The sunk cost fallacy is the nearly automatic psychology that causes you to stick with losing bets rather than jump ship. A strategy to combat this fallacy — mentally focusing on the potential gains of cutting and running rather than the losses — was outlined last week in The Atlantic. Persistence, an important quality in entrepreneurs, can also be amplified by self-justification or normative pressures to stick with in-progress endeavors, according to researchers at Oregon State and Utah State universities. They surveyed 135 (mostly male, middle-aged) high-tech entrepreneurs in the U.S. and found that the entrepreneurs don’t always pursue decisions that would maximize utility if it requires giving up a current business venture.

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Like mere mortals, entrepreneurs are also motivated in their decision-making to maximize potential financial and non-financial benefits (value) given the likelihood of achieving those benefits (expectancy). Entrepreneurs also have a host of other factors to consider, like their past startup experience, the size of their current business, potential psychological, social, and financial switching costs, and whether starting a new business meshes with their personal principles of autonomy and risk-averseness, for example. When it comes to leaving their current business and starting a new one, however, it turns out that the way expectancy and value play into the decision isn’t straightforward.

Here’s how the survey worked, in the researchers’ own words:

“The participants were asked to rate the likelihood that they would pursue a series of hypothetical entrepreneurial opportunities. Each hypothetical opportunity was presented as a comparison with the participant’s current business across four criteria: value of financial returns, likelihood of finan­cial returns, value of non-financial benefits, and the likelihood of non-financial benefits”

To test the effects of expectancy and value on entrepreneurs’ persistence with their existing business, the researchers set different prior conditions: in some cases the entrepreneurs would have the resources to continue with their current business as well as start a new one, while in others they had to choose between staying with the old business or launching a new one. These two conditions resulted in unexpected behaviors.

If the potential value of the current business was higher than that of the alternative, or if probability of success was higher for the current than the alternative, entrepreneurs tended to discount potential highly successful or financially rewarding outcomes associated with the hypothetical new business venture. That is, expectancy and value weren’t simply additive factors that predicted whether entrepreneurs would spring for a new business opportunity.

There are a number of factors that could be at play here beyond just money. The researchers also looked at the size of the company (entrepreneurs were more likely to leave bigger firms) and past startup experience, which could help entrepreneurs better evaluate the market (over 80 percent of those surveyed had previous startups under their belt). Uncertainty (as opposed to risk) may also play a role, with entrepreneurs opting to stick with their existing venture where some amount of uncertainty may already have been eliminated.

Of course, an online survey is no match for the real world, where entrepreneurs would have much more information and time to guide their business decisions. But if entrepreneurs can self-diagnose and recognize tendencies for overconfidence, counterfactual thinking, and a drive to avoid uncertainty, they can potentially maximize their returns and generate some kickass businesses in the process.

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The showcase for the product track packed an auditorium with 50 next-big-thing prototypes, apps, and inventions. Offerings included geolocation apps, hotel and travel services, sanitation and energy products targeted at the developing world, assistive technologies, and big data approaches to property search, programming, and human resources. More than a few of the teams looked a bit sleep-deprived, telling me they had cobbled together their platforms in a few days or weeks. Besides the Bluetooth pepper spray device (Deimos Defense) we hope we will never need, here are a few startups that stood out from the crowd.

Energy

Dragonfly Systems has patent pending tech to boost the output of solar panels. Instead of the weakest panel in a linked installation bringing all the others down, Dragonfly’s module reroutes the energy that would otherwise be lost as heat back to the grid. Each of their modules costs about $9, and Dragonfly said it brings the best of a costly parallel circuit system into the standard serial way that panels are linked. Their tech recently earned them third place in the Department of Energy FLOW clean business challenge.

Cloudfridge, from a company called Visible Energy, does what the name implies: in place of the traditional thermostat, it takes refrigeration to the cloud. A large fraction of commercial energy use goes towards refrigeration (think walk-in meat lockers). Cloudfridge uses Wi-Fi and sensors to optimize commercial-grade cooling, and has just been awarded a grant by the California Energy Commission.

Defense

One of the developers of this mine-sniffing tech is a native of Sri Lanka who was inspired to name his company after a poem by Nobel Prize winner Rabindranath Tagore. Red Lotus Technologies brings the beeping handheld metal detector into the digital age by visualizing buried hazards on a tablet. This visual feedback method could also improve training for human mine detectors. Red Lotus’ tech is being trialed by the Department of Defense later this year.

Engineering

The winner of the product showcase challenge was Alice, construction engineering software supercharged with artificial intelligence. In a matter of seconds, Alice churns out project management schedules optimized by equipment, manpower, and materials availability, to enable construction projects to proceed efficiently and on-time. Alice’s assembly-line-for-buildings tech earned its team $20,000 (below).

Medical devices

Awair won the $25,000 general entrepreneurial challenge with its patient ventilation system. The gag-inducing tubes used in intensive care units to deliver air are often accompanied by heavy sedation. Awair uses topical nerve numbing so reduced or no sedation is needed, leading to improved patient comfort and faster healing times.

Patient education

Anjna is a non-profit that harnesses the natural proclivity for texting in its low-income target demographic. Their system automates appointment and medical reminders via text, and also delivers tailored medical content. Anjna took home the grand prize of $25,000 in the social entrepreneurial track.

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Led by a group of entrepreneurs and venture capitalists, including SurePayroll founder Troy Henikoff, OkCupid founder Sam Yagan, Sandbox Industries’ Nick Rosa and New World Ventures’ Adam Koopersmith, Excelerator Labs launched three years ago and has established itself as a prominent part of Chicago’s growing startup community. In the past three years, the program said its 30 companies have raised a total of $30 million. But by becoming part of the national TechStars program, it could help elevate the local community and give founders access to TechStars’ larger network of mentors and entrepreneurs.

In a blog post, Cohen said he and TechStars cofounder Brad Feld had advised Henikoff and Yagan and had mentored companies in Excelerate Labs’ classes. He also said that he had personally invested in three Excelerate startups.

“As TechStars has expanded into new cities, we’ve always started our programs from scratch. But Excelerate made us think differently,” Cohen wrote. “We were so impressed with what they’ve built that we asked them to join forces with us and turn Excelerate Labs into TechStars Chicago. TechStars and Excelerate have always been kindred spirits: we both put entrepreneurs first and believe in the power of mentorship.”

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Backed by the New York City Economic Development Corporation and Health 2.0, PILOT Health Tech NYC is designed to pair health startups with city health organizations, including hospitals, pharmaceutical companies and nursing associations, for pilot programs.

Funded by the city and part of a larger effort to boost life science and health care technology, the program will award up to $100,000 each to 10 pilot programs that will last three to six months.

Jean-Luc Neptune, senior vice president of Health 2.0, a conference, media and innovation company in health tech, said that while health care organizations want to work with startups — and vice versa — it can take a couple of years for them to find the right partners and get the deal done. Hospitals, community groups and companies may not have the time or internal staff resources to research the best tech partners and implement new programs. And health entrepreneurs may not have the connections to navigate the larger ecosystem.

“We’re closing the gaps and making it easy for the technology to get to the market and for the market to find the technology,” Neptune said.

In partnership with the Blueprint Health accelerator and Startup Health academy, the new program is encouraging early-stage startups to attend “matchmaking sessions,” where they’ll meet with 10 to 20 “host” healthcare organizations. If the host organizations and startups make a match during the speed dating-like sessions, they’ll jointly apply for the $100,000 funding. Neptune said that startups and health organizations that have already expressed interest in working with each other can also apply to the program by its May deadline.

In addition to Blueprint Health and Startup Health, New York is now host to the New York Digital Health Accelerator and the Bio and Health Tech Entrepreneurship Lab. But given that for many health tech startups, a big hurdle (often more than getting capital or finding talent) is commercializing the product, PILOT Health Tech NYC will be a nice complement to the city’s existing health entrepreneurship programs.

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It’s hardly a shocker that longtime tech hub Silicon Valley took the No. 1 spot. But, over the past couple of years, New York has become more of a magnet for entrepreneurs and it’s surprising to see the city lag behind not just one location, but four. As my colleague Ryan Kim reported earlier this year, East Coast industries, like media and advertising, as well as the rise of local angel investors and venture capital firms, have made the city more of a draw for entrepreneurs.

Bjoern Lasse Herrman, CEO and co-founder of the Startup Genome, said that while he and his team were also surprised that New York didn’t come in second, several factors contributed to its new position.

“The goal of the rankings were to be able to look at the ecosystems less [in terms of] the pure number of companies but from the standpoint of being able to identify specific advantages and disadvantages,” he said.

In compiling the list, the company measured the cities across several indices: startup output (the total activity of entrepreneurship in a given region, controlling for population), the availability and activity of funding sources, the performance of startups (as measured by revenue, job growth and other variables), the mindset of entrepreneurs, how quickly startups adopt new technologies, the availability of mentors and support and the talent of founders. Startup Genome relied on data from the more than 50,000 companies that have used its Startup Compass benchmarking tool, as well as surveys.

While New York may best most other cities in terms of the sheer amount of startup activity, Herrman said its “startup output” index slipped once they factored in population.  He also said that relative to other cities, New York has fewer early investors willing to fund companies in their riskiest stages — a characteristic that is typical of younger startup ecosystems, he added.

Anecdotally, from the constant stream of funding announcements, it seems as though New York has a healthy supply of angel investors and venture capital firms. But Herrman said New York’s “funding index” was lower than that for Silicon Valley, Tel Aviv and Boston, which have longtime investors and serial entrepreneurs who are now actively investing.

New York does, however, distinguish itself in other ways, Herrman said. In fact, he added, out of the top eight ecosystems, New York is the most differentiated from Silicon Valley because of its focus on advertising, e-commerce and fashion. As the company reported in an earlier study, New York also beats out other cities on another key metric: the percentage of female startup founders.

In addition to the five companies mentioned above, the report’s list of the top 10 ecosystems included Boston, London, Toronto, Vancouver and Chicago (in that order).

Image by SeanPavonePhoto via Shutterstock.

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“Students from all majors are interested in being entrepreneurial but they crave real-world experience,” said co-founder and CEO Brian Sowards. “We realized this fundraising platform could be a way of empowering experiential learning.”

Launched in January and piloted at the University of Delaware this past semester, USEED is like a Kickstarter for education that allows students to raise money for research projects, philanthropic programs, foreign study travels and other experience-based initiatives. But in addition to just providing a crowdfunding platform, it aims to give students online guidance for pitching ideas, social media marketing, collaborating with peers and using other digital tools.  The company has raised an undisclosed amount of angel funding and is preparing for a wider private beta launch in January. This week, it won first place in a business competition at the annual Educause higher education conference in Denver.

USEED isn’t the only crowdfunding option available for education-related campaigns. Students of all ages already use general crowdfunding sites like Indiegogo and Peerbackers, as well as emerging education-specific sites like Smartn.me and KnowledgeStrong. Wishbone and Takeaeshine use crowdfunding to help low-income kids pay for educational opportunities. And Upstart helps college entrepreneurs find money and mentors for their ideas.

But Sowards, a Philadelphia area entrepreneur and former tech consultant whose co-founders include two recent University of Delaware graduates, said their platform differs from competitors in a few key ways. In addition to the focus on teaching students startup skills and including more tools for promoting campaigns, he said the site doesn’t target students directly, but works through universities.

By getting buy-in from school administrators and faculty, he believes they can have a bigger impact on the institution  (with offline clubs that complement the website, for example) — and they can help universities attract new donors.

Instead of taking a cut of the amount raised (as other crowdfunding sites do), USEED charges the university $500 per project page (for student or faculty projects). The university hosts the transaction and gets the opportunity to upsell funders on other institutional gifts (as well as the funder’s data unless they want to keep it private).

That kind of model – which targets the notoriously slower-to-move institutions instead of the students and teachers – is often discouraged among entrepreneurs and venture capitalists. People like Union Square Ventures investor Fred Wilson and Princeton Review and Noodle Education founder John Katzman have explicitly cautioned against selling to educational institutions. In K12 education, platforms like social network for education Edmodo, for example, are showing that they can penetrate schools by skipping over administrators and taking a bottom-up approach that starts with teachers and students.

But though Sowards acknowledged that USEED’s approach will take longer, he said he believes it’s important to help students and schools work with their community, including alumni.

“We’re taking a slower-scale model,” he said. “[But we get] deeper buy-in and comprehensive participation. This is a hearts and minds campaign.”

Image by Tischenko Irina via Shutterstock.

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On Wednesday, Fred Wilson, a managing partner at the firm, gave a little insight into how he and USV view opportunities in education technology as part of an open online course on entrepreneurship in education, called Ed Startup 101. Speaking to a group of ed tech academics, researchers and entrepreneurs, Wilson talked about the role of venture capitalists, potential business models for freemium startups in education and a few areas that are most ripe for innovation.

Until recently, venture capitalists haven’t looked favorably at education, which is notorious for its bureaucracy and long sales cycles. But as startups have attempted – and shown early success with – new models that skip over institutional buyers to target teachers and students, investors have steadily warmed to the sector, including K-12 education.

According to GSV Advisors, a Chicago-based investment firm that specializes in education, transactions in K-12 education climbed to $389 million in 2011, which is up from just $13 million in 2005 and more than three times the investment in the sector in 2010. Funding has been so strong that some have already started asking the inevitable question about whether an ed tech bubble is brewing.

Wilson didn’t offer a position on the bubble question, but said, “Investors think there’s a lot of money to be made at the intersection of education and technology. … This will turn out to be a hyper-competitive market.”

The full video of the talk – which was moderated by David Wiley, associate professor at Brigham Young University’s David O. McKay School of Education, and Richard Culatta, Deputy Director of the Office of Educational Technology at the Department of Education – is available here. But below are a few takeaways from the conversation.

Consumer tech offers plenty of models for freemium ed tech startups

It can be head-scratching for people outside the tech world (and even, sometimes, for those inside it) to watch venture capitalists pour money into startups without a clear business model. As one of the students in the course noted in a question for Wilson, “It seems as though the revenue model for these startups — for the time being at least — is just to raise venture capital.”

But Wilson provided several examples in which consumer startups with a free service eventually found a path to profitability after years of venture backing, including Dropbox and Twitter. In those examples, he said, venture capital played a key role in helping them reach the scale that would make a freemium model work.

While Union Square Ventures isn’t an investor in Coursera, he speculated that the company could grow into a WordPress-style open software model that provides a basic service for free but charges for extra support. As the ed tech market expands, he expects models of all kinds – from those supported by advertising to those with enterprise licensing models – to emerge.

Sell to the learner first, not the institution

“We should compete with the existing education system as opposed to sell to it,” Wilson said. That doesn’t mean he thinks the startups in his portfolio are going to put Ivy League institutions out of business, but that entrepreneurs can make faster progress by bringing their tools straight to the learners and the teachers providing instruction. That’s the way Edmodo has gained its strong traction and the approach Codecademy has taken with its after school program targeting students in schools without computer science instruction.  As students and teachers adopt new platforms, Wilson said, the institutions will come around.

Vendor exclusivity is like teacher tenure – it’s a bad thing

As more companies turn their attention to online learning and digital education, Wilson said universities shouldn’t standardize with just one vendor but support the range of tools that faculty members choose. Exclusivity, he said, makes vendors “fat and happy” and less incentivized to innovate. “Like tenure, I think it’s a bad thing in the education world because it makes people feel comfortable,” he said. “I don’t think there’s any benefit anyone would get by standardizing on one platform.”

Credentialing, peer-to-peer networking and verticals are areas of opportunity

Now that plenty of platforms offer courses and instruction, the next step is figuring out whether students are actually mastering the skills and knowledge that they’re setting out to learn.  That credentialing and accreditation question (which we’ve touched on in posts about startups like LearningJar, Degreed and Smarterer) is one of the areas in which USV is most interested in, Wilson said.  He also said he thinks there are opportunities in peer-to-peer platforms, which leverage online communities to reduce the cost of creating curriculum and learning content, and vertically-focused startups, such as those similar to Codecademy and Duolingo.

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In this episode of See Founders Run, Scullion talks about scaling a business, aligning a vision, and accepting the best roles for the company’s success.

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It’s stuffed with factoids that may well induce depression. For example, not only were most of Europe’s biggest companies were built out of the industrial revolution but in fact continental Europe has produced just one of the world’s top 500 companies over the last 30 years (California alone, by comparison, has produced 26).

Europe produces plenty of corner shops, hairdressers and so on. What it doesn’t produce enough of is innovative companies that grow quickly and end up big. In 2003, analysing Europe’s entrepreneurial gap, the European Commission cited a study which showed that during the 1990s, 19% of mid-sized firms in America were classified as fast-growers, compared with an average of just 4% in six European Union countries.

[…]

If Europe were more entrepreneurial, says everyone from the commission down, it would not have been such a poor producer of big businesses. And it would have produced more successful new technology firms. Entrepreneurship doesn’t have to be channelled through the tubes of the internet, but over the past few decades a great deal of it has been. That an economy so copiously provided with the technically educated as Germany’s has not produced a single globally important business-to-consumer internet company suggests a big problem with entrepreneurship.

So why exactly are things so dismal?

The article identifies a set of familiar problems: Europe suffers from a lack of risk-taking; its entrepreneurs have an inability to access larger funding rounds; there are more restrictive labor laws.

But it also identifies a few bright spots, such as the fact that governments are actually starting to take a more active — and actually helpful — role in promoting startups.

Go, read!

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