutions that have survived in recognizable form for the last 500 years include the Catholic Church, a few Swiss cantons, the Parliaments of Iceland and the Isle of Man, and about 70 universities. The occasional small liberal arts school goes under, and many public universities are suffering budget cuts, but as a rule, colleges are forever.

Small wonder that thousands of startups are now focusing on the market for higher education. Even the guy who discovered disruption, Clayton Christensen, has declared that online technologies will thoroughly disrupt education at all levels, predicting that half of all K-12 classes will be taught online by 2019.

During the past five years, online higher education has gone mainstream. The Sloan Foundation estimates that more 30% of all enrolled college students, some six million people, participated in on-line learning at accredited U.S. colleges and universities in 2011 and that the U.S. market for online higher education grew 12-14 percent annually between 2004-2009.

Many educators are realizing that the explosion of online education not simply due to its lower cost; it is often higher quality as well. Sometimes this is because of dramatically higher investment in course and instructor development. Christensen notes that the largely online University of Phoenix spends about $200 million each year developing online teachers and highlights a key difference with traditional universities: “..Harvard defines research as creating new knowledge, while The University of Phoenix defines it as finding new ways to provide knowledge. It blows the socks off of us in their ability to teach so well.”

Online education is quickly killing the in-class lecture, since recorded lectures have obvious advantages. Students can watch them when they are ready — after they are off work or when the kids are asleep. They can replay the confusing bits or skip the obvious parts. Most important however, is that the lectures themselves are more likely to delivered by world class teachers like Norman Nemrow, whose online accounting course has been taken by several hundred thousand students or by Walter Lewin, the MIT physicist whose lectures are shown on television. Supposedly over five million people have taken his intro to physics course (watch his promo reel below to see why. What? Your professor did not have a promo reel?)

It is not only lectures that fare better online. Instructors in online classes can measure outcomes and tailor the course to the needs of each student. Modern learning management systems provide live seminars with multi-location live video, backchat, social media, and many other capabilities not available in a classroom. Quizzes can be graded instantly so that both faculty and students get feedback fast enough to change course. Algorithms distill questions from thousands of students so that they can be answered either live or off-line. Students can undertake projects online with “classmates” who have never been on the same campus — or even the same country.

This is a time of vast experimentation with online education technologies. Two years ago, the Kahn Academy began to attract huge notice as a self-tutoring tool based on the brief lectures of one talented teacher. A year ago, 2Tor closed a large Series C and got very serious about providing major universities with technology, marketing, and course development assistance. A month ago, Google’s self-driving car maven Sebastian Thrun gave the talk at BLD in Munich that launched Udacity after 160,000 students from around the world completed his Stanford-based online computer science course (268 students achieved perfect scores on all the quizzes). In October, Knewton, an education technology startup, raised $33 million in its 4th round of funding to roll out its adaptive online learning platform. Earlier this year, Apple launched a suite of authoring and course scheduling tools to allow universities to move content to iTunes University. Only yesterday ShowMe launched its 2.0 platform that takes the Kahn Academy model and makes it social — anyone can use the platform to teach anything.

Universities are developing their own online education initiatives, often plagued by a terrifying thought: what if online education is just another form of digital media? They know full well that that as books, movies, and music, moved online, few incumbents survived. In each case:

• Content was disaggregated and mashed. Just as record albums were broken into songs, ringtones, and clips, educational content is unlikely to remain entirely within current disciplines or courses. Literature will not remain separated from history, nor calculus from chemistry. As technology makes it easier to recombine and repurpose courseware, it may become possible for two students to complete the same course without confronting the same content in the same sequence or manner. New forms of learning will produce certifications not limited to degrees, concentrations, or even courses.

• Engagement became social.  Digital movies benefitted Hollywood much less than YouTube and Netflix. It should not surprise us to see more learning become self-paced, socially certified, and delivered outside of colleges and universities. Startups may increase the demand for formal education, but they could also substitute for it just as many of the needs once filled by campus fraternities or alumni associations are now met by online social networks.

• Value shifted from content creators to aggregators. Book publishers and music labels learned that aggregators of content (Amazon and iTunes) hold a lot of cards. Will universities aggregate and distribute high quality educational content regardless of its origin? Or will universities, like film studios, attempt to remain relevant by offering exclusive, premium-priced, high-quality, proprietary content protected through careful online distribution and syndication? Top universities are betting on the Hollywood model, which is not only under sustained attack, but presumes producers who control their IP. Universities, in contrast, rarely limit the ability of their faculty to sell lectures and other courseware to the highest bidder, even though the university paid the professor to produce the content. In no other industry is such theft conceivable — a fact that Udacity will not be the last to exploit.

• The product went global. Books, movies, and music are licensed or sold in tightly controlled, nationally bounded markets, but digital media is naturally global because there are far fewer natural distribution barriers. This means more customers, which is why universities are now lusting after talented and wealthy Indian and Chinese students who are (at the moment anyway) willing to pay US-type tuition for a degree from a globally prestigious institution.

• Prices fell as comparison shopping became easier. It appears that the revenue optimal price for eBooks is between $2 and $5, depending on the author and in some cases the publisher. For songs it is between $1-$2, forcing record labels and publishers to seek entirely different business models to monetize their content. As a result, many of media markets actually shrank as they went online (if you only measure product sales. In music, for example, the market is about the same size, because concerts and merchandise make up for losses in record sales). Once

The response of universities to the rise of online education is like the response of Barnes and Noble to online bookselling. Faced with the rise of Amazon.com in the 1990s, the chain store simply created barnesandnoble.com. When Amazon launched the Kindle, they launched the Nook and merchandised it in their increasingly irrelevant bookstores. But the winner of this contest will of course be the company that is not forced to carry the cost of several hundred bookstores. Open Yale, MIT’s Open Courseware and MITx courses, Stanford’s Massively Open Online Courses including Corsera, and many others like it all share the Barnes and Noble problem: they need to price their offering to pay for extraordinarily high fixed cost institutions. Their disruptors do not.

Barnes and Noble charges customers for a wide range of activities unrelated to book purchases. It designed many of its stores as community centers where authors and  could meet readers. It built fun sections for kids to discover books. It integrated Starbucks in many locations. But books are simply not going to be sold in stores much longer, so these activities added more cost than value and ended up making the problem worse. Likewise, many institutions of higher education support multiple activities with tuition: research, sport, socialization, teaching, and credentialing. Online education exposes the fault lines between these different businesses, just as Amazon did with Barnes and Noble.

• Research. Top schools recruit faculty based on their ability to contribute new knowledge to their field not on their ability to teach. This is terrific for graduate students, who apprentice and occasionally indenture themselves to senior faculty, but suboptimal for undergraduates because the correlation between insightful research and capable undergraduate teaching is somewhere between weak and negative. Once undergraduates can receive a higher quality education at a lower cost by studying online, many will do so. Once Amazon made books cheaper, nobody wanted to pay for those kids play areas — not even people who liked them.

• Sports. That giant sucking sound is money draining from university budgets to support massively wasteful professional sports programs — while managing to abuse college athletes in the process. Intercollegiate sports are fine. Division 1 football and basketball is a scandal — and both universities and the NCAA know it.

• Teaching. Teaching and learning are rapidly becoming another online interactive social media. Some online learning will doubtless be indistinguishable from games. This part of what a university does will be rapidly mashed, commodified, and redistributed, just as books and movies have been. Universities often claim that they make use of these online technologies in “hybrid” classrooms. This is like selling Nooks in bookstores: the customers who buy will never come back.

• Socialization. Residential undergraduate programs deliver to young people a group of peers and the experience of learning independently with them. Some of what the university provides is in loco parentis — a structured environment for 18-22 year olds to transition to self-sufficiency as they learn. The question is how much families will pay for this service. As high quality online education becomes universally available, middle class families will be very tempted to forgo residential colleges for their kids. Now that families cannot enhance their incomes by working longer hours, sending a second adult to work, or borrowing easy money against overvalued homes, families will be willing to cut back on college expenses if it does not compromise the quality of their children’s education.

• Credentialing. Credentials are necessary for employers and future education institutions to distinguish between similar candidates. Many markets with this problem rely on brands or other signaling effects (watch how you select wine next time you are confronted with dozens of plausible choices). University degrees emerged long ago as a critical signal of professional capability independent of what the degree holder knows. Part of this is because of selection effects, as Malcom Gladwell explained some years ago:

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Any group wishing to challenge cuts in public spending that benefit them directly has a political problem if taxpayers see costs without benefits. So the group wishing to protect themselves from the cuts needs to answer two questions: Who else benefits from the spending? and How can we increase our public contributions? If the marchers trying to channel their inner Cesar Chavez had taken the first question seriously, they would have built a coalition. Had they been courageous in their answer to the second, they would have built a movement. Chavez, not incidentally, understood this and knew that those who ask only what their country can do for them produce the political equivalent of a large yawn.

• The California Community Colleges is the largest higher education system in the nation.  Its 112 colleges provide more than 2.9 million students with basic skills education, workforce training, preparation for four-year universities. They attract working student and ambitious immigrants in very large numbers. I used my local community college to learn blueprint reading and geometric dimensioning and tolerances to become a machinist; I also took classes in physics because they were exceptionally good.  Almost 60% of CSU graduates and 30% of UC graduates originally transferred from a California community college.

• California State University has 23 campuses, some 427,000 students, and 44,000 faculty and staff. It is the largest, most diverse, and one of the most affordable university systems in the country. CSU graduates 44% of the life sciences college graduates California, more than 60% of all of the state’s teachers, including 9 out of 10 of California’s public school educators, and 45% of the state’s computer and electronic engineers. CSU is an outstanding resource for underserved populations, awarding more than half of the bachelor degrees earned by African American, Latino, and Native American students in California.

• The University of California is a top-tier research university and an economic catalyst for the state. UC’s ten campuses enroll more than 220,000 students and employ more than 170,000 faculty and staff. Its three national labs manage hundreds of millions of dollars of state and federal research. A recent study estimated that UC generates $46.3 billion in annual economic activity for California, not counting benefits such as technology startups that grow directly out of university research.

Berkeley remains the premier UC campus and an amazing public institution, despite its bottomless capacity for self-parody (disclosure: my wife is a dean at Cal).

• A National Research Council analysis of U.S. universities concluded that UC Berkeley has the largest number of highly ranked graduate programs in the country. The analysis ranked doctoral programs within a range (such as between 1st and 5th), and found that 48 out of the 52 Berkeley programs assessed ranked within the top 10 nationally.

• Over the past decade (2000-2009), the National Science Foundation awarded more Graduate Research Fellowships to UC Berkeley students than to those of any other university (MIT was 2nd; Stanford 3rd; Harvard 4th).

• 135 Berkeley faculty are members of the prestigious National Academy of Sciences, exceeded only by Harvard with 150.  91 are members of the National Academy of Engineering, exceeded only by MIT with 105. Membership in the American Philosophical Society, the American Academy of Arts and Sciences, or winners of National Medal of Science teach overwhelmingly at three schools — Berkeley, Harvard and Stanford. Only one of these is a public institution.

• Berkeley’s single proudest claim however, ahead even of its 24 national rugby championships, is that it enrolls more students on Pell Grants than all of the Ivy League schools put together. A Pell Grant is a scholarship based on financial need. By serving academically qualified students on Pell Grants, Berkeley ensures that smart, hard-working kids from low income families can get a top-flight education.

The combined effects of this system on the California economy are astonishing. Community college students who earned a vocational degree or certificate in 2003-2004 saw their wages jump from $25,856  to $57,594 three years after earning their degree , an increase of over 100 percent. Census data indicate that an average college graduate earns a million dollars more during their working lifetime than a high school graduate. A masters degree adds another $400,000 and a doctorate another million on top of that. A professional degree adds another million on top of that (average lifetime earnings are $1.2 for those with only a high school diploma, $2.1, $2.5, $3.4, and $4.4 for BA, Masters, PhD, and professional degrees, respectively). Depending on what you count and how you count it, a dollar invested in California higher education returns $3, $5, or $14 but it doesn’t really matter — it’s a great public investment. And because many of the benefits accrue to individuals, not all of the investment needs to be public;  students can and should bear some of the cost, so long as financing is available with repayment schemes adjusted for students that pursue lower paying occupations.

This system of higher education is the goose whose eggs make California the Golden State. And playing the part of Aesop’s short-sighted fool who wishes to slaughter the creature for short term gain, is California’s legendary and dysfunctional state legislature. This august body last year, cut $500 million from UC, $500 million from CSU, and $400 million from the California Community Colleges to close a state budget deficit in 2011-12. California is not alone in this trend: between 2002 and 2010, states have cut funds for public research universities by 20 percent in constant dollars according to a report issued by the National Science Foundation.

Every Californian should be alarmed at the proposed “trigger cuts”, which would slash another $300 million, unless taxpayers pass a special ballot initiative to increase state taxes — which are already the nation’s highest. Where does all the money go? Pension spending aside (and it cannot be put aside for long), it goes to health care and to prisons. California is the only state that spends more on prisons ($10.7 billion in the current budget) than on higher education ($9.8 billion). Both are dwarfed by the state’s $42 billion Health and Human Services budget.

How Can We Contribute?
On these facts alone, students and faculty should be able to rally public support, not just each other.  Serious and sustained public support however, requires more. What, precisely, are students and faculty offering to contribute to make increased public investment even more compelling? Two ideas could completely change the conversation.

1. Use campuses year round.
The University of California and CSU teach either three ten week quarters or two fifteen week semesters each year, meaning that 33 large and expensive campuses are fully utilized less than 60% of the time. Adding a fourth quarter or a third semester would produce revenue that would go a very long ways to paying for fixed assets, including facilities, administration, admissions, counseling, health care, technology, and similar services that are staffed year round, even though paying students attend only part of the year.

Even if campuses completely eliminated so called “Summer Session” revenue and did not alter faculty teaching loads and research expectations (meaning that new faculty would be hired or current ones paid more in order to meet increased teaching demand), year round operations would generate hundreds of millions of dollars for the system as a whole (and based on limited public data on UC, it would more than makes up for the loss of state funding). Without reducing degree requirements or creating a cut-rate three-year undergraduate degrees, this approach would enable a student who undertook full time studies to complete the work for an undergraduate degree in three years or less and would substantially relieve pressure for additional tuition increases.

Faculty should embrace year round operations, which would not need to reduce time for research at UC but would offer the option for all faculty to earn additional teaching income. They should rally in support of an approach that would enable most departments to add new faculty positions, which will simply not happen otherwise. Year round campus operations would be very quickly copied by other top flight universities if UC and Cal State take the lead. As financial stewards of state educational resources, university leaders should admit that operating campuses 30 weeks per year (a schedule designed originally to make sure students made it home to help with the harvest) is economically wasteful, socially indulgent, and politically untenable.

2. Repay a public investment with public service.
As a candidate, Barrack Obama proposed a national service program that would serve as “a central cause of my presidency”. It hasn’t, but it should. He proposed to spend $3.5 billion to expand AmeriCorps to 250,000 volunteers and to double the size of the Peace Corps. He envisioned tuition tax credits for college students who performed community service while in school. His plan supported promising nonprofit community startups, expanded the GI Bill, and created a Classroom Corps to help teachers and students in high-need and underserved schools. Obama proposed a Health Corps to improve public health information and outreach to areas with inadequate health systems such as rural areas and inner cities and a Clean Energy Corps to promote weatherization, renewable energy projects, pollution clean up, trea planting, and park maintenance. Other volunteers would serve veterans or help communities with disaster preparation.

Not only is national service a good idea, but the politics of enacting it are not nearly as awful as they are on many other issues (recall that the GI Bill, one of the most popular and successful social programs in US history, was initiated by the American Legion together with FDR). In this spirit, the federal government could, for a modest amount of money, guarantee loans and offer tuition tax credits proportional to the public service performed. By accepting only freshman applicants who have performed at least one year of community service, California could set an example for the rest of the country and begin the long overdue process of rebuilding public support for its activities.

One of the faculty spokespersons for the current band of protesters is a leftist professor, a tenured friend who for decades has rarely missed a good demonstration. Not long ago, I asked him what he believed today that he did not believe in 1968, when his political habits were formed. He thought for a moment before declaring that ”1968 was a very good year”.  But he and his campus comrades appear to have forgotten the lessons of ’68: that lasting political change requires public education, coalition building, and a commitment to public service. Why do I suspect that the last people to figure this out will be those closest to the problem?

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He was right.

Bardacke, a respected labor activist and educator based in Watsonville California, was first mentioned in this blog six years ago in connection with his research on Cesar Chavez. Like Bill Gates and Mark Zuckerberg, he dropped out of Harvard after his freshman year and moved west to change the world. Unlike them, he joined the Berkeley Free Speech Movement and has had an abiding interest in radical politics ever since. In the early 70s, I traveled to China with Bardacke to get a first hand look at Mao’s proletarian dictatorship. Frank admired all things proletarian; I feared the dictators. Bardacke often views the world through a different template than I do, but I have learned a lot from him and continue to have enormous respect for his views.

Bardacke became a farmworker – one of a handful of Anglos and surely the only former Harvard student to work the celery fields. He became fluent in Spanish and formed friendships with many of the union staff and farmworkers who appear in his book. He spent more than a decade interviewing every major participant in the drama, reading every known book on the farmworkers and scouring every archive. He received help in managing this massive project from faculty in history and politics at nearby UC Santa Cruz.

The result, Trampling Out the Vintage: Cesar Chavez and the Two Souls of the United Farmworkers, is the most complete account yet of the rise and fall of the UFW. It is also an epic, Shakespearean drama with all of the elements of a Hollywood blockbuster. The pitch meeting would be surreal:

OK, picture this: we have a conservative Catholic who fasts and marches like he’s Ghandi. He courts progressive clerics and hires liberal Jews and alienated Anglos to mobilize immigrant Mexicans and Philipinos to fight Slavic and Italian growers. At first David slays Goliath, but then he morphs into King Lear and destroys his newly built kingdom amidst slaughter and recrimination. We’ve got side plot romances between devotees who work for $5/week and bad food trying to raise farmworker pay. We’ve got violent Teamster, UFW, and grower thugs straight out of the Sopranos. We’ve got a certifiably batshit human potential guru who wreaks havoc getting everyone to criticize everyone else. And under the carpet here somewhere, we may even have communists trying to advance a proletarian revolution without a proletariat. How can we miss?”

Astonishingly, it is a true story and Bardacke delivers it with intelligence and compassion. Unique among labor historians, he grounds his analysis in “the work itself”, with brilliant, memorable descriptions of how different stages of production for different crops in different regions of California all affect the ability and willingness of different crews to self organize. He describes clearly why organizing was often sustained by the tight-knit, highly skilled lechugeuros or the celery cutters, not the garlic or asparagus workers or those in ladder crops. He describes the skill and endurance that the work requires, introduces leaders that arise from various crews, and captures in fine detail how they interact with a union that was built on a very different set of principles from farm work. In a decade spent organizing waiters, housekeepers, nurses, bartenders, machinists, cannery workers, and assembly workers, I observed precisely these differences. The work itself shapes our propensity to organize. Bardacke is the first writer to apply this principle to the fields and he does so with a deep understanding and compassion for the work.

Bringing an existing union into a workplace is an act of industrial combat not for the faint of heart — but starting a new union from scratch is a herculean task that almost always fails.  I started a company that has lasted more than a decade, a public agency that lasted three years, and a union (United Espresso Workers – I was a bit early) that lasted all of three weeks. With the proud exception of the United Farmworkers, I cannot think of a single independent union formed in the United States in the past 50 years that was not sponsored and controlled by an incumbent union (I can think of several that tried and died – but none who made it).

This was not always true — new unions once spawned regularly in the US. There are many reasons for the change, but the lack of competition between unions has positioned them nicely for extinction. Organizations evolve through the mutation, variation, and selection that is always produced by competition. The labor movement stopped growing the instant the AFL joined with the CIO and prohibited unions from competing with each other. When two teachers unions competed, both grew. The instant the Teamsters stopped raiding the UFW, growth stopped. I hated the Teamsters (who were kicked out of the AFL-CIO for corruption and are not subject to the noncompete provisions) and I took a nasty beating from them once, but like sharks or wolves, they have their place in the ecosystem. (I am aware of no union leader who agrees with this view, by the way. Most feel that they have all the competition they can handle from employers).

But for a brief moment following the civil rights movement in the 1960s, a new labor union arose in the United States and in the least likely place. If you had asked in 1960 where in the economy a new union might appear, you would never have selected the farmworkers of California. Organizers prefer workers who are tied to one place and to one employer, not workers who are seasonal and often itinerant. Probably wrongly, organizers prefer workers who are covered by labor laws, which had always exempted farmworkers. Organizers like English-speaking Americans, not Tagalog or Spanish-speaking immigrants or Braceros who are tolerated for a season then ushered back to Mexico. A dozen or so failed efforts by farmworkers to form agricultural unions seemed to validate Marx and Lenin’s belief that workers would organize once they were forced into factories and worked for a single employer.

Bardacke demonstrates that Cesar Chavez succeeded in organizing farmworkers because he was, at heart, a brilliant and hard-working Alinksy-trained community organizer. As a community organizer, Chavez pioneered an enormous innovation that had the potential to transform labor organizing: he mastered the secondary boycott (illegal for most workers under the federal labor law, which thoughtfully excludes farmworkers). Chavez tirelessly organized enormous boycott operations in grapes, lettuce, and against major retailers including Safeway.

Farmworker boycotts were the Occupy movement of the 70s and 80s – a way for college students, community activists, and middle class young people to participate directly in the tough work of social change. And credit Chavez’s brilliant leadership, it worked magnificently: faced with effective boycotts, growers raised wages and improved working conditions and politicians begged the army of grass-roots Chavistas to help register voters and turn them out on election day. The UFW became a powerful force for social change.

But the UFW was only briefly a powerful labor union. Bardacke correctly diagnoses the boycott as creating a formidable tension within the UFW. He frames the tension between labor and boycott organizing as a struggle between the “two souls” of the UFW. The metaphor is fraught. As Bardacke demonstrates, the UFW collapses not because it has two souls, but because none of its activities were organized, financed, or led in a manner that enable them to grow. The problem is not that community organizing is a distraction – most American labor unions lack a community service organization and are much the weaker for it. This is tragic: having discovered and refined one of the few recent innovations in union organizing, Chavez cannot let it grow. Instead, he strangles his own child.

One of the heros of Bardacke’s book is Marshall Ganz, one of America’s most innovative labor organizers. Ganz also dropped out of Harvard, but moved south to organize for civil rights before heading west. After his exile from the UFW, Ganz helped the Silicon Valley Central Labor Council build a powerful neighborhood-based political organization for the 1984 elections. He was terrific at posing fundamental questions – and at directing me and others to writers and thinkers who helped answer them. In 1984 he urged me to read, of all things, a business book, In Search of Excellence. I quickly developed an appetite for business writing. decided to get trained in it, and ended up working with the book’s authors. Marshall returned to Harvard, got his degree after a 28 year hiatus, and now teaches at the Kennedy School. (His version of the UFW story, told in Why David Sometimes Wins, is a fine companion volume. It suffers for being his PhD dissertation and dwells more deeply on theories of organizing and less on the dynamics of local struggles).

So let’s ask a Marshall Ganz-like question: what does it take for an organization to grow successfully? Venture capitalists, a group not deeply concerned with the welfare of those who produce their salads, obsess about this question. There are at least as many answers as there are VCs, but common elements include:

• A big market. If there is not substantial demand for the product or service an organization produces, the organization cannot get very big.

• Positive unit economics. If serving one more person imposes more cost on the organization than it generates in revenue, then growth makes no economic sense and the organization will depend for growth on funding from charity or government. Anyone can sell a dime for a nickel; selling a nickel for a dime means that an organization has to add at least a nickel’s worth of value if it wants to grow.

• Customer or member acquisition costs that scale. Every organization has a cost of acquiring a customer that must be repaid over the lifetime of that customer or member. Smart organizations exhibit declining COA: the cost of acquiring each incremental customer declines with scale. Very smart organizations (and effective social movements) are viral: COA approaches zero as current participants recruit new ones. See Facebook, Google, or Arab Spring.

• Leadership. Growth is very, very demanding on an organization. Everyone in a fast-growing organization has to grow with it: jobs change radically every few months. Not everyone grows at the same pace, so leaders must recruit furiously, communicate direction and values continually, promote and replace people regularly, and test what works all the time. It is stressful and a lot of fun – ask anyone who has been involved in a fast-growing company, boycott, strike, or organizing campaign.

Back to the fields. Boycotts have completely different economics than labor organizations. Boycotts have huge markets: liberals eager to shop their conscience. Churches and colleges do the recruiting at very low cost to the boycott sponsors. Every convert adds more value (the grapes they don’t buy) than cost (the very low cost of volunteers leafleting).

Unions are different. The market for a membership organization of farmworkers is not small, but it is small enough that the UFW needed to capture almost all of it because, as Bardacke notes, organizing half an industry penalizes the organized growers. A union has a responsibility to organize the remaining growers and will frequently be cheered on quietly by those who have signed. More fundamentally, unions need to grow big enough to achieve minimum economic scale: they cannot fund the fixed cost of their operations if they are too small. Unions with fewer than a half a million members are nearly always too small to operate efficiently across the US (meaning that most unions in the United States waste money because they are too small). The UFW never had 100,000 members — although its field operations were mostly in California. Bardacke would counter that the democratic character of the union matters more than its size, which is true, but creating organizations that are not economically sustainable is a bad idea. Unions do this all the time.

Unions have a second problem, to which Chavez developed a unique but ultimately unworkable solution: the economics of labor organizing are often unattractive. Campaigns, negotiations, and strikes are expensive and uncertain of success. If unions file for elections on half of the campaigns they run, win half of the elections they file on, and negotiate contracts successfully 80 percent of the time, then every successful contract has to finance four unsuccessful campaigns and potentially a strike. If the campaigns and the negotiations are labor intensive and the union bears all of those costs, then the economics of organizing turn heavily on the cost and productivity of staff and on the cost and duration of strikes.

The Chavez solution to this dilemma was simple but utterly unsustainable: pump talented people through the organization. Those of us who worked boycott operations worked 14-16 hour days, often 7 days a week. We were paid $5/week and had to beg for donated food to eat. Once we were burned out, the UFW happily replaced us in a process Chavez once compared with pumping water. At any given time during large boycots, hundreds of young people slaved on the campaigns for months and sometimes years. Staff at headquarters (located in the small misnamed town of La Paz), were likewise furnished with living quarters, food, and a miniscule stipend. Chavez personally approved all expenses. From here, it looks like a cult – although from inside the cult, it looked like La Causa and stands today as some of the best work many of us ever did. Regardless of how it feels or looks however, and regardless of the ethics of exploiting volunteers on behalf of underpaid farmworkers, an organization without a core of talented, motivated leaders simply does not scale. Volunteers are not enough — and finding people like Marshall Ganz and Eliseo Medina to fight year after year for farmworkers without paying them even farmworker wages is simply unrealistic.

Bardacke does not go deeply into union economics in part because there is a much bigger tension restricting growth: a command and control organization. Chavez not only micromanages, but much worse, he prohibits local labor or boycott operations. Centrally led boycott operations could work: boycotts demand a consistent message and negotiations with a single adversary and since allied organizations delivered most of the volunteers with help from a skeletal UFW staff, there were relatively few local issues to resolve. But labor organizations are built in hundreds of unique workplaces. This is in part due to the work itself: the problems of lechugueros are simply not the same as tomato workers or lemon pickers. More important however, is that without elected reps, stewards, and ranch committee members, contract negotiations suffer because strike threats lose credibility. Without a credible strike threat, backed in this case by a credible boycott threat, growers rationally refuse to negotiate. Chavez tried to run the union from the top, like he built and ran the boycott. When George Meany and others derided the UFW as “not a real union”, they were wrong at the level of the fields. But in their description of La Paz, they were right.

Bardacke reveals Cesar Chavez to be a brilliant community organizer who campaigned for farmworkers but did not empower them. Bardacke plots the tragic trajectory of the UFW from an authentic movement led by a charismatic leader to one paralyzed by demoralized staff that could see no way to grow a union beyond the constraints imposed by its increasingly unstable founder. Chavez died afraid of his own organization, which he had shriveled into a family business devoted to nonprofit services, La Raza not La Causa, and promoting the Chavez legacy. The union was all but gone.

Bardacke masters an enormous amount of material to relate these events skillfully. He salts his prose with stories and characters straight out of Steinbeck. He rarely leaves the reader guessing about his point of view: Walter Reuther, the brilliant activist who built the United Auto Workers (and marched with Cesar in Delano) is a worthless hack because he voted against seating the Mississippi Freedom Delegation in 1964 and drove communists from the union. Those who cross the US border illegally are noble immigrants deserving of union embrace; those who cross picket lines legally are scabs deserving of UFW tire-slashing and intimidation (but not of UFW efforts to call La Migra and send the illegals among them home). Teamster and grower goons are thugs; Manual Chavez, designated hitter for his nonviolent cousin and other UFW punks are charming rogues who firebomb field sheds and beat their opponents. Those who seek to impose Synanon’s destructive ideology on the UFW are obviously crazy and should be driven from the union; those who seek to advance various communist or nationalist ideologies within the organization are dedicated activists who should be protected. Trampling Out the Vintage is a beautiful work despite these caricatures; it would be even stronger without them. It is a book that deserves a wider distribution and better copy editing than Verso, a niche left publisher, can provide. It would also be nice had Verso published the book electronically (then again, Frank confesses in the postscript that he composed the early chapters of the book on a typewriter!)

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But amidst the carnage, a funny thing happened: the music industry grew larger even though it had fewer labels and far fewer retailers. Revenue from CDs was replaced by revenue from live concerts, ring tones, downloaded singles, merchandise, and sponsorships. The new industry has its challenges (many of them traceable to lousy music), but it has hardly collapsed.

This transformation presages the coming destruction of traditional book publishing and retailing, even as their overall publishing industry grows. Here are the seven reasons that bookstores and traditional book publishers are doomed.

7. Americans have stopped reading books. This is a non-trivial problem (after all, we did not stop listening to music). But the landmark National Endowment for the Arts study “Reading at Risk” confirms what we intuitively know: Americans read less than we used to. 43% of Americans read no books outside of work or school — a number meaningfully lower than Canada or most European countries.

Those who do read books, don’t read many of them. About 24 percent of Americans read eight or more books in 2002, a lower percentage of “strong readers” than two thirds of European countries surveyed. Only 16% of the US population reads a book or more each month. According to Morgan Stanley, 20% of all book buyers purchase a majority of all books. Men read much less than women. NPR reports that among active readers, women typically read nine books in a year, compared with only five for men. Women read more than men in all categories except for history and biography.

When most of us read, we prefer magazines and online articles that are shorter and less demanding than books. Kind of like you are doing right now.

6. Many of the books we read are crap. The largest single book category is still romance novels — a fact so embarrassing to the New York Times and other tastemakers that they exclude the category entirely from best seller lists. These bodice-rippers, together with religion, self-help, fantasy, and thrillers, account for a majority of books sold in the US (Gothic romance, which did not exist before 1972, by itself accounts for a majority of all paperback sales). Nearly all of these sales are to women, but women buy and read a lot more books than men even if you adjust out the Harlequins.

Part of this is, no doubt, that brains exposed to constant media are not well wired for long form reading. We prefer writing that is built around tidy lists…oops. Nice essay to this effect by Alan Jacobs (hey, if you have read this far, you can manage it).

5. We can easily get books for free. Just Google “Torrent” and “Books” along with anything else and you will be directed to many sites that enable you to download books as pdf files easily readable on a tablet or an eReader. The site I checked helps you steal any of several dozen books on religion, most of which presumably counsel the reader against theft.

It is always hard to estimate the economic impact of illicit downloading. I wonder if the net effect isn’t positive, even if authors howl. WordPerfect marketer Pete Peterson had a sensible point when he said that “if someone is going to steal software, I hope they steal ours”. Every illegal download is not a lost sale — but every time a reader finishes a book and raves about it, the marketing leads to new sales. Realizing this, most publishers will let you read the first chapter for free anyway. If we see publishers offering books for free but with advertising, we will know that the torrent sites have struck a nerve.

My current bet is that it won’t happen for the same reason that iTunes curbed illegal music downloading. Customers like the ancillary content and the reliable file quality enough that if the experience is frictionless and the price sensible, we will pay.

4. “Books” are mutating.  Like music and movies, books are becoming a service, not a product. Today Amazon launched its Kindle Lending Library, which turns books into a service like Spotify for music or Netflix for movies. The number of publishers who have embraced this idea? Zero. These guys would rather face the Torrent sites than let Amazon loan their books. But publishers need to monetize their back list. Over time, they will do a deal with Amazon, even if they require Amazon to purchase a new copy after a finite number of rentals. Many publishers require libraries to do that now — and would doubtless oppose libraries as socialist if Ben Franklin hadn’t established libraries before they got organized.

Books have become protean. Sites like Byliner and the Atavist are publishing long form essays by well known authors. This writing is longer than most essays but shorter than a book. Sometimes the pieces are free, sometimes paid, and sometimes, as in the case of a recent piece by author John Krakauer, free for the first 50,000 downloads, then paid. Inkling, a San Francisco startup, takes textbooks and transforms them into socially enabled multimedia iPad apps that end up not looking much like textbooks at all. They have just released The Professional Chef, the bible textbook produced by the Culinary Institute of America. You can buy the book or you can just buy a chapter. It features photos, note sharing between cooks, demonstration videos, etc. Their south of market neighbor,  Blurb, does the opposite: it converts your online blog into a nicely bound book you can give to mom. O’Reilly makes many of its books available by the chapter and lets you join a club to get lifetime book updates and access to community events. EBrary lets academic subscribers read huge online libraries and charges by the page for printing or copying.

3. Robo-books.  I shared a taxi yesterday with a guy who bragged that his wife “cranks out eBooks”. She writes 2-3 books each week the same way some kids write college papers: by stealing content and re-writing enough of it to not get caught. Of course, free market capitalism being the spectacular engine of innovation that it is, some late night huckster even sells Autopilot Kindle Cash that helps “your ten year old kid publish 10 to 20 new Kindle books a day.”

The impact of the resulting spam “books” has been extraordinary. In 2002, about 250,000 books were published in the US; about 15% of these books were self published. By 2010, the number of books had increase thirty times. 3.1 million books were published in the US — about 8,500 “books” per day and 90% of these books were self-published.  In response, Amazon has been forced to “curate” the user experience, meaning that they must try to filter the output of products like Amazon Kindle Cash. If they are wise, they will start charging “authors” $20 to publish their “books”, and deploy the same software that faculty use to detect even clever plagiarists.

Amazon's best selling Single

2. Economics. Amazon has put the publishing industry on notice by hiring respected industry veteran Larry Kirschbaum. In a sly reference to the music industry, Kirshbaum launched Amazon Singles. A single is what it sounds like — a chapter, not a book. It can be an article or an essay, like this terrific one by Hitchens on Bin Laden. In books as with music, you often want just the single, not the entire album.

By promoting authors whose books sell, Amazon has also created self-published millionaires. John Locke and Amanda Hocking are the superheroes of self-publishing. By making millions, they have helped transform self publishing from an industry backwater inhabited by the untouchables to a place where writers no longer share sales with publishers. Importantly, writers price their books and they have become smart about demand elasticity. Locke discovered that his CIA  novels increased twenty fold when he dropped the price from $1.99 to $.99.

“It wasn’t so long ago that an aspiring author would … don a pair of knee pads and assume a supplicating posture in order to beg agents to beg publishers to read their work. And from way on high, the publishers would bestow favor upon this one or that, and those who failed to get the nod were out of the game. No more.”

This trend will affect all publishers. Famous authors will wonder why they share revenue  with publishers. New authors (like Amanda Hocking) will demand enormous advances once they establish a reputation as a successful self-published writer. Because the profitability of the publishing industry turns on the ability of a few popular authors to subsidize the great majority of unprofitable ones, the defection of popular authors is especially threatening.

Publishers and retailers are being badly disintermediated not only because they add too little value, but because they add unnecessary costs. Traditional book retailing is insanely wasteful: at any given time about a quarter of the books are moving backwards in the supply chain because retailers can return product, usually without penalty, to distributors or publishers. I am not aware of any other industry that permits this. These and other costs make printed books more and more more expensive. Price increases, not unit sales, account for nearly all of the “growth” in the sales of traditional books. Trade book prices have risen twice as fast as inflation for more than a decade. Libraries now pay more than $80 per book, in part because library books require specialized processing.

1. Amazon. The number one reason that bookstores will close and publishers will die in large numbers is that Amazon is continuing to take a page from the Apple playbook and create a user experience that is integrated from content development to ecommerce and the device. They are not identical models: we will not see Amazon stores any time soon, nor Apple publishing, but clearly Amazon has learned a lot from Apple.

Indeed one could argue that they learned too well. Walter Isaacson’s asserts in his recent biography of Steve Jobs that Apple won the battle over agency pricing (they let the publisher set the price and took a cut, whereas Amazon set the price as the retailer and paid publishers a commission). In truth, Amazon won and Isaacson got the story wrong. Customers care enormously about price and convenience, as a quick glance at iBooks reveals: it is a wasteland. By combining a preeminent retail experience, offering books as physical, print on demand, or eBooks, featuring buy-back programs and used books, offering Singles, Publishing, and now Libraries, Amazon controls the reading waterfront. They are quickly taking the oxygen out of traditional book retailing and publishing.

When the dust settles, we will see the same thing we saw in music. Spending on what we read will go up with economic growth or a bit faster. But it will go to very different players for very different products than in the past.

Fine. 

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Steve Jobs died

I felt like someone had unplugged my compass. Steve Jobs was by any reasonable measure the greatest entrepreneur and the greatest CEO in American history. He was a hero to his customers, but to most technology entrepreneurs, he was a God. He revered the Beatles and always reminded me of John Lennon: a genius with round glasses, a rebel with a mischievous grin, and an artist who showed the world things that it had not realized it wanted. With both, it takes years to absorb the full loss.  

Steve Jobs had the soul of an an artist. Like Leonardo DaVinci, Samuel B. Morse, or Edwin Land, he lived at the intersection of humanities and technology and could ruthlessly carve away marble until only his vision of beauty remained. He was a practical poet who understood that “real artists ship”. He accomplished his goal of “making a dent in the universe” — but his premature death has left a dent in the hearts of people the world over.

Steve was the rarest of creatures: a business revolutionary motivated by a deep love of technology and its power to change the rules. We always knew that his “Think Different” ad was really about him:

Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. While some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.

Steve broke rules eagerly. He dropped out of college and dropped acid. He fathered a daughter and disclaimed her, much as his Syrian biological father had lost track of him. He followed very odd diets and lived on communes. At age 20, he made a sojourn to India to see a guru. He learned to focus and focus some more. Often, this meant removing features. The original Mac had no cursor keys. Steve was the first to take away keyboards, mice, modems, floppies, Flash, screens, and CD-ROMs. Reviewers raged and the digerati derided him, but Steve knew that “innovation means saying no to a thousand things”.

His passion often made him obnoxious. Seated next to him on a flight in 1979, he learned that I had made my Apple II usable for word processing by inserting a Z-80 card so that I could run WordStar under the CP/M operating system. He was appalled: “Why on earth would you ever do that?” he asked twice, shaking his long hair and making it very clear that I had flunked the bozo test. He publicly insulted competitors and employees. He launched huge products, including the iPad, with no market research (“it is not the consumer’s job to know what they want”.) At a dinner in 2006, he repeatedly assured me and others that Apple would never sell a telephone under any circumstances. Nobody believed him for a moment (six months later, he unveiled the iPhone), but any other CEO would have deflected the rumor instead of lying outright. This sort of behavior famously got him fired from his own company.

I harped constantly in this blog and elsewhere on his insistence that he control every aspect of the user experience. I recall construction workers building Pixar across the street from my company shaking their heads in awe every time Jobs would land on the property in his baby blue helicopter and take a pencil to their blueprints. He spent millions moving walls and even foundations at the last minute so they would end up precisely where he thought they should go.  He obsessed about details that few CEOs notice (when you upgrade your iPhone next week, notice that as you bring the message shade to a full close, a very tiny animation rounds off the squared edges. Nobody but Steve Jobs would bother to do that.)

Steve Jobs failed. A lot. The Apple III was a disaster. The Lisa sold so poorly that tens of thousands of computers named after his daughter ended up in a large land fill in Utah. You have hardly heard of the Pippin, the Newton, the Copeland, HiFi, the G4 cube, Mobile Me, and several other products that were complete busts. It didn’t matter. Jobs remained unbelievably self-assured and ridiculously demanding. Over the years, I met several Apple employees who worked insane hours and suffered nervous insomnia because they had to present a product or an idea to Jobs – and were terrified at the prospect. One such encounter, possibly apocryphal, was reported in The Atlantic.

When engineers working on the very first iPod completed the prototype, they presented their work to Steve Jobs for his approval. Jobs played with the device, scrutinized it, weighed it in his hands, and promptly rejected it. It was too big.

The engineers explained that they had to reinvent inventing to create the iPod, and that it was simply impossible to make it any smaller. Jobs was quiet for a moment. Finally he stood, walked over to an aquarium, and dropped the iPod in the tank. After it touched bottom, bubbles floated to the top.

“Those are air bubbles,” he snapped. “That means there’s space in there. Make it smaller.”

As I drove north towards San Francisco following the news of Steve’s death, the radio reported that mourners were gathering at Apple headquarters, at Apple stores, at Jobs’ house, and in Dolores Park. Tributes followed from around the world – many of them written and read on devices that Steve built. Here are some that resonated:

7. Of the statements by the famous, Obama called Jobs “…brave enough to think differently, bold enough to believe he could change the world, and talented enough to do it.” He shoulda said “think different”, but otherwise a good statement.

Bill Gates was quick and generous: “For those of us lucky enough to get to work with him, it’s been an insanely great honor. I will miss Steve immensely.” Gates ordered the flags at Microsoft lowered to half-mast. Microsoft joined Amazon, eBay, Google, and many other other sites in offering home page tributes.

6. Insanely Great  author Steven Levy wrote a colorful, articulate obit for Wired that is exceptionally well done. Sample: “If Jobs were not so talented, if he were not so visionary, if he were not so canny in determining where others had failed in producing great products and what was necessary to succeed, his pushiness and imperiousness would have made him a figure of mockery.”

5. John Markoff, the talented New York Times technology writer who has known Jobs for many years wrote a precise, careful, definitive obituary. That, of course, is why we have the New York Times.

4. Fake Steve Jobs, captures the Jobsian hauteur and poetry with surprising and touching verse. An excerpt:

3. Apple. Immediately revised its home page, as did Pixar. Very Steve. He probably approved it in advance, but still. I hope they keep up the tributes and his spirit.

2. The Onion: “The Last American Who Knew What the Fuck He Was Doing Dies”. “We haven’t just lost a great innovator, leader, and businessman, we’ve literally lost the only person in this country who actually had his shit together and knew what the hell was going on…” My kind of tribute. Not for everyone. But anything that makes me laugh at tragedy is +1 in my book.

1. Steve at Stanford. The YouTube video was watched 8 million times yesterday, as crowds paid tribute at Apple stores around the world. NPR played the speech in full at noon. It’s a classic believed by many to be the best commencement address ever given. Even if this is not such a high bar, it’s a great talk and worth watching again.

Many are memorializing Jobs as this generation’s Henry Ford because he did for computers what Ford did for cars — transform them from hobbyist toys to indispensable commodities. In his day, Ford was hugely popular — tens of thousands attended his memorial services in 1947. Some have declared Jobs a modern Thomas Edison, the great inventor who was buried by a small group of friends in rural Ohio (a group that included, ironically, Henry Ford).

Others compare him to Walt Disney, a technology and artistic visionary whose ashes are in Glendale (he is not cryogenically frozen, as widely believed) and whose largest shareholder ended up being Steve Jobs (Jobs made about twice as much money selling Pixar to Disney as he did selling Apple to the public — although these things change with the stock market and there is no evidence that he cared much in any case).

By a very wide margin, Steve Jobs earned first place in the pantheon of genius entrepreneurs. He utterly transformed not one industry but five or six: personal computers, music, telephones, tablets, and animated film. And possibly publishing. He  personally led extraordinary business turnarounds at both Apple and Pixar. When he stepped down as CEO, Apple was the most valuable company in the world. 

Steve was a national treasure and we should honor him in a big way: schools, parks, battleships, postage stamps — the whole thing. I’d gladly throw Columbus under a bus to give Steve Jobs a national holiday. I hope his forthcoming biography is the smashing success that everyone expects it to be.

We will miss this guy enormously.

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During the past two months, I have helped three technology startups raise early stage growth capital and casually advised several others. Each business is in a completely different market: mobile, pharma, cloud computing, crowdsourcing, global communications, etc. Each has unique strengths and weaknesses. The entrepreneurs have wildly different backgrounds and personal qualities.

Not all have completed their funding, but in the process each team has learned similar lessons in how best to approach outside investors (investments from friends, family, and fools doesn’t count. They apply different criteria.) Although I managed to raise tens of millions of dollars for early stage businesses, mainly Alibris, I have personally made most of the mistakes listed here and I have made some of them more than once. Nor is this list particularly unique: investors and experienced entrepreneurs write about them all the time.

So here is my list of the top ten mistakes that entrepreneurs make when they try to raise money from outside investors:

1. No story.  Entrepreneurs try to convince investors that they have a winning business – but investors have no idea which businesses will really work. It’s just too complicated. So investors do what human brains are wired to do when confronted with bewildering complexity: they listen for a coherent story. They listen for a particular kind of story that nearly always has three parts: a strong team that achieves impressive traction solving a big problem. These may be called Team has Traction on Trouble or Management has Momentum in a big Market, but to sell your company, you need to tell your version of this story.

2. No pain. Gill Cogan is a savvy financier, a friend, and a former investor of mine. I once pitched a business to him and after ten minutes, he smiled and said, “that’s what we call a vitamin business.” He explained that people often skip their vitamins – but they never skip their painkillers. Investors prefer a painkiller business. Or as another VC put it “what I really like is a tourniquet business”. A solution to a problem that is acutely felt can grow rapidly. A solution to a minor problem may not be a market at all, even if the problem is widespread. VCs do not fund vitamin businesses.

The flip side of no pain is, of course, no gain. More than anything else, investors want to back companies in huge or potentially huge markets. This leads to herd investing: everyone piles into mobile, cloud computing, or gaming. This is why venture investing has always been a fashion business. This looks irrational, but it makes perfect sense even if it kills the Phoenix. To start with, the cost and risk of investing in any startup is high and approximately constant, so why not focus on companies with huge upside? Moreover, fast growing markets put a lot of wind at a startup’s back, which makes errors much less costly. Investors understand what Google’s Eric Schmidt means when he says “rising revenues solves all problems” — so they back companies where explosive revenue growth is most likely. These are markets that solve big problems or capture huge opportunities.

3. No hub. You live in the wrong place. Capital is highly mobile, but capitalists and startup infrastructure are not. They live in Silicon Valley, Boston, and New York and more importantly, so do the entrepreneurs, technologists, researchers, startup attorneys, talented marketing types, engineers, specialized commercial banks, vendors, mentors, and much else. You can raise venture money in Austin, Charlotte, Seattle, LA, Portland, Chicago and a few other places – although investor quality drops precipitously outside of the major hubs. (If you care why and how this occurs and where is it all going, Google AnnaLee Saxenian – a leading scholar on this topic and a fantastic wife to boot). You may be able to raise money if you are not in a place with active venture or angel investors (several companies have, of course) but it’s tougher. If you live outside a funding hub and are serious about building a technology company, it often helps to relocate.

4. No traction. Your company has an idea but no product or service. Or it has a product but no customers. As Babak Nivi and Naval Ravikant, two well known investors behind the indispensable site VentureHacks, like to say, “traction speaks louder than words”.

You believe that you have invented a revolutionary new dog food that will quickly disrupt the market. Investors cannot possibly figure out if it is really better, so they look for a metric that is rising rapidly up and to the right – often by 20%/month. Any metric that shows rapidly growing engagement will do. Profit is ideal (if profits are growing fast, you can always raise money — although you may not need to). Revenue growth is next best, even if it is from a tiny base. Next best after that is growth in accounts, beta customers, users, or page views. Worst case, show videos of dogs wagging their tails and survey data from dog owners excited about your products. If you don’t have any signs of traction, you don’t have something that people appear to want. You don’t yet have a business.

As important as traction, is an understanding of why you achieved it and why it will continue. Are users engaging other users? What are your viral metrics? Are large companies buying? Why are they trusting a startup? Are customers buying? What are you offering that others cannot and how do you know? Real data about traffic, conversion, average transaction size, repeat rates, defections, costs, margins, etc. begin to paint a clear picture to investors. Ideas about what you hope will happen are simply no substitute.

5. No team. You love your team, but it may not be financable. Most investors back teams with a combination of proven business and technical experience. Why? A VC who was ex Air Force used to say, “backing entrepreneurs is like picking a pilot for an F-15. I favor the guy who has already crashed one, because he or she really doesn’t want to see that happen again”.  Or more commonly: “we know that good judgment comes from experience – and that experience comes from bad judgment”.

This may seem like a Catch-22, but it is rational. Recent research concluded that a venture-capital-backed entrepreneur who succeeds in a venture has a 30% chance of succeeding in his next venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.” The solution? Recruit a co-founder with the skills your team lacks. It does not substitute for product/market traction – but many investors will recognize that your ability to attract talented people is a form of traction.

By the way, there is one glaring sign of a weak team and I see it a lot: relatives in the company, especially on the founding team. Husbands and wives, fathers and sons, brothers and sisters, and couples of all sorts. It is rare that the weaker of these individuals would have been hired in a dispassionate search. Having your relatives in the company, especially a spouse, is a great way to signal investors that you are not determined to hire the very best.

6. Lousy communications. A lot has been written about this. Usually what gets called a communication problem is really a business problem. Bad communication is frequently a sign of bad thinking. But there is one communication problem that is chronic to entrepreneurs: over-communicating. You know too much about your business and in early stage conversations, your knowledge is a liability.

The solution is to prepare three sharply focused business summaries: a 15 word “big idea”, a 15 second elevator pitch, and a 15 slide funding pitch. The big idea is the subject line of the email that your trusted intermediary sends the VC. If they were helping you pitch YouTube in 2005, it might have said “Flickr for videos”. If you were pitching Alibris in 1997, it might have said “find millions of out of print books in one online store”. It is not a consumer-facing tag line, it is the cocktail party handle that people will use to describe your business.

The elevator pitch is the most important and most overlooked. Intermediaries who introduce you to investors will use this in the body of their email. You will use it to describe in a few sentences what problem you solve and what traction you are achieving. Bonus points if you can also fluff the team. Marc Andreesen, were he someone who needed money, might have pitched Ning in 2007 by asserting, “Social networks are an amazing, powerful medium. Ning lets any group build it’s own private social network. We recruited a first rate team, we are hosting more than 100,000 user-created networks, and we are growing at 10% per week.” Boom. Hold the elevator – I want to hear more.

Attached to the introductory email is either the 15 page pitch or a one page summary. Either can work. Do not prepare the pitch from scratch — follow a proven recipe like the excellent ones outlined here, here, here, or here. 15 pages, 15 minutes, 30-point type. It  is hard to over communicate in 30-point type.

There are three things that you should not communicate to an investor. Do not show them secrets. Investors share ideas — that’s often how good ideas germinate. They will share yours. Don’t show them an NDA — they won’t sign it. And don’t show them a business plan. You may want a business plan to force yourself to think through your operations and to have something to use to build a founding team, to brief a board member, or to attract talented leaders. But a business plan will not help you raise money because investors won’t read it and they shouldn’t.

7.  High burn. You have ten employees working for cash, nice offices, no product, and no customers. There are PR and law firms on retainer. You are burning faster than you are learning. Remember this: investors are not looking for companies that need money. They look for companies that will succeed whether the investor commits or not. Raising equity is like borrowing: quite often, the more desperately you need money, the less likely you are to get it. If this is you, take heart: you are unlikely, no matter how hard you try, to violate this rule more than I have.

To state the obvious: any business without revenue has to run very lean, even if they start with a million dollars of 3F seed money. You are still trying to fit your product to the market. You are testing, tweaking, selling, and learning. For most web-based businesses, you don’t need titles; you need one or two people who can sell and small team that can build. Pay is low – everyone works long hours for a bunch of stock. As one investor memorably put it, “an early stage business runs like a one story whorehouse: no fucking overhead”.

8.  No cred. Experienced investors listen for a team that shares the details about what it has built. They listen for specific milestones that reflect customer needs met. Weak teams spend more time talking about future plans – their unproven ideas about where to go next. Talk about traction, engagement, measurable progress both in your current business and in past ones. If you worked at a brand name company or went to a brand name school, mention it – but focus on what members of your team have built. You are trying to build a business, so your record of what you have built gives your team credibility.

9.  No insight into sales or distribution. Early stage companies often don’t know what they don’t know about sales or distribution. This is understandable because early stage companies are obsessed with building a product or a service to fit a market. Achieving product/market fit, or traction, or engagement is hard, critically important work. When it finally happens, it is like a deep sea fish striking your baited line – customers start pulling the product from your hands. You know it instantly (recall the crazy moment in the Social Network where Facebook suddenly goes viral at Harvard).  Getting to this point is the obsession of every startup team. As a result, most are not yet obsessing about sales and distribution.

But they will. Sales and distribution challenges vary all over the map, but most in most companies there are large learning curves and scale effects. Your customer acquisition costs drop as you get bigger and smarter. But in the beginning, you don’t really know how much it costs to acquire customers. The number is likely to be much bigger than you imagined. Which means you can burn through a lot more cash in year one than you expected to.

Put another way, traction can be a trap because it leads entrepreneurs to try to get as much capital as possible out of their growth. This is completely backwards. The point of starting a company is to get as much growth as possible out of your capital.

10. No lawyers. Entrepreneurs, with rare exception, did not go to law school or if they did, they did not pass the bar and become lawyers. New entrepreneurs often dislike lawyers – but they quickly learn that good lawyers matter. A lot.

Once investors are shareholders, their interests are substantially aligned with yours. Until they are shareholders however, the economic interest of an entrepreneur and an investor are opposed. Investors want to buy low; entrepreneurs want to sell high. And the terms, which can be bewildering to a new entrepreneur, matter a lot (as many a VC has said, “you can set the price, if I can set the terms”. They mean it.) In this situation, an entrepreneur needs legal counsel at least as competent as that enjoyed by investors. Day to day, a low cost lawyer is fine. For a major financing however, get a good lawyer who does startup financings for a living.

That’s my list of ten common errors. It is not comprehensive: you could no doubt put together a list of ten others. Nor is it universally right: every generalization has exceptions, including this one. And avoiding these mistakes is no guarantee that you will attract an investor. In raising money, most entrepreneurs kiss a lot of frogs before they find a prince. Then again, so do investors.

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Gay Freedom does not matter yet to most Americans — but it will, soon enough

One of the great strengths and great weaknesses of humans is that we form tribal attachments. We are drawn to people like ourselves, which allows us to form families,  communities, enterprises, and governments. Tribes enable science, education, commerce, and religion. Tribes probably enable language itself.

The problem, of course, is that the bonds that tie can also enslave. Tribes have boundaries and reject those who cross them. They have to or it isn’t a tribe. Children have a known tendency to wander from their parent’s tribe. Thank God for that — human progress surely depends on the freedom to form and demolish tribes. In general, the more of both the merrier. Tribes matter — we cannot and will not do without them — but they rarely evolve.

Gay freedom is at least in part about the ability of people to re-form or reshape our tribe of birth. Most members of the LGBT tribe were not born into it and most people outside the tribe are nervous about their kids or friends joining it. It’s an unusual tribe because, unlike being female, black, or Asian, being gay or lesbian isn’t visible. Imagine the history of feminism if first, one had to acknowledge the socially unpopular fact of being female.

This is the context for Tales of the City, the exuberant musical now on at San Francisco’s ACT. It is a huge, sprawling, production based on bits from the beloved books by Armistead Maupin. The play, (like The Beginners, featuring George Plummer as a man who comes out at age 75) is saved from a meandering and implausible script by wonderful characters and spectacular acting, just as the music is saved from forgettable melodies by terrific lyrics and enthusiastic performances. I have not enjoyed myself at a musical this much since Avenue Q, (the talented Jeff Whitty wrote the libretto for both).

Even three years ago, following the passage of Prop 8 in California, it was not clear that New York, backed fully by Wall Street and large numbers of business Republicans, would endorse gay marriage. It was very clearly not true in 1976, the setting for Tales of the City. But some small decisions made that year have rippled forward to the present day.

Recall that in 1976, San Francisco mayor George Moscone prevailed in a campaign to legalize homosexuality by repealing California’s sodomy laws.  That same year, San Francisco was gripped by the trial of Patty Hearst for helping an apparently drug-addled group called the Symbian Liberation Army to rob a bank. Patty was the granddaughter of William Randolf Hearst, the American publishing magnate who printed, among other rags, the San Francisco Chronicle. Then, as now, the Chron was not a real newspaper. We bought it to find out when movies were playing and to read Doonesbury. Also Herb Caen, the irreverent cataloger of left coast life and father of three dot journalism…When interest in the SLA trial began to wane, the editors of the Chronicle decided to try something new: a serialized novel.

Printing a novel in daily installments in the local newspaper was an old idea, not a new one. It is how much of Charles Dickens, first came out (US papers would plagiarize each episode without paying Dickens or his publishers a dime. Made him mad as the dickens…). The Chron ran a column by writer nobody had ever heard of. Armistead Maupin, who called his column Tales of the City.

Oh. My. God….the effect was amazing. It was like soap opera – you hated to miss an installment. Pretty soon you actually cared about the friends and neighbors at Barbary Lane — the fictional community invented by Maupin. The plots never made any sense (a cult of cannibals at one point took over St. Mary’s cathedral on Nob Hill), but it was a helluva lot of fun. And not only that, it was outrageous gay fun — which at the time seemed considerably more fun than the sort the rest of us were having. This was the year that George Moscone nominated a respected community leader, Jim Jones of the People’s Temple, to San Francisco’s Housing Authority and banned roller-skating on public streets. It was the year that Bob Dylan, Eric Clapton, Joni Mitchell, Neil Young, Van Morrison, Muddy Waters, and Ringo Starr performed “The Last Waltz” with The Band at Winterland, which Martin Scorcese made into a fine movie.

Within two years, Maupin was a successful author and an important voice of a gay community that continued to grow in power. In 1978, the Gay Freedom march drew 250,000 people — double the size of the San Francisco antiwar marches of a few years earlier. Reaction was swift: orange juice commercial queen Anita Bryant launched a Save the Our Children Campaign, a crusade that received national attention and politically galvanized conservative churches. The gay community retaliated, boycotting Florida Orange Juice, costing Bryant her lucrative endorsements, and driving her into bankruptcy. John Briggs, the Orange County Republican, tried to ban gays from teaching positions in California. But the cause of Gay Freedom seemed only to grow, spreading from San Francisco and New York to major cities around the country and the world.

What could stop this sort of delirious progress? It was a dizzying, naive, and stupid time — wonderful and amazing to recall. To preserve the momentum hes saw building, Moscone played hardball: he led San Francisco to district elections. This meant that San Franciscans voted by neighborhood. For the first time, they elected a Chinese-American leader, an African American woman, a single mother, and, most incredibly and for the first time in US history, an openly gay man: Harvey Milk of the Castro.

Those who wondered when the progress would end soon found out. San Francisco was forming new tribes and demolishing old ones at a record pace. Some tribes were crazy like SLA wannabes such as the Red Guerrilla Family and the New World Liberation Front. Or the People’s Temple. Moscone responded by installing metal detectors in City Hall. But in November, Jim Jones, who had left the Housing Authority and taken his followers to Guyana, killed 900 of them in a mass suicide. Nine days later, Dan White, a disgruntled Irish Catholic cop and former supervisor who had lost out in district elections, assassinated both Moscone and Milk. He avoided Moscone’s metal detectors by crawling in through a basement window.

Within three years, gay men were being diagnosed with an illness nobody understood. Doctors knew that it was an immune disorder, but had no idea what triggered it, so they could only call it a syndrome, an acquired immune deficiency syndrome. The disease is now a global pandemic and has killed more than thirty million people. Nearly two million people die from AIDS each year, even though it is now a disease that can be medically managed. I can think of no social movement in human history that has been so disproportionately affected by a contagious illness that targets its members. AIDS slowed the cause of gay rights by at least twenty years.

Which makes this week’s victory all the more powerful. Liberty and the pursuit of happiness cannot happen in a closet and often cannot happen in one’s tribe of birth. Those who care about freedom, and that is a very large group, need to defend the freedom of all people to define, discover, and celebrate their own identity at least as vigorously as we protect our ability to form tribes.

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Suppose that you had an al Qaeda-like urge to cripple the world’s strongest economy. Instead of flying planes into towers and killing a few thousand however, you aspire to sicken hundreds of millions of us. You want to poison Americans gradually but in huge numbers. Your goal is to shorten our lives, weaken our children, and cripple our economy with extraordinary health care costs, knowing that  as people become sick and discouraged, they often sacrifice their young and rarely develop memorable literature, arts, technology, or civilizations.  

Your poison of choice might be an addictive, debilitating drug. England demonstrated this approach in the 19th century when they spread opium throughout urban China. The Chinese became so weak that England ruled them for a century. When they tried to revolt, the Brits grabbed Hong Kong for 166 years. The problem with this approach is that it’s too 19th century. Americans recently chased Big Tobacco overseas — we are naturally suspicious of narcotics.

If drugs are out, what about food that is addictive and toxic in excess? This would be ideal, since even Americans who hate tobacco smoke will defend their God-given right to eat unlimited quantities of tasty food.

THE KILLER DIET

In a moment of dazzling insight, you realize that at least three essential foods are both delicious and highly toxic if over-consumed. We are all, in varying degrees, wired to love sugar, salt, and fat — probably because they are both essential and historically scarce. Most of us can overcome a preference for salt and fat in a few weeks. But a strong preference for sweets is evident in newborns and can be an especially tough habit to kick.

To carry out this plot at scale, you would need powerful allies in government, corporations, and the media. Food companies and restaurant chains will rally to your cause. Pepsico, America’s largest food company, would become your closest ally. During the course of a generation, they have made calorically dense, dry, salty, oily, and sweet foods available at very low prices. They offer these foods in gas stations, movie theatres, hotel rooms, airlines, workplaces, and schools. Allied companies make meat so cheap that consumption has risen from less than a pound a week to nearly a pound a day. These companies ensure that taxpayers subsidize cheese, butter, and sugar so that per capital consumption of these ingredients has tripled or quadrupled within a few generations. Drug companies and most doctors will also join your cause because they make billions treating the illnesses you are determined to promote.

Disinformation … er, advertising, is essential to your campaign. Pepsico, the world’s largest vendor of sugared, salted, oily snacks calls itself “a health food company” and spends billions advertising images of fresh fruit and vegetables alongside its products. They wisely hired a smart, attractive vegetarian woman as CEO. She has hired respected nutritionists from government and universities and coaxed credulous puff pieces from NPR and the New Yorker. Fortune has twice declared her the most powerful businesswoman in the world. 

You need flacks and lobbyists, so your allies would fund the Salt Institute and the Sugar Association, to promote salt and sugar as a healthy and part of a “balanced, natural lifestyle”. Modeled after their late sibling, the now defunct Tobacco Institute, the Sugar Institute declares itself “Sweet by Nature” and promises “to promote the consumption of sugar through sound scientific principles” and to describe “the benefits that sugar contributes to the quality of wholesome foods and beverages”.

A wonderful feature of your plan is that it can go viral. As people consume ever more more sugar and refined carbs, diabetes will become epidemic, which sharply increases heart and kidney disease. Once Americans have the world’s saltiest diet, high blood pressure will inevitably follow and make diabetes and kidney disease much worse, while leading directly to heart disease. Obesity will not only lead to diabetes, heart disease, and high blood pressure, but it leads to more obesity because getting fat slows your metabolism – making you even fatter. Meanwhile, your plan promotes a nice variety of cancers and, in an amazing stroke of luck, it hits the most vulnerable people first: blacks, Latinos, and poor people get sick even faster on these diets than affluent whites do. The viral growth of Google or Facebook has nothing on your plot. 

Physicist Steven Hawking asserted this week that “heaven is for people who are afraid of the dark” (of course some people do science because they are afraid of the dark, but that’s another post). But suppose for a moment that our great grandparents were watching this conspiracy unfold. They would shout to high heaven. Listen carefully and you might hear their voices:

“YOUR KIDS ARE GETTING FAT”

They would be alarmed that children are no longer skinny. In the 50’s, my nickname was “Slim” because you could easily count my ribs — and this was true of most kids. Since then, childhood obesity has tripled. Today we no longer call Type II “adult onset” diabetes since overweight kids now get this serious, life-altering disease all the time.

Our ancestors would hardly recognize our diets. The UN Food and Agricultural Organization notes that Americans consume more calories than any other country – an average of 3,770 per person per day. Since men burn on average about 2,700 calories/day and women about 2,000, we eat a lot of food that we don’t need. It adds up: airlines have to carry more fuel per passenger than a generation ago because a planeload of people weighs a lot more than it used to (to offset the increased fuel costs, they serve snacks instead of food, which doesn’t exactly help).  

“CUT THE CRAP”

Our great grandparents would be alarmed at how much of our food comes from boxes and bags and how little of it comes from a home kitchen. The USDA: “Americans eat 31 percent more packaged food than fresh food, and they consume more packaged food per person than their counterparts in nearly all other countries. A sizable part of the American diet is ready-to-eat meals, like frozen pizzas and microwave dinners, and sweet or salty snack foods.”  

We eat more fat than any other nation and the USDA reports that Americans eat 156 pounds of added sugar each year — a five-pound bag every 12 days. Most of it is not traditional sugar, or sucrose, but another word that ends in “ose” (dextrose, maltose, high fructose corn syrup) or honey, molasses, etc. The largest source of “added sugar” is soft drinks from companies like Pepsico. We drink an average of 50 gallons of soda each year, accounting for a third of all added sugar we consume. A quarter of our added sugar comes from prepared foods like yogurt, ketchup, canned vegetables and fruits, and peanut butter (most ketchup, for example, has more sugar per ounce than chocolate ice cream). 

We have understood this problem since at least the early 1950′s, when the US military became alarmed at the results of autopsies on US Korean War casualties. Every US soldier had atherosclerosis — fat in their coronary arteries. But Korean soldiers did not — unless they were Korean-American. The discovery that the US diet was sickening young, fit soldiers was a closely guarded secret for many years.   

Our ancestors would yell at us to join the resistance by avoiding oil and refined carbs. Even “healthy” oils are not helpful. That extra virgin imported stuff not only has the same 4,000 calories per pound as any other oil, but it tastes great, so you eat more of it. A good guideline is to not buy or eat anything with more than 20% of its calories from fat and to avoid any package that lists a sugar in its top five ingredients. 

But don’t some people lose weight on kenotic (high fat, Atkins-style) diets? Many do, if they cut out more calories of refined carbs than they add back in fat. But they mortgage their health, as Atkins himself would have discovered had he attended his own autopsy. The pathologist discovered that Atkins had suffered a heart attack and had both congestive heart failure and hypertension (he did not die of these things — he fell and whacked his head). Some flashy journalists notwithstanding, not a single peer-reviewed study supports kenotic diets for weight loss or for health — but more than 113 peer-reviewed studies demonstrate that very low fat, low salt, near vegetarian diets combined with exercise can make an enormous and sustained difference.

“SAVE CHICKEN FOR SUNDAY”

In good times, our forebears ate “a chicken every Sunday”, and it often fed a family of 8-10. Today we routinely order 24 oz steaks and serve each person a half chicken. The American Meat Institute is thrilled: they brag that Americans consumed 234 pounds of meat and poultry per person in 2006. Since 10% of population claims to be vegetarian and another 10% are under ten years of age, the average adult carnivore is eating 300 lbs of meat and poultry each year (and only about 12-15 pounds of fish). Fish are better because unlike the fat from animals with feet, fish oil is unsaturated and often contains Omega 3s that retard arterial inflamation. 

Saturated fat and trans fats (margarine and other oils that are solid at room temperature) are the leading cause of the atherosclerosis — the first sign of heart disease that is now the leading killer of Americans. People who eat no more than 3-4 oz of skinless fish or white chicken 2-3 times a week do a lot better. This is a serving about the size and thickness of a deck of cards. Plenty of people, especially educated young people, have simply cut out meat altogether. Not only is this dramatically healthier for humans, but it is much better for the planet. Now that large populations in developing countries have enough grain to raise livestock rather than subsist on it directly, we need to treat meat as a condiment to be used sparingly, just as the rest of the world does.  

“PASS ON THE SALT”

Our ancestors would gag on the quantity of salt we eat. The Institute of Medicine, part of the National Academy of Sciences and the USDA both recommend that healthy adults consume no more than 1,500 milligrams of sodium per day, 1,300 for people over 50, and 1,200 for people with hypertension or who are over 70. (Recommended Daily Allowances on food labels are still based on the old standard of 2,400 mg.) Data from the 1988-91 National Health and Nutrition Examination Survey estimates that we consume 3,400 mg of sodium per day before we add salt in cooking or at the table. Altogether, we eat almost 4,000 mg of sodium daily. People who frequently eat in restaurants consume even more.

What’s wrong with sodium? It causes hypertension — i.e., high blood pressure. Hypertension is the #1 destroyer of kidneys, the #1 risk factor for stroke (which is the #1 reason people enter nursing homes), the #1 cause of heart failure, and a major risk factor for senility. Two thirds of Americans have high blood pressure, including far too many children and teens.

We have known for decades that every population that adds salt to food suffers from hypertension and that no population that refrains from adding salt suffers from this problem (see the chart below for examples. Note that it shows dietary salt, not sodium. Salt is 40% sodium by weight). As the National Heart and Lung Institute notes:

“the experimental data with animals have consistently shown that diets high in salt raise blood pressure in a linear dose-response relationship. The findings include data from a study of chimpanzees, the animal species genetically closest to humans. Cross-population studies also have confirmed the salt-blood pressure relationship.”

Result? 90% of Americans over 70 have high blood pressure and most who don’t have it will get it. Most people who have hypertension are not being treated for it and most of those who are being treated do not have their blood pressure under control. Since cardiovascular disease is the primary cause of death in the United States and hypertension is both a leading cause of heart disease and the number one reason that patients visit doctors, cutting out salt is common sense. According to a recent University of California at Berkeley study reducing salt intake by 1,200 mg/day (or by less than 1/3) would save as many lives over the next 10 years as if all American smokers quit tomorrow for good. 

Where does all of this salt come from? Mostly we get it second-hand, courtesy of packaged food. Bread, soup, pasta sauce, canned veggies, canned beans, nuts, and cereals are nearly all salt toxic — even if the other ingredients are perfectly healthy. Salt in our diet is championed by the maker of Fritos, Tostitos, Doritos and dozens of other salty, oily snacks. That would be Pepsico – by far the world’s largest maker of salted snacks.

Resistance fighters have a real challenge here. If you eat a 2,000 calorie diet each day, you will get about half of your 1,500 mg of sodium naturally from food. That’s all you need. To stay within medical guidelines, nothing you buy in a store should have more mg of sodium than calories. (If a serving of pasta sauce has 150 calories, it should not have more than 150 mg of sodium. It will often have 600 mg). Read the labels and you will become astonished and enraged at how much salt is quietly added to packaged food. Corn Flakes, for example, have more salt in them than corn chips. Restaurants are even tougher — you have to consult with the chef. I have been minimizing added salt, fat, and sugar for about a month. It takes a bit of planning, because food manufactures and restaurant cooks make these second-hand toxins pervasive. Indeed, sugar, fat, and salt are the only flavors that many food manufacturers seem to know. 

“GET OFF YOUR ASS”

Our forefathers and mothers did tough physical work. Most of us, obviously and thankfully, do not. The National Health Interview Survey by the Center for Disease Control determined that 40% of us never engage in any exercise, sports, or active hobbies. The older we are, the less educated we are, and the darker we are, the less likely we are to ever break a sweat.  

People who are sedentary are at significantly greater risk factor of getting coronary heart disease, hypertension, colon cancer, diabetes, obesity, and much else. Medicine has few very simple answers, but along with paying attention to what we eat, exercise is the closest thing medicine can offer to a magic bullet. Maybe this is why people in Pepsi ads are so fond of it. 

“DIET, PEPSI”

The current issue of the New Yorker contains a wonderful article on Pepsi by John Seabrook. He explores with Pepsi CEO Indra Nooyi the paradox of a company devoted to sugar, salt, and fat suddenly declaring itself a health food company. Even though Seabrook knows better, he finds himself being seduced by Pepsi’s apparent commitment to sustainability, workplace fairness, and healthy foods. He is fascinated by Nooyi and her doublespeak (“Performance with Purpose” is the corporate tattoo), by the potato chip factory, and even by the forthcoming “15 micron salt”. He needs to be honest: Nooyi runs a company that directly kills more Americans than tobacco executives could ever dream of. Where is Seal Team 6 when we really need them?

The article is a horrible muddle, but it contains one shining moment of clarity. Seabrook encounters an expert who understands that the main difference between Pepsico and al Qaeda is their respectability and their timeline for killing Americans. When asked to comment about Pepsico’s aspiration to play a leading role in the battle against obesity-related public health issues, the unfortunately named Marion Nestle, a professor of food studies at NYU, had the guts to blurt out the obvious truth: “the best thing Pepsi could do for worldwide obesity would be to go out of business.”

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What’s up with Wisconsin? Is the American labor movement finally rising from the dead? Will progressives in the birthplace of the Progressive Party defeat Republicans in the birthplace of the Republican Party?

Wisconsin is a misleading event because Republican overreach masks the real, even desperate, problems facing public employees.

• Public unions in many locations face legislation intended to destroy them. The attacks will succeed in some states — perhaps even in Wisconsin. But unions are well-equipped to deal with political attacks. Plus, as Wisconsin illustrates, politicians habitually over-reach. These things backfire.
• Every public union is now under massive economic pressure thanks to the math of budget deficits. This is a separate problem that fuels the political attacks. It’s urgent because most unions lack the tools and the imagination to address structural deficits in state and local governments and their contribution to those deficits is both nontrivial and politically damaging.
• Finally, public unions lack a sustainable strategy. Public employees depend on public support. But they sold their soul in the 60s when they chose politics and collective bargaining over service innovation and professionalism. They will be obliterated if they don’t rethink the deal.This is the most daunting challenge of all because it requires unions to rethink their purpose and redefine the source of their power — something that very few organizations can do successfully.

The Cheeseheads Fumble

Wisconsin Republicans are behaving badly and increasingly, the public knows it. The newly elected governor, Scott Walker, is turning out to be the gift to organized labor that keeps on giving. He has made at least three unforced, rookie errors:

• He ruined the optics by championing a self-serving proposal. Instead of proposing to weaken all public unions, he wants to exempt the firefighter’s and police unions that supported him. Since the public fears strikes by cops and firefighters more than by teachers or janitors, this is hopelessly back asswards.
• His timing is off. Walker attacked after unions had granted substantial economic concessions not before. He denied himself the cloak of economic crisis. Weak.
• His tactics are ham-fisted. By confronting unions directly, Walker played to their strength. American labor unions are born of industrial combat — confrontation is a core competence. Walker forgot what every third grader knows: don’t pick a fight with the big mean kid. Instead, put him in a round room and bet him he can’t find the nickel in the corner. Major fail.

Walker has botched not only his tactics, but along with most Republicans, his fundamental strategy is also a mess. Walker wants to cut off the air supply of public unions by removing union security and dues check off provisions and requiring annual recertification votes. Union security agreements address the free-rider problem that plagues organizations designed for collective action. These provisions require anyone who enjoys the benefits of a union contract to contribute to the costs of obtaining and enforcing the contract. Dues check off requires an employer to collect the dues via payroll withholding.

Walker fails to appreciate that what makes unions happy also make them fat. Union security provisions are like donuts: they satisfy an immediate craving but leave unions soft in the middle. When union members pay dues in person to a shop steward or at the union hall, unions get valuable first-hand information about their member’s concerns. The union becomes tightly woven into the fabric of work life. Once management automates the process, loyalty to the union weakens. But hey, those are some nice donuts…

I began organizing and representing public health care workers in the mid 1970s, when California did not permit either agency shop or union shop agreements in public hospitals. As a union representative, I had to collect dues on the job, which required me to organize and train a cadre of shop stewards to get it done. It forced me to visit all three shifts 2-3 times each week for every public hospital I represented. I got to know every workplace leader. If someone had questions about the union or a problem with it, I met them in person. I learned about workplace problems early (in a hospital in Salinas, I never filed a single grievance in two years. I knew every supervisor and could worked out quick solutions when I needed to – often before an employee had been disciplined or fired. Of course the threat of formal grievances helped). The point is not that I was always convincing – it’s that I was never indifferent. Frankly, I couldn’t afford to be.

In the late seventies, California law changed and we negotiated union security and dues check off provisions. Soon, I knew the shop stewards but not the shop floor leaders. I cut back on late night and early morning visits. The union felt stronger because it was richer– but we had been weakened and we knew it. One sign: a backlog of grievances.

Employers, notably those affiliated with the National “Right to Work” Committee think that taking donuts away makes unions weaker. They look at states that prohibit union security arrangements and see weaker unions. They conclude that imitating these states, as Wisconsin is basically proposing to do, would weaken their unions. And in the short term, they are surely right. Sugar cravings are a bitch.

But in the long term, Republicans would be smart to remember that every truly powerful union in American history was built without union security or dues check-off. The railroad, steel, mining, auto, shipping, and textile unions that could and did paralyze national commerce were built by hand, without the help of friendly HR staff who signed up members as part of the employment paperwork. Republicans who want their unions unsweetened risk seeing them mutate like a zombie virus. Unions may die or they may go the gym and come back ten times stronger, especially any place they enjoy a steady diet of arbitrary management. Which is to say, everywhere.

During my health care days, there was one CEO we feared more than any other -- a guy who achieved astonishing clinical and cost results by applying management principles to hospital operations. He didn’t fight unions so much as he focused them on improving patient outcomes. His hospitals were very tough to organize because he fired arrogant managers and listened to his people. Unions were delighted when this guy got caught in the largest Medicare fraud scandal in US history.

That CEO, Rick Scott of Columbia HCA, is now the governor of Florida. He thinks he is CEO of Florida, but he knows better than to do things that strengthen his unions. He cannot put enough distance between his state and Wisconsin. What Rick Scott and other politicians much smarter than Scott Walker know is that if you hate unions, grant them security provisions and dues checkoff. Don’t take away the donuts — they are a proven sedative.

Indeed, if Republicans want to lower the cost of government, they should look as we will now, to those responsible for controlling costs: public sector managers.

Next: Management Malpractice and High Union Pay

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If the global financial collapse has a silver lining it’s the Vanity Fair accounts by Michael Lewis of how three different European countries responded to the meltdown. We can only hope that Lewis adds to these reports and turns them into another best-selling book.

Lewis (Liar’s Poker, Moneyball, The Blind Side, The Big Short) is a genius who is studied by every serious business writer. A local guy who finds drama and comedy in high finance and sports. Lewis is funny and astute. He exposes fools with a touch so deft that they become his friends. The man appears incapable of producing a dull paragraph. 

In his Euro DisasterLand trilogy, Vanity Fair serializes Lewis’ accounts of the financial collapse of Iceland, Greece, and Ireland. In each country, cheap and unregulated money created a very different disaster. In each case, Lewis notes, “An excessive faith in free financial markets led people to be allowed to do things with money they should have never been allowed to do.”

• <Wall Street on the Tundra> describes how a group of Nordic Alpha Males pretending to be investment bankers looted and wrecked the economy of Iceland, which is now run mainly by women. 
• <Beware of Greeks Bearing Bonds> tells of Lewis’ visit to a wealthy monastery to meet monks who exploit the uniquely Greek combination of extremely generous social services and rampant tax evasion.
• <When Irish Eyes are Crying> Lewis finds a housing bubble which is a parody of the US experience. Without a single derivative, the Irish bid their real estate to spectacular levels and dump the full cost of the resulting bank collapse onto taxpayers.

Lewis brings an innocent eye to these stories of nations seized by financial foolishness. It helps that he does not have a deep background in these countries. As he did in The Big Short, he meets people who saw the crisis coming (an in some cases profited from their insight).

Lewis is of course anything but innocent. Having documented the foibles of his reckless co-workers who traded bonds for Salomon Brothers, exposed the fact-averse pretenders who ran baseball teams, and shamed willfully blind US regulators, rating agencies, and derivatives investors, he knows that the story will end badly. You know it too, but you press on because, like any mystery novel, you want to see the bad guy go down. 

Unfortunately, in matters of global finance, the victims are not always the bad guys. Lewis asks who, when the dust finally settles, pays for all of this foolishness? Iceland seems determined to bootstrap its way back by rebuilding its banks. Greece, a nation that appears even less numerate than our own, looks to be in complete denial. Ireland, astonishingly, elected to impose the full cost of brain-dead banking on its taxpayers — for now. 

This will be a fine book — but it’s not worth the wait. If you have not followed the Euro DisasterLand trilogy, chase the links and treat yourself to some of earth’s finest business journalism.

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