Blog: Thomas Meloche

Thomas Meloche has been an entrepreneur for as long as he can remember. A native Detroiter and UofM grad, he co-founded, managed, and sold nine different start-ups in Michigan over 20 years, including the professional service firm, Menlo Innovations LLC. He is currently President of Procuit (pronounced Pro-Q-It) Inc.

Thomas will be writing about untapped Michigan potential, and more importantly, how to tap it!

Post No. 3

 I Wish We Were So Stupid

From time to time I hears folks criticizing one of our wonderful Michigan businesses. I know, this is hard to believe, but it is true. To be specific, people sometimes call our businesses and their great leaders stupid. “Ford was stupid doing this,” “GM was stupid for doing that,” and “all of them are stupid for ignoring W. Edwards Deming,” and on and on. (O.K., I admit, I'm usually the one making the Deming comment.) Usually the criticism is followed with, “And you will not believe what the morons running my company just did.”

In the past, whenever I heard people complaining about how stupid Michigan companies were, I would tell them, “If you want to really experience stupid, you have work for a California company.” Over the years, while still living in Michigan, I've somehow managed to end up working for California companies. I am not exaggerating when I say that these are the absolutely most amazingly stupid companies I have ever had the pleasure of working with. In fact, in the case of Commerce One, they turned stupidity into a mind numbingly glorious singularity burning in stupid brightness, losing literally hundreds of millions of investment dollars, shutting down profitable businesses, and driving themselves to financial ruin. If you really want to meet stupid people, I am convinced that there is no better place than Silicon Valley.

At one point I mistakenly took solace in the idea that the Michigan companies I knew were significantly smarter than the California ones. Yes, the California companies were continually doing bold, innovative, and dramatic moves, but most these moves were also colossally unforgiving and, to me anyway, quite frequently stupid. Silicon Valley companies seem to enjoy betting their entire future on some crazy innovation, a single roll of the dice. Imagine how stupid the California VCs and Angels must be to invest in these companies.

To add insult to injury. Californians seem to celebrate their stupidity. They wear it as a badge of honor to have tried a startup and failed. Their VCs actually give money to inventors and managers who failed the last time they tried a startup: they let them try again! They even fund teenagers and college students ten to fifty thousand dollars for a stupid startup idea, with no real business plan, not even a single financial projection. Some even expect them to launch a new business in only 10 weeks. Oh the insanity, the insanity, and yes, I'm talking about you, Y Combinator.

In Michigan we have a better way slow, deliberate, cautious, ..., smart. By golly, I remember the response I received when I presented an idea for an Internet company to a Michigan VC firm in 1996. The Michigan VC said, “The Internet, well, I don't really know if that Internet is going to go anywhere.” After all, we wouldn't want to invest if we didn't really KNOW the result ahead of time, like a Treasury Bill. That's the smart way to invest.

I was happy with my opinion on how smart we all are in Michigan. Even my experience with our local VC community didn't really change that opinion, although it did begin to shake the ground a little. It wasn't until I read, On The Origin of Species by Means of Natural Selection by Charles Darwin, that I fundamentally began to question my faith in Michigan's approach to intelligent investing. That Darwin, always challenging our faith. I couldn't help but apply his theory to business, and I was surprised at the perspective it gave.

The beauty of the theory of natural selection is that doesn't require intelligent design. That is why it is so offensive to so many people. The key concept that so intrigues me is this:

Natural selection doesn't require intelligent design.

It is not intelligent selection, it is natural selection. It is not survival of the smartest, but survival of the fittest. And sometimes, being the fittest, is simply a function of luck. When I think of Darwin in the realm of innovative startup businesses, I am inclined to believe that intelligence is overrated.

What is required for natural selection to perform its wonders for startup businesses?

A large population, selection, and time.

Here is where we may be in trouble in Michigan. We are just too darn smart. We are trying to do intelligent design on a process better suited to natural selection. Intelligent design simply isn't as good as natural selection in creating strong, new, innovative businesses and jobs. The world is changing so fast, and technology is moving fast, if you want to ride the edge of innovation you cannot wait to make intelligent investments, for by the time it is clear what investments will survive and thrive, the opportunity has passed you by, and someone else will have the thriving new business life created by the process.

Say, for a purely hypothetical example, a new piece of technology appears called XMLhttprequest. Let's call the technology, and how it is applied, Web 2.0. California, being stupid, blindly starts up and finances hundreds and hundreds and hundreds of Web 2.0 companies, all in less than three years. Mostly stupid companies, with stupid ideas, and no hint as to how they will ever even make any money.

Stupid. Stupid. Stupid.

Michigan, however, is much more clever. We only startup a few, and we don't provide them with any capital. Certainly no Michigan VC gives them any money, and for goodness sake, don't even approach the Angel Groups or the MGCS with this sort of lame idea. Include these types of businesses in the 21st Century Jobs Fund? That would be stupid.

Michigan is smart. California, clearly stupid.

End of the story? Unfortunately, no. The galling thing is that, in the end, California wins. How? The power of natural selection over a large population outperforms intelligent design.

Out of these thousands of new startup companies created in California many will, through the process of natural selection, survive, adapt, and even grow. Most die. Some absolutely thrive, creating whole new industries and thousands of new jobs. At the end of a few years, California successfully employs thousands and thousands of engineers and managers in the thriving companies. Thousands more work in those that are merely surviving. These companies being to develop synergy, create new ideas (mostly stupid), and launch yet still more new businesses creating new jobs.

Michigan. Michigan in the same time frame likely creates ten to twenty Web 2.0 companies. Most get no funding and die on the drawing board. Others move to California. And the few remaining ones who are successful, well, if they have an exit strategy it likely involves selling the company and moving it to California. After all, the only people stupid enough to buy it, are in California.

Final score: California, tens of thousands of new jobs in new industries, without a single tax credit to create them. Michigan, 0.

I wish we were so stupid.

There was a time when Michigan was a lot dumber. Henry Ford stupidly wanted to sell affordable cars to everyone. The smart money kept telling him to focus on selling cars only to the rich. "Silly Henry, don't you know the farmers can't afford cars, and we don't even have any roads for people to drive on." I can hear the capital speaking even now. Oh, if only we had a few thousand people as stupid as Henry around, and a few others stupid enough to back them.

The next time you hear somebody say how stupid a Michigan company is, tell them what I say, "Yeah, and not nearly stupid enough." I mean, we wouldn't want to have created a good alternative fuel car when gas was only $1.00 a gallon that would've been stupid.

Tip of the Day: A slightly different take on my thesis can be found in the most excellent book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by
Nassim Nicholas Taleb. Would you like to better understand Web 2.0? Read Tim O'Reilly's original article. It is a bit technical, and a bit old, but still quite good. My personal Web 2.0 project? StudyTag. Check it out, and maybe even learn something about the Great Lakes. Best of all, StudyTag is free. I know, I know, it is stupid to give stuff away for free.