Find Your Flow: How the Psychology of Optimal Experience Makes Work and Recreation More Rewarding

A jazz drummer hits every note in her solo, and bends the rhythm in unexpected ways.  

A basketball player lands a three-pointer, then another, and another – he feels like he can’t miss. 

A professor delivers a lecture and keeps every student engaged and participating.  Suddenly, two hours have felt like two minutes.  

A standup comic thoroughly “kills,” leaving the audience in hysterics.  It’s as if he can do no wrong.

These are all examples of flow.  We’ve all experienced it, almost certainly more than once, maybe even on a daily basis.  But more than likely, we didn’t have the words to describe it, or the framework to fully understand the psychological mechanics behind it, let alone the awareness of how to wield it to improve performance at work.  Last week I delivered a presentation on flow to a group of fellow coaches, consultants and other entrepreneurial service providers.  What follows is an introduction to the core concepts of flow and some suggestions for further reading.  

What is Flow? 

Flow state, also known as optimal experience, is the point at which your challenges align with your skills (see graph).  The term also describes a process of acting with full involvement, energized concentration and enjoyment.  The term was coined and developed by Mihaly Csikszentmihalyi (pronounced ME-high CHICK-sent-me-high-ee...yeah, good luck with that), a pioneer of positive psychology, who published a number of books on the subject (see below).  Csikszentmihalyi aimed to explain the special feeling he experienced while rock climbing.  Some call it being “in the zone,” “firing on all cylinders” or being "in the pocket" – regardless of the label, flow can be an incredibly powerful force – not only in sports and recreation but also in business.

What Happens in a Flow State?

Csikszentmihalyi, along with other researchers he influenced, identified the following eight dimensions of flow:

1. Clear goals and immediate feedback.  Video game designers have long understood and attempted to capitalize on this phenomenon.  Part of what makes video games potentially so addictive is that the goals for each activity are clearly explained to you and you earn rewards or acknowledgement each time you achieve them within the game.
2. Equilibrium between level of challenge and personal skill.  As the graph above depicts, flow emerges when the level of challenge entailed in an activity aligns with the individual's personal level of skill. This can happen through serendipity, but understanding the mechanics of flow can empower you to make proactive adjustments -- either decreasing the challenge or increasing your skills -- in order to facilitate flow for yourself. 
3. Merging of action and awareness. In flow you feel fully immersed in the activity, free of distractions.  This is why people often refer to it as being in the "zone" -- this is an instance, not unlike a meditative state or trance, where consciousness takes on measurably different parameters.  
4. Intense, focused concentration on the present moment.  That NBA player hitting three-pointers or nailing free-throws is somehow able to tune out the roar of the crowd.  That's because flow state enables an incredible level of concentration that doesn't feel tedious or forced. 
5. Sense of potential control or agency over the activity.  When challenge and skill achieve equilibrium, one of the byproducts is a heightened sensation of efficacy and the ability to influence the outcome.  This feeling, not surprisingly, becomes a self-fulfilling prophecy that enables heightened performance.  
6. Loss of self-consciousness.  You also lose any sense of self-doubt or concern for how others are perceiving you, despite whatever pressure or expectations might exist. 
7. Time distortion. When people enter into a state of flow, they often lose track of time, experiencing a subjective alteration in their perception of time.  For some, time speeds up – suddenly three hours have past but only felt like thirty minutes.  For others, time appears to slow down – think Neo in the Matrix – and they feel as if they can think faster and accomplish more than usual in mere moments.   
8. Autotelic experience – intrinsically self-rewarding activity. Whether it's the panoramic view at the top of the mountain, the applause from the crowd, or simply the knowledge of a job well done, flow can only be achieved when the activity entails some mechanism for self-satisfaction and gratification.  

What Are the Benefits of Flow?

Flow can be an incredibly powerful tool for learning, innovation and productivity.  Flow has been shown to offer the following benefits in a wide variety of contexts:

  

• Enhances performance and creativity.  Flow makes you more productive and open to experimentation and outside of the box thinking that leads to breakthroughs and innovation.  
• Prompts learning and new skill development.  The inherently rewarding nature of activities conducted in a flow state incentivizes you to continually increase the level of challenge along with your skills to generate that rewarding feeling. 
• Enables collaboration and co-creation. Major companies have been trying to tap into collective flow states to empower teams of employees to work together to be more productive and creative.   
• Increases satisfaction, enjoyment and quality of life.  Most importantly of all, flow makes us happier and more contented.  It just feels damn good and produces terrific outcomes.  

Check out this video for a quick tutorial on how to use flow to combat anxiety and boredom in the workplace.

My Experience of Flow

The more I think about it, the more I realize that I've experienced flow in a variety of different activities.  The one that sticks with me most is playing music.  When I was playing drums in bands in high school and college, especially during longer improvisations, I would often find myself losing track of time and feeling a special sense of control and creative energy.  It was as if I could do no wrong.  At the time I didn’t have the terminology to describe this sensation, but now I can identity it as a flow state.  Part of what makes art so rewarding for creators – and can sometimes lead to obsession – is this feeling of being completely immersed in and empowered by an activity.

Recreation is one thing, but what about work?  To be honest, until I started coaching I rarely felt myself reach a state of flow in a professional context.  When I’m preparing for a coaching session or workshop, or actually working with a client, I often feel myself entering into this state of heightened awareness and empowerment.  Now the challenge is to develop the level of skill necessary to achieve flow while tackling other aspects of the business – such as sales and business development – that don’t feel as intuitive and gratifying. 

Go Forth and Flow!

For more information on flow, how to use it to increase productivity and creativity (for yourself or for your employees) please feel free to reach out to me via coach@inclusivastrategies.com.  

Further reading on the subject:

Fast Company's article on the Art of Work 

Flow: The Psychology of Optimal Experience

Finding Flow

Good Business

Inclusiva Now Offering Business Workshops and Executive Coaching

The Inclusiva website has recently undergone some important tweaks and updates.  In addition to some layout and navigational improvements, I'm pleased to announce a couple of exciting developments:

Now Offering Nifty New Workshops 

First off, Inclusiva is now offering speaking and instructional engagements on a variety of business topics, including:  

• Time and Stress Management
• The Art of Budgeting
• Negotiation & Conflict Management
• Unlocking the Mysteries of Crowdfunding (Always a...wait for it...crowdpleaser!  Sorry.)

Each of these topics can be addressed in either workshop or lecture format.  To learn more or to inquire about booking a workshop or keynote, please contact me to chat. 

C-Levels Types Need Coaching, Too

Secondly, I'm expanding my menu of services to include more specialized executive coaching, designed for corporate officers and nonprofit directors.  Inclusiva remains committed to serving a diverse array of clients, with a special emphasis on creative business owners.  Though the focus of the content may differ from the small business context, I believe that my interdisciplinary expertise and holistic approach to coaching will prove to be a game-changer for clients in larger organizational settings as well.    

The Harvard Business Review recently published research on the skills that many high-powered, entrepreneurially minded leaders lack.  The study found that while serial entrepreneurs tested above average in skills such persuasion, personal accountability and goal-setting, they ranked severely below average when it came to empathy, planning and organizing and self-management.  While these findings should come as little surprise to anyone who has ever worked closely with tech entrepreneurs, they suggest that executives in a wide variety of organizations need more effective help and guidance to develop these crucial skill sets.

Inclusiva's executive coaching services will address the needs of executives who want to challenge themselves to address their weaknesses head-on and develop their mastery in the following areas: Planning & Organizing, Delegation, Power and Humility, Problem-solving, Empathy, Interpersonal Dynamics, Conflict Management, Work-Life Balance, Time/Stress Management, etc. 

While often derisively referred to as "soft skills," these qualities exert a concrete impact on business performance - including the bottom line.  To learn more, check out Inclusiva's new Executive Coaching page, and refer Inclusiva to any corporate officers or nonprofit managers you think might be interested in holistic coaching services. 

Top 10 Praiseworthy Podcasts for Business and (Guilty) Pleasure

Maybe you endure a hellish daily commute, enjoy distracting yourself at the gym, or just need to zone out while cooking dinner.  Whichever scenario sounds most familiar, my forthcoming list of go-to podcasts offers no shortage of intellectual stimulation and shameless diversion.  For enjoying these and other fine audio programs, I highly recommend an app called Stitcher, available for free on your smartphone and desktop web browser, which allows you to organize your favorite podcasts into playlists (e.g., business, politics and pleasure – guilty or otherwise).  

Business Podcasts:

Marketplace

Despite being a longtime listener of NPR, it took me a while to give Marketplace a chance.  It probably had something to do with the fact that the voice of its host and senior editor Kai Ryssdal sounded overly slick and narcissistic -- I visualized the progeny of a used car salesman and a game show host in front of a microphone.  Little did I know that Ryssdal is bright and well-intentioned, and his show is almost unquestionably the finest all-around business and economics podcast currently gracing the airwaves.  With an unexpectedly sociological perspective on finance, Marketplace makes the world of mainstream business accessible and engaging for experts and laypeople alike. 

Fareed Zakaria GPS

If my grandfather knew what a podcast was, he would never forgive me for neglecting to include Mr. Zakaria on my list of favorites.  Despite the title, this is not a show about geolocation gadgets.  CNN's GPS – an annoying, head-scratch inducing acronym for Global Public Square – features consistently thoughtful and articulate editorials by its host (past troubles with plagiarism notwithstanding).  With uncharacteristic intellect and worldliness, FZ proves week after week that he remains one of the few worthwhile commentators in the increasingly odious cable news landscape. 

Marketplace Morning Report

An offshoot of the aforementioned Marketplace, the Morning Report offers insightful business stories in succinct, seven-minute segments.  When you just want a taste of the day’s headlines without too much of a time commitment, this show is a great option.   

KQED’s Forum

Join good-natured, low-key host Michael Krasny, Ph.D. as he explores political, economic and cultural topics, including those that affect the Bay Area in particular.  Ever since 1993 Krasny has been interviewing intellectuals, authors and other newsmakers with his genial, easy-going style.  Forum has a slightly more local Nor Cal focus than some other shows on this list, and includes a mixed bag of call-ins from listeners, but it deals with broad themes and issues that should prove relevant to a wide audience.

This Week in Startups (TWiST)

TWiST is a weekly podcast series hosted by tech entrepreneur Jason Calacanis who discusses the latest developments in the world of Silicon Valley tech startups and interviews founders of emergent internet companies.  This one is new to my lineup, but offers casual yet revealing chats with a roster of interesting guests for those interested in technology, venture finance, crowdfunding and related topics.

Entertainment Podcasts:

This American Life

Is there anyone left out there who isn’t hooked on TAL?  Every week Ira Glass and company deliver engrossing, humorous and often poignant stories that blur the lines between journalism and radio drama.  Last year they were forced into an unprecedented apologia after finding themselves in hot water for airing a story called "Mr. Daisy and the Apple Factory," which turned about to be almost entirely fabricated.  But in true TAL fashion, even their retraction proved captivating and unforgettable.  If you want a shining example of TAL’s brilliance, check out this installment entitled "The Incredible Case of the P.I. Moms," a seemingly straightforward story that quickly devolves into an outrageous, mind-bending tale of criminal conspiracy, corruption and intrigue that is not to be believed.

NPR: Fresh Air from WHYY

I have a serious soft spot for Terry Gross, the venerable host of NPR’s long-running Fresh Air interview show.  Pretty sure I'm not the only one.  Among the most classic interviews I’ve ever come across was Terry’s testy encounter with KISS frontman (and unhinged megalomaniac) Gene Simmons back in 2002.  Several times a week, Terry and her inner circle of contributors interview prominent actors, filmmakers, musicians and other newsmakers, blending unassuming politeness with probing interrogation. 

The Treatment with Elvis Mitchell

Erudite, dreadlocked film critic Elvis Mitchell interviews Hollywood insiders on his weekly public radio show.  Mitchell often surprises his guests with the depth of his research and the scholarly – bordering occasionally on pretentious – questions that he brings to each conversation.  For any fan of motion pictures, this one is a no brainer.     

Girl on Guy with Aisha Tyler

I first became aware of Aisha Tyler as the voice of perpetually exasperated secret agent Lana Kane on FX’s hilariously off-the-wall animated series Archer.  Turns out this foul-mouthed female comic is a Bay Area native who loves science fiction, video games and fine whiskeys...be still my heart.  Her suggestively titled podcast series features surprisingly in-depth, down-to-earth chats with fellow comedians and other entertainers she admires.  A great example of the show is her fascinating convo with legendary chef, food writer and irrepressibly hedonistic TV personality Anthony Bourdain.

Smodcast: Fat Man on Batman

You don’t have to be a comic book geek to enjoy former filmmaker turned podcast pioneer Kevin Smith’s weekly interview show devoted to his love for the Caped Crusader…but it helps.  This series is an unabashed guilty pleasure for anyone who adores all things related to Batman and Gotham City as much as I do.  Despite Smith’s indulgent, meandering introductions and ganja-fueled asides, the show features fascinating interviews with many of the key artists involved in Bat-media, from the current New 52 comics to the beloved Animated Series, the Chris Nolan trilogy and beyond.   

Debunking the Myth of the Entrepreneurial Identity

We have all been conditioned to believe that entrepreneurship is an exclusive identity.  But it’s not.  Entrepreneurship is an activity, made possible by a wide array of skills, tools and resources.  Over the course of the next several paragraphs, I hope you’ll bear with me as I do my best to debunk the widespread and counterproductive myth of the born entrepreneur.

The Verb Is Mightier Than the Noun

The term entrepreneur comes from the French word entreprendre, meaning to undertake or to manage.  As a result, entrepreneurship is etymologically linked to a form of action, rather than a state of being or set of traits.  While the meaning behind the term is broad and open-ended, most literature about entrepreneurship is distressingly exclusive in tone, whether inadvertently or by design.  The web is full of articles and blogs endlessly listing the character traits that every entrepreneur simply must have to be successful.  They frame it in terms of: how to be a successful entrepreneur…in order to succeed you must be these things, have these very particular yet thoroughly generic attributes.  The implication is that an incredibly small subset of the population, people with superhuman talent and insights like Bill Gates, Steve Jobs, Sergei Brin and Larry Page -- they have what it takes to create meaningful new businesses because they were simply wired that way.  The message is that they have the right stuff and, most likely, you don't.  

To Be or Not to Be, That Is Not the Right Question

This entrepreneurship-as-identity fallacy unfortunately pervades higher education as well.  In business school, I selected entrepreneurship as my concentration.  In more than one class, we were required to purchase outrageously expensive textbooks littered with misleading truisms like “The Seven Character Traits of Entrepreneurship.”  One – Perseverance.  Two – Creativity.  Three – Flexibility.  Four – GIVE ME A BREAK!  For the most part, these textbooks are a complete waste of money.  Of course, starting a business requires perseverance, creativity and flexibility.  You know what also requires a ton of perseverance, creativity and flexibility?  Life.  Just living requires those things in some form or another, and they are certainly necessary to succeed in any profession, not just the business world.

Along with my friends in the entrepreneurship program, I quickly realized that it makes no sense trying to teach someone how to be an entrepreneur.  Why?  Because entrepreneurship isn’t an identity; it isn’t a set of personality traits that you’re either born with or you’re not.  Entrepreneurship is a process, a means to an end.  You don’t have to be an entrepreneur to create a business or innovate one, but you do have to learn and integrate entrepreneurial thinking and doing into your life. 

You can’t teach someone how to be an entrepreneur, any more than you can teach someone how to be Richard Branson.  Although, come to think of it, how hard can that be?  Step One: Grow out your hair. Step Two: Speak with a foppish British accent.  Step Three: grow a goatee, refuse to wear a tie, and go parasailing, constantly… Thanks a lot, textbook.  (Only kidding, Sir Richard – you rock!)

The most familiar type of entrepreneurship is also the most extreme and atypical.  Risking everything you have to start a high-growth tech company from scratch is incredibly difficult, and admittedly not everyone is willing to accept that level of risk.  But that is by no means the only way to create a viable business.  Entrepreneurship is less of a cohesive identity, and more importantly a process – a way of thinking and doing – that spurs innovation and creates value.  That’s why many large companies try to embrace the idea of intrapreneurship, innovation and informed risk-taking from within an established organization.  

Entrepreneurial Exceptionalism, a Dangerous Delusion 

I'll be the first to admit that not everyone has the tools or the drive to undertake and manage a new business, but not because it requires a certain character profile, but rather because it takes a commitment to a process, a mindset, a way of solving problems and a set of skills that can be learned over time, especially with the help of down-to-earth role models and mentors.  You don’t have to start a huge global corporation from scratch to do entrepreneurial things, or to innovate, or to take calculated risks based on strategic planning and see those risks handsomely rewarded.   

Some self-proclaimed entrepreneurs (or so-called "treps") may resent these arguments because they feel that they are somehow exceptional; only they can do what they do.  In some cases, they’re right…but not always.  Perhaps out of ego, perhaps to avoid more competition, entrepreneurs are often loathe to admit that many more people could do a lot more of what they do.  Kind of like how some lawyers may neglect to tell you that you don’t have to be a lawyer to draft a valid, enforceable contract.  You also don’t have to be a lawyer to think like a lawyer.  That is something you will likely never hear a practicing attorney say, because they have been conditioned to believe that they are special.  The unfortunate reality is, we have done too good a job of convincing bright young people they should go to law school, when what our economy really needs is less litigation and more innovation.  Our economy desperately needs more entrepreneurial thinking and undertaking, in every profession and industry. 

Cut to the Chase Already

What’s the point of all this, you might ask?  I created Inclusiva because there are a lot of creative people out there who excel at their chosen craft, but don’t think that they can be entrepreneurs, don’t think that they can be in business because they have been made to feel that business is something other, something purely about profit, something incompatible with being creative, conscientious, community-focused, fill in the blank.  Or maybe they’ve read one too many of these boneheaded lists online or self-help books about what it takes to be an entrepreneur, and they’ve been made to feel that they simply don’t have what it takes because of who they are.  Inclusiva exists to change this way of thinking, to approach entrepreneurship as a widely inclusive discipline, rather than an identity reserved for an elite few.   

6 Invaluable Advantages of Holistic Business Coaching

As the New Year approaches, ask yourself: What’s stopping me from hiring a business coach, either for myself or someone I care about?  Maybe you’ve heard the term ‘business coaching,’ but the advantages remain a bit unclear or undefined.   

When chatting with friends and acquaintances, I often feel uncertain where to begin when explaining just how transformative business coaching can be.  I want to use this entry to summarize the feedback I’ve received from clients on the most valuable, transformative aspects of a business coaching relationship.   

1.      Increase Your Focus and Bandwidth

Let’s face it.  Running a business is hard.  It’s time-consuming.  It can run you ragged and take a toll on your relationships with family and friends.  Time and stress management skills are something that traditional school systems never explicitly teach us, and yet these skills prove essential for almost type of professional.  The insights you extract from business coaching will enable you to boost your bandwidth in unexpected ways, making more room for personal reflection and strategic planning, but also for spending more quality time with the people you care about. 

2.      Set and Realize Values-Driven Goals

This may seem like an obvious point, but it’s one that cannot be overemphasized.  Holistic coaching looks to the client, rather than external sources of cookie-cutter common wisdom, for answers.  That is to say, your own needs, priorities and personality will shape and determine your goals, while your coach helps make them measurable and achievable.  Holistic coaching is not about imposing external values on you; it’s about using your own values as the driving force that leads you down a highly personalized path of constructive change.

3.      Boost Confidence and Awareness

The coaching process pushes you to look at your business from new angles, and opens your eyes to new possibilities and new ways of thinking, acting and reacting as a leader and manager.  Not only will you learn new skills in a way that reflects the way you naturally learn (verbal, visual, experiential, etc.), you will gain access to versatile tools and frameworks that you can carry with you throughout your career.  Working with a business coach persistently expands your comfort zone in a safe, supportive manner.  Coaching boosts your confidence and professional self-worth by helping you to capitalize on your strengths, relying on constructive feedback and affirmations rather than criticisms or judgments. 

4.      Expand Your Professional Network

One of the perks of business coaching is that coaches are natural connectors.  They have the ability to introduce their clients to a wide range of other professionals and service providers.  Whether you’re in need of a  down-to-earth attorney, trustworthy financial advisor, or affordable payment processor, your business coach can help put you in touch with allies and partners who can make your life a lot easier. 

5.      Grow Your Business and Brand

Coaching requires an investment of time, energy and, yes, money.  But holistic coaching is designed to ultimately pay for itself by enabling you to facilitate the growth of your business, through both increased revenue and greater efficiency.  While business growth serves as a central goal, it is by no means the only goal.  Holistic coaching aims to optimize –- rather than simply maximize –- business success.  In other words, greater financial success does not have to come at the expense of other important considerations like values, creativity, integrity, responsibility and social consciousness. 

6.      Extract More Satisfaction Out of What You Do

Holistic coaching operates under the premise that success is subjective, personal and multifaceted.  What is the point of growing your business if you can’t get no satisfaction from the process?  When running a business, the process must be at least as much the rewards as the outcome –- because in many cases, the ultimate results remain uncertain at best.  Business coaching helps to align your passion with your potential for meaningful outcomes.  It not only gives you permission and encouragement to succeed, it gives you the tools you need to make it happen.

What Are You Waiting For?

Business coaching is a game-changer.  No other investment you can make in your business offers these special types of returns.  The impacts it will have on your goals, bandwidth, growth, confidence, network and satisfaction represent priceless dividends that often begin to manifest very quickly, and pay out over time with a sustained, wholehearted commitment to the coaching process. 

Inclusiva offers coaching engagements for practically any type of enterprise and any level budget.  Don’t wait – start reaping the rewards today.  Email coach@inclusivastrategies.com for a free introductory consultation.  

Transcending Small Business Obstacles: An interview with Arturo Noriega

Arturo Noriega is an entrepreneur, small business expert and founder of Centro Community Partners.  His career includes work as a manager of advisory services at Ernst & Young, consulting for Deloitte and Aon, and business development at Barclays Global Investors.  

I first met Arturo through my work as an MBA Advisor at Centro.  I thought he would be a great resource, as someone who works every day to help small business owners and entrepreneurs overcome obstacles.  Here's the transcript from an interview I did with him a while back: 

LBBB: When professional investors assess the viability of a startup, they often examine three core ingredients: the Market, the Team, and the Technology/Innovation...not necessarily in that order.  Which of these core elements do you find to be the most important, and why?

AN: Most important to success?  I think there’s a pecking order from most to least, the most being the people.  Regardless of how good your tech is, unless you have a great team, you don’t really have anything.  Anything good starts with good people.  But you have to have a complimentary set of skills, meaning that everyone has a different sweet spot that contributes to the overall success of the company.

The next I’d say is market, the unmet need.  Then it would be the innovation or advantage that you’re offering but only so far as it responds to the need of the market.  And everything comes back to the team, the leadership.  You need that vision – leadership – that’s able to respond quickly to market demands, and really leverage whatever tech is being created here.

LBBB: What would you say is the greatest obstacle that small businesses tend to face?

AN: The greatest obstacles?  Time and money – the two things that kill any startup, especially in tech.   Lack of capital, running of money, underestimating capital requirements for carrying out operations…If the company does run out of capital it obviously can’t meet requirements of the market.  Also time, time for setting up and carrying out processes.  In one of the ventures I’ve been working on, everything has proven to cost twice as much as I thought and taken twice as long.  See, no one ever forecasts how much money and time it really takes.  Usually, take your forecasts and multiply by two.  That 2x multiple – most startups don’t see that coming and it’s really a killer.

LBBB: What about the flipside of that coin?  What would you say is the greatest asset that small business have but often overlook or fail to take advantage of?

AN: Ideas that are generated by the team because no one asks the question – in other words, the unidentified opportunities.  In startups, people are so focused on specific things and tasks that they don’t fully explore ideas or opportunities, don’t really look at the big picture.

Also, communication.  Because people are not available, they’re working virtually, or working on different projects, they don’t get that interaction and cooperation that stimulates the process, asking those what-ifs.  Human capital is the greatest asset – the potential is not fully recognized.  Leaders don’t even ask “what do you think?”

Another asset that’s overlooked is networks.  People feel they have a limited amount of professional advice to navigate waters of startup when really there are unlimited resources outside of the organization to help the startup succeed.

LBBB: We had a guest speaker talk to our class about the importance of space.  How important do you think brick and mortar is to a small business? What kind of pitfalls have you experienced that you would advise readers to avoid?

AN: Getting an office is important…if your budget allows it.  Many people now meet virtually or work from home, maybe even meet up in a café somewhere to get certain things done, though that’s not always conducive to work.  The key thing is making sure you have appropriate office space.  You know what I mean?  Many startups get office space – because they don’t know better – and it’s just  inappropriate for their level of growth.  It’s either too expensive or too small, but either way it doesn’t allow for organic growth.  The trade off here is productivity, right?  That’s the whole point of office space, to make your company more productive.  You also want a physical address and that sense of legitimacy, that you’re a legitimate business in the eyes of your customers and the public.

LBBB: Besides the obvious issues of liability and regulations, what is it about HR and staffing that proves so difficult for small businesses? 

AN: You know that’s a really good question…(laughs) and I haven’t really come up with a solution yet.  HR is ongoing challenge, not just for startups.  The big thing I think is that vetting process – you want someone to be able to walk right in and be able to do [the job].  But that comes with a premium beyond the reach of small businesses.  What happens is that as they’re forecasting growth and allocating capital to staff, that’s done really poorly.  Roles and responsibilities are not well defined because people do multiple things.  In order to manage that , managers must really be sure to create detailed job descriptions.  You might realize you can split work between part-time workers instead of getting one fulltime professional.  I’ve done that and that works great. 

What happens, too – you don’t know how committed they are to the mission.  Motivation is so key. It is rocky.  You can navigate and manage that situation but until you measure performance… Another solution is to give up more equity to attract better people.  That way they have a vested interest in the success of the organization.  Motivation becomes the big issue and keeping people committed to the mission. 

5 Things You Should Know About Crowdfunding and the JOBS Act

Chances are you're aware of crowdfunding.  But what is all the fuss about?  

The JOBS Act is a controversial, multifaceted piece of legislation, shrouded in hype.  Proponents promise that it will be game-changing for startups and small businesses, while detractors dismiss it as a Trojan horse of deregulation.  So what does it all mean?  Will the JOBS Act really change the world?  It is really a license to print money?   The following post aims to shed some light on the topic of crowdfunding. 

Background

Back on April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act (sorry, no relation to the late Steve), after being passed by an uncharacteristically bipartisan Congress.  The JOBS Act aims to encourage funding for small businesses and startups by easing the regulatory burdens on smaller companies, and permitting a form of fundraising known as crowdfunding, made possible by online crowdfunding platforms (CFPs) like Kickstarter and RocketHub.  The underlying premise is that small companies should be able to access funds from small investors without having to jump through the same hoops as giant corporations like Apple or Google. 

To learn more about the history of the JOBS Act, take a look at this nifty infographic here.

Okay, without further ado, here’s my list of the top five things to keep in mind about crowdfunding under the JOBS Act:

1.       The Crowdfunding Gold Rush Has Only Just Begun

The proof of concept for crowdfunding was established with the help of microlending platforms like Kiva, which connects people with money to impoverished entrepreneurs who lack access to traditional financial resources.  The basic premise behind crowdfunding platforms, or CFPs, is not totally dissimilar.

Like me, you’re probably most familiar with Kickstarter, the CFP launched in 2009 that has emerged as the brand name in the crowdfunding arena.  Kickstarter is a funding platform for creative projects supported by fans in return for rewards.  I was surprised to learn that a competitor, IndieGoGo, had actually launched in 2008, a year earlier than Kickstarter. 

With just a cursory web search, I found over 20 different CFPs – I’m sure there are many more out there, and even more in the pipeline. 

Here is my current list:
Kickstarter, RocketHub, IndieGoGo, GoFundMe, 40Billion, Fundable, Crowdfunder, EarlyShares, SeedInvest, GetFunded, RelayFund, WeFunder, CrowdCube, Seedmatch, Rock The Post, Razoo, Pozible, FundaGeek, Credibles (and please let me know if I’m missing any!)

2.       The JOBS Act Really Does Change the Status Quo of Fundraising

As Morrison Foerster researchers explain, “[c]rowdfunding can be used to accomplish a variety of goals (e.g., raising money for a charity or other causes of interest to the participants), but when the goal is commercial in nature and there is an opportunity for crowdfunding participants to  share in the venture’s profits, federal and state securities laws will likely apply.”

The JOBS Act eases the longstanding prohibition against ‘general solicitation and general advertising’ in securities offerings.  The law will now provide a special exemption under the Securities Act for ‘crowdfunding’ offerings.  The reforms will also enable both accredited and non-accredited investors alike to participate, albeit with separate rules and thresholds.    

Learn more about some of the law's key parameters here.

3.       The Type of Funding Is Key

While the coverage of crowdfunding tends to lump all CFPs together, funding can take a variety of forms, each with different implications.  Platforms like Kickstarter, RocketHub, IndieGoGo and Go-FundMe use a model wherein project creators raise contributions from funders –- in exchange for rewards, rather than an ownership stake in the project.  These rewards can take many forms –- copies of products, mementos, experiences -- pretty much anything that has value and satisfies backers.

One idea underlying the rewards model is that the funds are considered business income, rather than securities (like common stock), which would fall under the auspices of the SEC.  While Kickstarter focuses on creative projects and has publicly stated that it does not intend to offer equity, others like RocketHub and IndieGoGo may attempt to transition to an equity model, requiring strict adherence to the SEC's forthcoming crowdfunding rules.

It appears that the JOBS Act -- and its pending SEC regulations -- are primarily concerned with equity and lending-based  crowdfunding platforms, which more closely resemble traditional securities offerings.

Graphic courtesy of Forbes.  

Forty-nine percent of the total $585 million in funds raised by crowdfunding platforms has come through donation-based platforms.   Meanwhile, 18% has come from equity and 22% from lending-based models, which remain highly constrained until the SEC sorts out its approach to implementation.  Surprisingly, only 11% has come from rewards-based platforms like Kickstarter. 

4.       The SEC Has Until 2014 to Release Its Implementing Regulations

The SEC has until 2014 to create and implement its regulations, which will provide the specific rules of conduct permitted under the JOBS Act.  There have been a few previews of what’s to come; the SEC announced back in August that it would create distinct classes of crowdfunding investors, with separate rules for each class.  Until the SEC regs are released, pure equity platforms like Crowdfunder are stuck in a sort of legal limbo.  It will be interesting to see the SEC's approach, considering their justifiable concerns about the potential for fraud and abuse -- not to mention their naturally self-defensive resistance to any form of deregulation.  

5.       Crowdfunding Is Not Free Money

Crowdfunding has become increasingly popular with contributors and fundraisers alike.  As an example of crowdfunding's rapid growth in popularity, Venture Beat recently did a story on so-called Kickstarter addicts.  

“What you absolutely cannot do,” Forbes contributor Suw Charman-Anderson warns CFP users, “is treat crowdfunded money as some sort of magic bonanza that is exempt from normal business rules. It’s not.”

Despite its reputation as free – or at least cheap – money, the reality is that crowdfunding is NOT a tax-free windfall.  Reward-based crowdfunding proceeds are considered income by the IRS, just like any other sales income.  That means that companies raising funds will most likely face some sort of tax liability, especially for wildly successful projects. 

Many users also fail to read the fine print when it comes to the fees charged by the CFPs.  Kickstarter, for example, charges a 5% commission on all funds raised (once the target threshold has been reached).  On top of that, there’s a 3-5% fee from Amazon Payments for managing the transaction. 

The bottom line is that businesses and individuals raising money through CFPs need to factor in the costs and expenses, just like with any other source of capital. Crowdfunding may ultimately prove to be an attractive alternative for companies seeking to raise relatively modest amounts of capital from a large number of investors.  That said, companies will need to weigh the costs and risks that arise, including the tax implications and reporting requirements contemplated by the legislation.