6 Steps for Avoiding Groupthink on Your Team | Management Excellence

6 Steps for Avoiding Groupthink on Your Team

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Groupthink is one of the nefarious decision-making missteps of teams, and a trap that many smart people and groups have fallen victim to throughout history.

From the classic example cited in nearly every discussion on decision-making, the Kennedy administration’s Bay of Pigs fiasco, to Ford’s launch of the Edsel, to Neviille Chamberlin’s inner circle that believed peace with Hitler was at hand, Groupthink has earned a prominent place in our culture.

And while you might not be planning an invasion or negotiation with evil dictators or planning on launching an ugly automobile, chances are that Groupthink has show up from time to time in your professional world.

Groupthink at Work in the Workplace:

The essence of this decision-making trap is the irrational pursuit of consensus above all other priorities.  Along the way, those that study group dynamics have identified a number of technical characteristics of Groupthink, including:suppression of reality testing, censorship of doubts, ignoring outside information, overconfidence and an emerging attitude of invulnerability.  While some of these terms have a distinct technical ring to them, they are descriptive enough to suggest a closed, insular and out-of-touch with reality team culture.

I see Groupthink at work regularly on management teams that have convinced themselves that their strategy is the only way forward. They spend months defining a universe that fits their collective frame of reference, and then they build plans to operate in that universe.  While the plans are often elegant, the team’s construct on the external world and clients becomes as much fiction as fact, guaranteeing failure.  After a long period of time invested in framing this strategy, Groupthink’s cousin, Escalation of Commitment, joins the party and together, they work to block out evidence to the contrary and prevent the team from recognizing the need to restart.

Functional groups are prone to a kind of Groupthink, when the organization’s culture and structure emphasizes rigid boundaries and strong penalties for stepping on turf and toes that are not your own.  The isolated group begins to define the internal and external world from its own viewpoint, and almost as a survival strategy, it shuts out external opinion and blocks ideas that are potentially threatening to their view and their silo boundaries.

And perhaps more commonplace, project groups of all types work to believe that achieving consensus is the only way to move forward on an issue. Often, if you peel a layer back on the push towards consensus, it’s driven in large part out of an irrational concern for the feelings of others.  “We want people to feel invested,” or, “I don’t want to step on anyone’s toes.”  If this were the holiday season, I would offer a distinct, “Humbug!” The pursuit of consensus gives rise to the tyranny of mediocrity.  Or worse.

6 Steps to Avoid Groupthink on Teams:

1. Anticipate Groupthink in your Risk Plan. While it might sound like planning to fail, ignoring the potential for Groupthink is a failure to plan for a very real risk.  And like any risk plan, there must be processes for monitoring and mitigating emerging Groupthink.

2. Size counts. Limit the typical team size to less than 10 and ensure that there are well-defined boundaries for inclusion.  Porous team boundaries and widespread casual involvement on teams breeds dysfunction, including pressure towards consensus for the wrong reasons.

3. Invite external perspectives at various stages of the process.  Of course, you’ve got to have the procedures in place to both protect external viewpoints and to find ways to incorporate them into the group’s thinking and plans.

4. Lengthen the discussion phase…use structured discussion to focus on vetting the issues.  Delay a rush to judgment.  I encourage groups to incorporate non-typical discussion processes such as Six Hats Thinking to dramatically improve discussion quality.

5. Develop a second solution.  I referenced this approach in Practical Lessons in Leadership. Challenge your team to assume that management will reject their first solution.  Develop an alternative and very different second solution and be prepared to defend it.

6. Invite the Devil’s Advocate to the party. While a designated Devil’s Advocate is a contrived role and everyone knows it, at least someone will be throwing rocks at the groups beautiful picture.  Rules on respecting and vetting the DA’s perspective are critical to benefitting from this approach.

The Bottom-Line for Now:

Forewarned is forearmed.  Decision-making is tough enough, and it grows in complexity when there are groups involved.  Don’t naively assume that your group of smart people is immune to the many pitfalls and missteps that dot the path towards a decision.  Groupthink is like the common cold, and while there may not be a cure, there sure are some preventative measures that can help keep it at bay.

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Comments

3 Comments on 6 Steps for Avoiding Groupthink on Your Team

  • Robert Comer on Thu, 8th Jul 2010 4:29 pm
  • Excellent Post Art,

    Many managers like to surround themselves with like minded people; they think it will make their task easier to accomplish; but increase the chances of Groupthink and thereby increase the risk of poorly managing the possible setbacks. you
    gave very good examples of how to avoid such pitfalls.

    Good insight

  • Art Petty on Thu, 8th Jul 2010 4:34 pm
  • Thanks, Bob! It’s a big problem that merits more attention. Best, -Art

  • Elisha Tan on Thu, 15th Jul 2010 6:42 am
  • Just to add on, I would suggest educating the team about Groupthink as a method to avoid it from happening. This will help provide a better understanding of why external opinions or a devil’s advocate is necessary in each team’s decision making process. Failure to do so may create an impression of the devil’s advocate as being a troublemaker or that external opinions are needed because the team was not capable enough.

    Tell me what you're thinking...
    and oh, if you want a pic to show with your comment, go get a gravatar!

    Guest Blog: The Networking Wham-Bam-Thank-You-Ma’am by Elene Cafasso « Unsolicited Business Advice from Carol Roth

    How NOT to Network

    Networking can be about a fun as sticking pins in your eye, but sometimes what you need is not what you want. I had the good fortune of meeting today’s guest poster at a networking event, ironically, so she was the natural choice to talk about what not to do when networking…


    EC: Most folks I talk to are a bit afraid of networking. Don’t get me wrong – they’re not anti-social. They just really seem to believe that a “secret handbook” exists somewhere and they don’t know how to get a copy. Many won’t feel comfortable doing this “thing” called networking until they have explicit instructions on where to go, who to talk to, a verbatim script of what to say and an ironclad guarantee that 100% of the people they meet will buy from them/hire them/give them money in some way!

    Sorry – that’s not going to happen. A quick Google search will show you that there are a LOT of tips, classes and “Top 10” lists of techniques all claiming to make you a better networker. However, I’m a simple lady and a firm believer in the K.I.S.S. (Keep It Simple Stupid) principle. To me, the only networking “rule” is The Golden Rule: Treat others as you’d have them treat you. Not so hard, right?

    Well, I recently had a networking experience that was the antithesis of my one and only rule. In fact, this guy did EVERYTHING so very wrong that I was literally left speechless. Since this happens extremely rarely (trust me on that one!), I walked away feeling I had finally found the “Networking Story that MUST be Told”!

    So what did this guy – let’s call him Joe – do? I was in the middle of a conversation with a new acquaintance named John who was doing everything RIGHT. This wonderful gentleman was engaged, personable, genuinely curious in learning more about me and my business, and, after only two minutes, already had me feeling I was the most fascinating person in the room.

    Joe walked up (barged in would be more accurate!) and, without waiting for so much as eye contact or a break in our conversation, demanded “You got a card??”. I was so stunned I invoked my favorite defense – honesty!

    “Why yes, I do.” said I while pulling one out of my purse. “Do you”?

    “I haven’t needed one in ten years. I write the XYZ Newsletter” Joe replied. Who knew? Turns out I was in the presence of an “author” and was just too darn stupid to know it! My bad.

    I handed him a card with my mouth still hanging open unattractively. Without so much as a ‘thank you’ or a ‘goodbye’, Joe turned on his heel and proceeded towards his next victim.

    Feeling a bit as if we’d just witnessed a train wreck, John and I could only shake our heads and resume our conversation.

    The following week, I received the “XYZ Newsletter” in email. Although I broke several sound and speed records racing to click the “unsubscribe” option, I do have to thank Joe for stepping up to fill my newly created position. He has now been officially named the “Poster Child of how NOT to network”!

    What’s YOUR worst networking experience? Anyone out there challenging Joe for the title??? I’d love to hear your stories!

    ____________________________

    Elene Cafasso is President of Enerpace, Inc. which helps leaders focus on what REALLY matters, while growing themselves, their team and their bottom line. She has worked in the corporate world for 14 years where she held executive level positions in the banking and telecommunications industries. Elene holds an MBA in Marketing and Finance from the University of Chicago, is a graduate of the Coaches Training Institute (CTI) and ACC certified by the International Coach Federation.

    CR: Thanks again to Elene for her insights

     

     

    This entry was posted on Tuesday, July 13th, 2010 at 6:09 am and is filed under Business Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

     

    The Creativity Crisis - Newsweek

    Back in 1958, Ted Schwarzrock was an 8-year-old third grader when he became one of the “Torrance kids,” a group of nearly 400 Minneapolis children who completed a series of creativity tasks newly designed by professor E. Paul Torrance. Schwarzrock still vividly remembers the moment when a psychologist handed him a fire truck and asked, “How could you improve this toy to make it better and more fun to play with?” He recalls the psychologist being excited by his answers. In fact, the psychologist’s session notes indicate Schwarzrock rattled off 25 improvements, such as adding a removable ladder and springs to the wheels. That wasn’t the only time he impressed the scholars, who judged Schwarzrock to have “unusual visual perspective” and “an ability to synthesize diverse elements into meaningful products.”

    The accepted definition of creativity is production of something original and useful, and that’s what’s reflected in the tests. There is never one right answer. To be creative requires divergent thinking (generating many unique ideas) and then convergent thinking (combining those ideas into the best result).

    In the 50 years since Schwarzrock and the others took their tests, scholars—first led by Torrance, now his colleague, Garnet Millar—have been tracking the children, recording every patent earned, every business founded, every research paper published, and every grant awarded. They tallied the books, dances, radio shows, art exhibitions, software programs, advertising campaigns, hardware innovations, music compositions, public policies (written or implemented), leadership positions, invited lectures, and buildings designed.

    Nobody would argue that Torrance’s tasks, which have become the gold standard in creativity assessment, measure creativity perfectly. What’s shocking is how incredibly well Torrance’s creativity index predicted those kids’ creative accomplishments as adults. Those who came up with more good ideas on Torrance’s tasks grew up to be entrepreneurs, inventors, college presidents, authors, doctors, diplomats, and software developers. Jonathan Plucker of Indiana University recently reanalyzed Torrance’s data. The correlation to lifetime creative accomplishment was more than three times stronger for childhood creativity than childhood IQ.

    Like intelligence tests, Torrance’s test—a 90-minute series of discrete tasks, administered by a psychologist—has been taken by millions worldwide in 50 languages. Yet there is one crucial difference between IQ and CQ scores. With intelligence, there is a phenomenon called the Flynn effect—each generation, scores go up about 10 points. Enriched environments are making kids smarter. With creativity, a reverse trend has just been identified and is being reported for the first time here: American creativity scores are falling.

    Kyung Hee Kim at the College of William & Mary discovered this in May, after analyzing almost 300,000 Torrance scores of children and adults. Kim found creativity scores had been steadily rising, just like IQ scores, until 1990. Since then, creativity scores have consistently inched downward. “It’s very clear, and the decrease is very significant,” Kim says. It is the scores of younger children in America—from kindergarten through sixth grade—for whom the decline is “most serious.”

     

    The potential consequences are sweeping. The necessity of human ingenuity is undisputed. A recent IBM poll of 1,500 CEOs identified creativity as the No. 1 “leadership competency” of the future. Yet it’s not just about sustaining our nation’s economic growth. All around us are matters of national and international importance that are crying out for creative solutions, from saving the Gulf of Mexico to bringing peace to Afghanistan to delivering health care. Such solutions emerge from a healthy marketplace of ideas, sustained by a populace constantly contributing original ideas and receptive to the ideas of others.

    It’s too early to determine conclusively why U.S. creativity scores are declining. One likely culprit is the number of hours kids now spend in front of the TV and playing videogames rather than engaging in creative activities. Another is the lack of creativity development in our schools. In effect, it’s left to the luck of the draw who becomes creative: there’s no concerted effort to nurture the creativity of all children.

    Around the world, though, other countries are making creativity development a national priority. In 2008 British secondary-school curricula—from science to foreign language—was revamped to emphasize idea generation, and pilot programs have begun using Torrance’s test to assess their progress. The European Union designated 2009 as the European Year of Creativity and Innovation, holding conferences on the neuroscience of creativity, financing teacher training, and instituting problem-based learning programs—curricula driven by real-world inquiry—for both children and adults. In China there has been widespread education reform to extinguish the drill-and-kill teaching style. Instead, Chinese schools are also adopting a problem-based learning approach.

    Plucker recently toured a number of such schools in Shanghai and Beijing. He was amazed by a boy who, for a class science project, rigged a tracking device for his moped with parts from a cell phone. When faculty of a major Chinese university asked Plucker to identify trends in American education, he described our focus on standardized curriculum, rote memorization, and nationalized testing. “After my answer was translated, they just started laughing out loud,” Plucker says. “They said, ‘You’re racing toward our old model. But we’re racing toward your model, as fast as we can.’ ”

    Overwhelmed by curriculum standards, American teachers warn there’s no room in the day for a creativity class. Kids are fortunate if they get an art class once or twice a week. But to scientists, this is a non sequitur, borne out of what University of Georgia’s Mark Runco calls “art bias.” The age-old belief that the arts have a special claim to creativity is unfounded. When scholars gave creativity tasks to both engineering majors and music majors, their scores laid down on an identical spectrum, with the same high averages and standard deviations. Inside their brains, the same thing was happening—ideas were being generated and evaluated on the fly.

    Researchers say creativity should be taken out of the art room and put into homeroom. The argument that we can’t teach creativity because kids already have too much to learn is a false trade-off. Creativity isn’t about freedom from concrete facts. Rather, fact-finding and deep research are vital stages in the creative process. Scholars argue that current curriculum standards can still be met, if taught in a different way.

    To understand exactly what should be done requires first understanding the new story emerging from neuroscience. The lore of pop psychology is that creativity occurs on the right side of the brain. But we now know that if you tried to be creative using only the right side of your brain, it’d be like living with ideas perpetually at the tip of your tongue, just beyond reach.

    When you try to solve a problem, you begin by concentrating on obvious facts and familiar solutions, to see if the answer lies there. This is a mostly left-brain stage of attack. If the answer doesn’t come, the right and left hemispheres of the brain activate together. Neural networks on the right side scan remote memories that could be vaguely relevant. A wide range of distant information that is normally tuned out becomes available to the left hemisphere, which searches for unseen patterns, alternative meanings, and high-level abstractions.

    Having glimpsed such a connection, the left brain must quickly lock in on it before it escapes. The attention system must radically reverse gears, going from defocused attention to extremely focused attention. In a flash, the brain pulls together these disparate shreds of thought and binds them into a new single idea that enters consciousness. This is the “aha!” moment of insight, often followed by a spark of pleasure as the brain recognizes the novelty of what it’s come up with.

    Now the brain must evaluate the idea it just generated. Is it worth pursuing? Creativity requires constant shifting, blender pulses of both divergent thinking and convergent thinking, to combine new information with old and forgotten ideas. Highly creative people are very good at marshaling their brains into bilateral mode, and the more creative they are, the more they dual-activate.

    Is this learnable? Well, think of it like basketball. Being tall does help to be a pro basketball player, but the rest of us can still get quite good at the sport through practice. In the same way, there are certain innate features of the brain that make some people naturally prone to divergent thinking. But convergent thinking and focused attention are necessary, too, and those require different neural gifts. Crucially, rapidly shifting between these modes is a top-down function under your mental control. University of New Mexico neuroscientist Rex Jung has concluded that those who diligently practice creative activities learn to recruit their brains’ creative networks quicker and better. A lifetime of consistent habits gradually changes the neurological pattern.

    A fine example of this emerged in January of this year, with release of a study by University of Western Ontario neuroscientist Daniel Ansari and Harvard’s Aaron Berkowitz, who studies music cognition. They put Dartmouth music majors and nonmusicians in an fMRI scanner, giving participants a one-handed fiber-optic keyboard to play melodies on. Sometimes melodies were rehearsed; other times they were creatively improvised. During improvisation, the highly trained music majors used their brains in a way the nonmusicians could not: they deactivated their right-temporoparietal junction. Normally, the r-TPJ reads incoming stimuli, sorting the stream for relevance. By turning that off, the musicians blocked out all distraction. They hit an extra gear of concentration, allowing them to work with the notes and create music spontaneously.

    Charles Limb of Johns Hopkins has found a similar pattern with jazz musicians, and Austrian researchers observed it with professional dancers visualizing an improvised dance. Ansari and Berkowitz now believe the same is true for orators, comedians, and athletes improvising in games.

    The good news is that creativity training that aligns with the new science works surprisingly well. The University of Oklahoma, the University of Georgia, and Taiwan’s National Chengchi University each independently conducted a large-scale analysis of such programs. All three teams of scholars concluded that creativity training can have a strong effect. “Creativity can be taught,” says James C. Kaufman, professor at California State University, San Bernardino.

    What’s common about successful programs is they alternate maximum divergent thinking with bouts of intense convergent thinking, through several stages. Real improvement doesn’t happen in a weekend workshop. But when applied to the everyday process of work or school, brain function improves.

    So what does this mean for America’s standards-obsessed schools? The key is in how kids work through the vast catalog of information. Consider the National Inventors Hall of Fame School, a new public middle school in Akron, Ohio. Mindful of Ohio’s curriculum requirements, the school’s teachers came up with a project for the fifth graders: figure out how to reduce the noise in the library. Its windows faced a public space and, even when closed, let through too much noise. The students had four weeks to design proposals.

    Working in small teams, the fifth graders first engaged in what creativity theorist Donald Treffinger describes as fact-finding. How does sound travel through materials? What materials reduce noise the most? Then, problem-finding—anticipating all potential pitfalls so their designs are more likely to work. Next, idea-finding: generate as many ideas as possible. Drapes, plants, or large kites hung from the ceiling would all baffle sound. Or, instead of reducing the sound, maybe mask it by playing the sound of a gentle waterfall? A proposal for double-paned glass evolved into an idea to fill the space between panes with water. Next, solution-finding: which ideas were the most effective, cheapest, and aesthetically pleasing? Fiberglass absorbed sound the best but wouldn’t be safe. Would an aquarium with fish be easier than water-filled panes?

    Then teams developed a plan of action. They built scale models and chose fabric samples. They realized they’d need to persuade a janitor to care for the plants and fish during vacation. Teams persuaded others to support them—sometimes so well, teams decided to combine projects. Finally, they presented designs to teachers, parents, and Jim West, inventor of the electric microphone.

    Along the way, kids demonstrated the very definition of creativity: alternating between divergent and convergent thinking, they arrived at original and useful ideas. And they’d unwittingly mastered Ohio’s required fifth-grade curriculum—from understanding sound waves to per-unit cost calculations to the art of persuasive writing. “You never see our kids saying, ‘I’ll never use this so I don’t need to learn it,’ ” says school administrator Maryann Wolowiec. “Instead, kids ask, ‘Do we have to leave school now?’ ” Two weeks ago, when the school received its results on the state’s achievement test, principal Traci Buckner was moved to tears. The raw scores indicate that, in its first year, the school has already become one of the top three schools in Akron, despite having open enrollment by lottery and 42 percent of its students living in poverty.

    With as much as three fourths of each day spent in project-based learning, principal Buckner and her team actually work through required curricula, carefully figuring out how kids can learn it through the steps of Treffinger’s Creative Problem-Solving method and other creativity pedagogies. “The creative problem-solving program has the highest success in increasing children’s creativity,” observed William & Mary’s Kim.

    The home-game version of this means no longer encouraging kids to spring straight ahead to the right answer. When UGA’s Runco was driving through California one day with his family, his son asked why Sacramento was the state’s capital—why not San Francisco or Los Angeles? Runco turned the question back on him, encouraging him to come up with as many explanations as he could think of.

    Preschool children, on average, ask their parents about 100 questions a day. Why, why, why—sometimes parents just wish it’d stop. Tragically, it does stop. By middle school they’ve pretty much stopped asking. It’s no coincidence that this same time is when student motivation and engagement plummet. They didn’t stop asking questions because they lost interest: it’s the other way around. They lost interest because they stopped asking questions.

    Having studied the childhoods of highly creative people for decades, Claremont Graduate University’s Mihaly Csikszentmihalyi and University of Northern Iowa’s Gary G. Gute found highly creative adults tended to grow up in families embodying opposites. Parents encouraged uniqueness, yet provided stability. They were highly responsive to kids’ needs, yet challenged kids to develop skills. This resulted in a sort of adaptability: in times of anxiousness, clear rules could reduce chaos—yet when kids were bored, they could seek change, too. In the space between anxiety and boredom was where creativity flourished.

    It’s also true that highly creative adults frequently grew up with hardship. Hardship by itself doesn’t lead to creativity, but it does force kids to become more flexible—and flexibility helps with creativity.

    In early childhood, distinct types of free play are associated with high creativity. Preschoolers who spend more time in role-play (acting out characters) have higher measures of creativity: voicing someone else’s point of view helps develop their ability to analyze situations from different perspectives. When playing alone, highly creative first graders may act out strong negative emotions: they’ll be angry, hostile, anguished. The hypothesis is that play is a safe harbor to work through forbidden thoughts and emotions.

    In middle childhood, kids sometimes create paracosms—fantasies of entire alternative worlds. Kids revisit their paracosms repeatedly, sometimes for months, and even create languages spoken there. This type of play peaks at age 9 or 10, and it’s a very strong sign of future creativity. A Michigan State University study of MacArthur “genius award” winners found a remarkably high rate of paracosm creation in their childhoods.

    From fourth grade on, creativity no longer occurs in a vacuum; researching and studying become an integral part of coming up with useful solutions. But this transition isn’t easy. As school stuffs more complex information into their heads, kids get overloaded, and creativity suffers. When creative children have a supportive teacher—someone tolerant of unconventional answers, occasional disruptions, or detours of curiosity—they tend to excel. When they don’t, they tend to underperform and drop out of high school or don’t finish college at high rates.

    They’re quitting because they’re discouraged and bored, not because they’re dark, depressed, anxious, or neurotic. It’s a myth that creative people have these traits. (Those traits actually shut down creativity; they make people less open to experience and less interested in novelty.) Rather, creative people, for the most part, exhibit active moods and positive affect. They’re not particularly happy—contentment is a kind of complacency creative people rarely have. But they’re engaged, motivated, and open to the world.

    The new view is that creativity is part of normal brain function. Some scholars go further, arguing that lack of creativity—not having loads of it—is the real risk factor. In his research, Runco asks college students, “Think of all the things that could interfere with graduating from college.” Then he instructs them to pick one of those items and to come up with as many solutions for that problem as possible. This is a classic divergent-convergent creativity challenge. A subset of respondents, like the proverbial Murphy, quickly list every imaginable way things can go wrong. But they demonstrate a complete lack of flexibility in finding creative solutions. It’s this inability to conceive of alternative approaches that leads to despair. Runco’s two questions predict suicide ideation—even when controlling for preexisting levels of depression and anxiety.

    In Runco’s subsequent research, those who do better in both problem-finding and problem-solving have better relationships. They are more able to handle stress and overcome the bumps life throws in their way. A similar study of 1,500 middle schoolers found that those high in creative self-efficacy had more confidence about their future and ability to succeed. They were sure that their ability to come up with alternatives would aid them, no matter what problems would arise.

    When he was 30 years old, Ted Schwarzrock was looking for an alternative. He was hardly on track to becoming the prototype of Torrance’s longitudinal study. He wasn’t artistic when young, and his family didn’t recognize his creativity or nurture it. The son of a dentist and a speech pathologist, he had been pushed into medical school, where he felt stifled and commonly had run-ins with professors and bosses. But eventually, he found a way to combine his creativity and medical expertise: inventing new medical technologies.

    Today, Schwarzrock is independently wealthy—he founded and sold three medical-products companies and was a partner in three more. His innovations in health care have been wide ranging, from a portable respiratory oxygen device to skin-absorbing anti-inflammatories to insights into how bacteria become antibiotic-resistant. His latest project could bring down the cost of spine-surgery implants 50 percent. “As a child, I never had an identity as a ‘creative person,’ ” Schwarzrock recalls. “But now that I know, it helps explain a lot of what I felt and went through.”

    Creativity has always been prized in American society, but it’s never really been understood. While our creativity scores decline unchecked, the current national strategy for creativity consists of little more than praying for a Greek muse to drop by our houses. The problems we face now, and in the future, simply demand that we do more than just hope for inspiration to strike. Fortunately, the science can help: we know the steps to lead that elusive muse right to our doors.

     

    Come See the Incredible, Shrinking VC Industry!

    The VC industry is starting to shrink with some rapidity, according to data released today by National Venture Capital Association (NVCA) and Thomson Reuters. The trend, which first started in 2008, has only accelerated. During the second quarter of 2010, new money committed to venture funds plunged 49 percent from the previous quarter and 57 percent from the same period a year ago. NVCA believes the soft economic environment is to blame for much of the recent decline in new funds.

    The latest quarter saw 38 funds raise $1.91 billion — the lowest level since the third quarter of 2003. There were 26 follow-on funds and 12 new funds raised in the second quarter of 2010, NVCA noted. These included new funds by Polaris Venture Partners and Venrock Associates.

    venturefunds.gifIf you look at the accompanying graphic, you can see that the total amounts being raised by venture capital firms are decreasing, and 2010 isn’t looking particularly attractive. I think the data (and financing trends) has some near- and long-term implications for entrepreneurs.

    I don’t think the early stage startups, especially those who are focusing on the consumer web and mobile applications, are going to be much impacted by the shrinking VC industry. The startups of today are much more capital efficient and need a lot less money to grow in the early phase of their life. The rise of the new angel investors is only helping the startups, who are taking small amounts of funding to prove their ideas before hitting up venture capitalists for more dollars.

    While fewer VCs would mean fewer dollars, it would also mean less funding for multiple competitors, a problem that reared its ugly head during the 1990s and then in mid-2000s, coinciding with a big upswing in VC fundraising.

    However, if there is any good news for the VC sector, it is on the exit side of the equation. According to NVCA, during Q2 2010, there were 17 venture-backed IPOs that were valued at $1.3 billion and included Gaithersberg, Maryland–based Broadsoft, Inc, a developer of voice-over information technology, which raised $67.5 million and Tesla Motors, which raised $226 million. During the quarter, 92 venture-backed M&A deals were reported. The information technology sector saw 78 deals with a disclosed total dollar value of $2.4 billion, including Google’s $750 million acquisition of Admob.

    These exits can only help the industry, which has struggled to show any meaningful returns that would convince investors to come back and up their commitments to venture funds, especially those who are looking to raise funds in 2011. It is clear that the true test of the industry is going to come next year, and we can (and should) expect some kind of a shakeout.

    Credit Union Lending: A Solution to Small-Business Capital Crunch? | Small Business Trends

    Some people think that higher limits on the amount credit unions can lend to small business will make a difference in easing the so-called entrepreneurial credit crunch.  Others are not sure there even is a credit crunch.  And to some, this is all about feuding between community bankers and credit unions.  Let’s examine what’s happening, and you decide.

    Sen. Charles Schumer (D-NY) is co-sponsoring a bill that would increase the amount of their assets credit unions can lend to small businesses from 12.25 percent to 25 percent, BusinessWeek reports. The proposal has been included in The Small Business Lending Enhancement Act, which is currently before committees in the U.S. House and Senate, and has bipartisan support in both chambers.

    The Credit Union National Association believes raising loan limits could create some 100,000 new jobs and $10 billion in new loans. “More lending means more capital for small businesses,” John Magill, senior vice president for legislative affairs at the association, told BusinessWeek, “and that translates into more jobs at a time when job creation is a national priority.”

    However, the concept faces stiff opposition from the Independent Community Bankers of America, a trade association for small banks. The association is battling the proposal, contending that it does not fit credit unions’ mission as tax-exempt organizations. Community bankers also say there’s no need to raise limits in the first place, since most credit unions haven’t come close to hitting the limits. Finally, the bankers argue, making smart decisions about business lending is harder than ever in today’s tough regulatory climate, and most credit unions lack the sophistication to do so.

    According to the California Credit Union League in Ontario, U.S. banks’ business lending dropped by 15 percent over the past year, while credit union lending to businesses rose 11 percent in the same period. The average loan amount from a credit union was $210,000.

    But one Southern California credit union president told a Press-Enterprise reporter that, while he supports the measure, he doubted it would not much impact on local businesses because demand for loans has dried up.

    While community banks and credit unions may be battling each other on this issue, the real question remains how much impact this will have on small businesses.  Undoubtedly there are small businesses that need credit, but not everyone agrees that lack of credit is a big problem facing small businesses today.

    This has be categorically disproved A million times, there's no such thing as an entrepreneurial personality

    There is no magic formula for small business success, but most owners who do well share the same six personality traits, according to a new report.

    The Guardian Life Small Business Research Institute report hopes to explain why only 1 in 2 small businesses will survive more than five years, according to Small Business Administration figures. The study - called Six Dimensions That Characterize Success-Oriented Small Business Owners - is based on analysis of a survey of 1,100 small businesses with between 2 and 99 employees. (The Institute is run by the Guardian Life Insurance Company of America, and it conducts ongoing research on what it calls "the Index of What Matters Most" to small businesses.)

    Top of the list for successful entrepreneurs is the ability to collaborate. Those who can delegate, build strong relationships with their management teams, employees, and others are more likely to click with customers.

    The other five traits frequently found in flourishing small business owners:

    • Being self fulfilled. Good small business owners put a high price on the fulfilment their companies provide them, relish being their own boss, and enjoy being in control of their personal income. They value "doing something for a living that I love to do," "being able to decide how much money I make," and "being able to have the satisfaction of creating something of value."

    • Future-focused. Small business owners who thrive are good at both short- and long-term planning. They're as likely to have a well thought-out plan for the day-to-day running of the business as a road map for how to run the business for years.

    • Curious. Good entrepreneurs are always reading and asking questions. They want to learn everything from why a particular business failed to how to find, motivate, and keep good employees.

    • Tech-savvy. Perhaps not surprisingly, the best small business owners invest time and money on their company's website and are likely to "rely a great deal on technology to help make our business more effective and efficient." (For more on why social media is worth a company's time, check out this guide.)

    • Action oriented. Successful founders are proactive and always "differentiating ourselves from our competitors," survey respondents said. They were less worried than other small business owners about the state of the economy, and more likely to look at adversity as "a kick in the rear to help you move forward."

    Said Mark D. Wolf, the institute's director: "Success-oriented small business owners are a special breed of highly motivated, caring and curious individuals. They effectively balance their personal and business goals, take advantage of others' expertise and continually seek to learn the best practices exhibited by peer companies."

    Time for an Adjustment of Attitudes and Expectations - The Entrepreneurial Mind

    I have been observing more and more business owners who, although their businesses have survived the economic downturn, seem to be losing heart.

    The stress and strain caused by these difficult times has worn on them. But doing business in today's economy requires a steady hand, a sharp eye and most of all -- a calm mind. There are four steps that can be taken to help to cope with the emotional toll of being an entrepreneur in difficult times.

    First, adjust your expectations. The growth in revenues and profits that you experienced during the good times may not return for quite some time, if ever.

    Don't burden your business with unrealistic profit goals. It is time to reset your personal budgets to reflect the new reality of what your business can generate for you in terms of income. Also, be patient and understand that it will probably take longer for you to get to retirement.

    Creating wealth from your business will be a longer process that will take careful management and planning.

    Second, celebrate each small step forward. Set short-term, realistic milestones for your business. What can you get done this week, this month, to make modest improvements in the performance of your business?

    While you still may have big dreams for your business, take the time to enjoy the smaller accomplishments. For over time, it is those small victories that will lead to achieving your long-term goals.

    Third, focus on the things that really matter. There is so much more to your life than your business. Work hard at being a good spouse. Strive to become a better parent.

    Pay attention to your friends. Be a good citizen in your community. These are the things that ultimately define who you are as a person, not how big you can grow your business.

    Finally, let go of the things outside your control. Even under the best of times, entrepreneurs who have been well trained in what it takes to start and grow a successful business still face about a 20 percent failure rate. Failure comes from many things that you cannot predict or plan for. Call it uncertainty, call it risk, or call it plain old bad luck.

    The reality of 2010 is that entrepreneurs face much tougher odds. Nationally, the prolonged recession has led to skyrocketing business failure rates. And Nashville small-business owners face the added pressures created by the recent floods. For years, I have put a prayer on the syllabus for every entrepreneurship class I teach. It reads:

    "God, grant me the serenity to accept the things I cannot change,
    the courage to change the things I can,
    and the wisdom to know the difference."

    It is known by many as the "Serenity Prayer," but I like to call it the "Entrepreneur's Prayer" as it helps entrepreneurs remember that the best course is to focus on those things that they can control.

    While times may be tough, it's still possible to truly enjoy the entrepreneurial journey.

    9 Ways To Manage People Who Bother You, and you don't have to take every customer that walks into your business - Stepcase Lifehack

    Ever faced people who bother you? I’m sure all of us have faced such people before. It’s okay when we have to face them just once or twice, but there are times when these people emerge in facets of our life where we have to deal with them on an ongoing basis. They can be business associates, fellow colleagues, friends, or even family members and relatives. In such cases, we have to learn how to deal with them. Here are my 9 tips to handle such people:

    1. You can only change yourself.

    When dealing with people, always remember that it’s not about changing others, but about changing yourself. You can try to change others, but you may not succeed doing so. The best way to address the situation is to change how you perceive it and how you react to it. By changing that, everything else will subsequently change as well.

    2. Draw your boundaries.

    Be clear on what you will tolerate and what you will not tolerate. Then stick with it. You have your own personal space and it’s your perogative to protect your space. By drawing the boundaries, even if just mentally, you are clearer of the kind of behaviors to expect from others. If you don’t do so, it’s easy for you to be pushed over by others, especially since such people tend not to be conscious of personal boundaries. You’ll wind up shrinking in a corner and feeling miserable, and you wouldn’t want that.

    3. Be upfront about where you stand.

    If the person has a history of spilling into your personal space, then let him/her know where you stand the next time you communicate. People aren’t mind readers, and sometimes they may not be aware that they are infringing on your space. Giving the person some indicators will help. If he/she tends to take up a lot of your time, then let him/her know that you have XX minutes at the onstart of the conversation. That way, you are being fair by informing him/her in advance. If you prefer to communicate via email/text/chat/other channels, then let him/her know too.

    4. Be firm when needed.

    If the person does not stick within the boundaries, then enforce them. Give a gentle reminder at first. If he/she still does not get the hint, then make a call and draw the line right there. I used to be very relenting in my communications. I would attend the person for however long it took. In the end it enroached on my personal space, and I wasn’t sure if all that time and energy I spent ever did anything too. As I gradually pushed back and became firm on my boundaries, I was a lot more fulfilled. I realized if I wasn’t meeting my needs, I couldn’t be helping anyone with theirs.

    5. Ignore them.

    Ignoring is effective in the right moments. When you respond, you give them a reason to continue their behavior. If you just ignore, they don’t have a choice but to seek out someone else. Not only that, it also hints to them about their behavior and helps them do some self-reflection.

    6. Don’t take it personally.

    Most of the times, these people behave the same way around others too. I had a friend who was very negative. She always had something to criticize whenever we were together. At first I thought she had something against me, but after I observed her interacting with our common friends, I realized she was like that with everyone else too. Realizing it wasn’t anything personal helped me deal with her objectively.

    7. Observe how others handle them.

    Watching others deal with the same person you find annoying can be an eye-opening perspective. Even if the person may be at his/her wits-end handling the individual, just observing from a third party’s point of view can give you insights on how to manage. The next time you are with this person, get someone else into the conversation too. Take a back seat by broaching a topic that’s relevant between the two of them, then play the silent role in the situation. Observe how the other party handles him/her. Try this exercise with different people – from savvy networkers, someone you find difficult to deal with as well, someone similar to you, etc. You will get interesting results.

    8. Show kindness.

    Often times, they act the way they do because they are looking for an empathetic ear. Hear what they have to say, and be empathetic towards them. Give them some friendly act of kindness. Don’t impose on them, but just be there and empathize. It might well do the trick.

    There was once when I had a long talk with a client on an issue she was facing. Later in the week, I sent her an sms telling her that ultimately it boiled down to her, and as long as she believed in herself, there was nothing insurmountable. Many weeks after that, we were catching up, and she told me how the message was really encouraging for her. She normally deleted all her smses but left that one in her phone. A little kind act from you may take little effort on your part but mean the world to others.

    9. Help them.

    Beneath the facade is really a cry for help. Check with them if they need any help, or if there is anything you can do to help them. Sometimes, it’s possible they require help but they don’t know how to articulate it. Help them to uncover their problem, then work with them to analyze the issue and discover the solution. It’s important to still let them take charge in the situation, because the end outcome is you want them to learn to take control of the situation, and not grow dependent on you for help.

    Staying Credulous: With years of experience in business and seeing the absurd ideas people come up with it is hard to stay positive sometimes.

    I turned 40 in March. I didn’t think of it much, and I don’t plan on buying a convertible sports car or otherwise engaging in a mid life crisis. These age milestones just aren’t as meaningful for most men as they are for some women. Besides, I still have the maturity level of an average teenager.

    But one thing I am very aware of is my growing skepticism of some of the crazy startup ideas I see. Five years ago when I started TechCrunch I still had real enthusiasm for any entrepreneur trying to build a company. I know from experience that starting companies is psychologically hard, even in the U.S. There are always lots of critics to tear you down. Sometimes all an entrepreneur needs is a few credulous people willing to say that they have a chance. That gives them the psychological boost they need to fight on for another day.

    I have always been that guy, looking for the positive in any startup situation. Even if you fail you’ve just had the best on the job training possible. Paul Graham says it best: “So, paradoxically, if you’re too inexperienced to start a startup, what you should do is start one. That’s a way more efficient cure for inexperience than a normal job. In fact, getting a normal job may actually make you less able to start a startup, by turning you into a tame animal who thinks he needs an office to work in and a product manager to tell him what software to write.”

    There is some evidence that the most successful entrepreneurs are 40 or older. I don’t believe that. Or rather, it may be that statistically a startup founded by someone over 40 will be more likely to “win” financially than one started by a 20 year old. But nearly everything that is really disruptive is created by someone too young to know that they never had a chance of winning. So they blindly charge ahead, and they win.

    The companies that shape our culture – Microsoft, Apple, Yahoo, Google, Facebook, etc. – are almost always started in a dorm room. These are the companies that matter in the long run.

    It’s so easy to look at a startup and think of the ten startups before that tried to solve the same problem and failed. In fact, most startups look sort of dumb in the really early stages, mostly because if they were so obviously going to win then someone would have likely jumped in already. Like I said, you have to stay credulous to believe.

    The wisdom that comes with experience seems like such a valuable asset to have. You have advice that people should listen to, you think, as you smirk condescendingly at the kid with the big idea and no clue what terrible obstacles stand between her and success.

    I sometimes feel that skepticism creeping into my thinking when I look at a new idea being presented by an eager and innocent young entrepreneur. It’s a relatively recent thing, and I want to stamp it out like a cancer.

    There’s no room in my world for that kind of nonsense. Who am I to tell someone that they can’t change the world? I say fight on. And if you fail I’ll give you a solid fist bump and tell you to get back on the horse, or whatever the saying is, and try again. Because you’re going to get it right, whether it’s this startup or another one.

    So please call me on it if you see me starting to act my age. I don’t mind being 40 at all – life definitely gets better as you get older and you figure out what’s really important. But I want to look at startups with the same eager and innocent anticipation that I did when I was 25. Even when I’m 80.