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Wall Street Journal's Weekend Interview: A Case of Uncreative Destruction


Wall Street Journal's Weekend Interview: A Case of Uncreative Destruction

Evan Baehr

Why isn't there innovation in government? Meet two entrepreneurs who wanted to help the U.S. Postal Service digitize mail. Some local postmasters liked it. Washington didn't.

In my mailbox several days ago was a bill from Time Warner Cable, a West Elm furniture catalog, a coupon for a cleaning service and letters for three previous tenants who moved out years ago. The only piece of mail I didn't throw away or put back in the box with a passive-aggressive note for the postman was the New Yorker.

Like many Americans, I have developed a careful strategy for dealing with the U.S. Postal Service: Use UPS or FedEx whenever possible. A few years ago, Evan Baehr and Will Davis decided to do something moderately more productive: They founded Outbox, a company with a digital solution to simplify—or eliminate—mailboxes across the country.

For $4.99 a month, Outbox would collect your mail and scan it. The company could unsubscribe you from unwanted catalogs and shred junk mail. A smartphone app allowed you to categorize and file bills with the swipe of a finger. Outbox could also forward wedding invitations and Christmas cards back to your home. Call it snail mail for the 21st century.

Too bad the postmaster general shut it down.

The Outbox story begins in 2011, after Messrs. Baehr and Davis graduated from Harvard Business School. They started testing the concept of digitized mail in Cambridge, Mass., collecting letters and bills from acquaintances and scanning them "on a flatbed scanner in Will's trunk," as Mr. Baehr recalls. Within weeks, Mr. Baehr called Sheryl Sandberg at Facebook, where he had accepted a job offer. He told her that he wasn't coming to Silicon Valley after all.

Venture capitalists including Peter Thiel (a former boss of Mr. Baehr's) and Mike Maples soon backed Outbox as Messrs. Baehr and Davis focused on two post offices in Austin, Texas, where they had moved. Forging personal relationships there was key, Mr. Davis says, because "some postmasters do have some autonomy and they actually will take a little bit of a risk." They found one risk taker in Austin, who, they admit, "maybe didn't see the full weight of what was going on here."

The concept was simple: The two young men would ask letter carriers to set aside their subscribers' mail in a designated box in the post office. Each day the duo would pick up the mail, scan it at Outbox's downtown office, and then deliver it digitally. "By 3 p.m. our customers had their mail. And that's when the cool stuff happened," says Mr. Davis.

Cool thing No. 1: They were able to unsubscribe users from junk mail. But the Outbox founders also quickly learned that "not all junk mail is created equal. Some people wanted their Pottery Barn," says Mr. Davis. "We could test what we call the holy grail of advertising, which is intent, brand affinity, understanding what people like—that's really fascinating."

It's also potentially lucrative. Today companies like Pottery Barn know only whether their catalog is delivered. "Imagine if Google only knew that an ad was shown, they have no idea if people clicked on it. That's the situation the postal service is in with the mail," says Mr. Baehr. It isn't hard to imagine how valuable that information would be.

But wasn't the goal to get rid of paper spam? " Williams-Sonoma was not the enemy," says Mr. Davis. "The enemy is giving you Williams-Sonoma every single month without you ever asking for it. Our goal was to figure out through your choices what brands you wanted. To give you perfect control."

Building their own version of the postal service, Mr. Baehr adds, "wasn't just so that we could scan mail." It was to build a new type of "digital-physical hybrid communication company." In other words: Start by taking pictures of mail. End up as an essential portal where users consume content and ads.

The two business partners felt it would be a great deal for the USPS. "In this new model we could save them money, increase customer engagement, and be better for the environment," says Mr. Davis. So when the postmaster general's office called the Outbox founders in May 2012, they were cautiously optimistic. "I was thinking maybe this can be a great example of how private innovation can be married with government." You would think so, especially given the postal service's $100 billion in debt and unfunded employee benefits.

But you would be wrong. In a windowless conference room at USPS headquarters in Washington, D.C., Messrs. Baehr and Davis presented their ideas to Postmaster General Patrick Donahoe, who is also the postal service's chief executive officer, and to the chief operations officer, chief legal officer and chief innovation officer. "Our goal for the meeting was get to a productive partnership," says Mr. Baehr. "We wanted to share with them a lot of data about how people interact with mail, because that's information they don't have right now about their customers."

Mr. Donahoe didn't see it that way. "Those aren't my customers," he said, in Mr. Baehr's recollection. "My customers are several hundred volume mailers, and my product to them is the guaranteed delivery of their mail onto the kitchen tables of Americans." As for the postal service adapting to the Internet age? "Digital is a fad. It will only work in Europe," said the chief innovation officer, according to Mr. Baehr.

Overnight, their model was shut down.

That's when the Outbox guys decided to go to the mattresses. "The only way we're going to be able to do this is by taking the $2 million and the 10 smart people that we'd recruited and literally going out and making a better postal service. And that's where the whole 'take mail out of the mailbox' came in," says Mr. Davis.

Without cooperative postmasters and letter carriers, Outbox hired "unpostmen," gave them white Priuses with big red flags on the side, and sent them out into the streets of Austin and San Francisco armed with smartphones and lots of keys to subscribers' mailboxes. Several times a week, they'd "undeliver" the mail.

The unpostmen got Outbox a lot of press, much of it critical of the model's inefficiencies. One thing was clear: The cost was prohibitive. Plan B, they admit, was "insane." Outbox announced they were shutting down in February.

Outbox isn't the only digital-mail company that has failed in recent months. Zumbox, which had more than $30 million in funding from backers like former Walt Disney CEO Michael Eisner, closed in April after seven years. Hearst's digital-mailbox service, Manilla, has announced that it is closing July 1.

Perhaps the lesson is that users don't need a digital-mail service—that the pain point, to use startup speak, isn't painful enough. Many Americans have switched to paperless billing, and, anyway, is a few minutes sorting sweepstakes letters so bad?

That's not how Messrs. Baehr and Davis see it. The reason digital-mail startups are failing, they believe, is because taking on government is exponentially harder than taking on a typical incumbent business. "The government has totally corrupted this piece of the marketplace," says Mr. Davis. "It's literally impossible to get us out of the 1960s."

In a decade where Airbnb can challenge the hotel industry and Uber can disrupt taxi cartels in cities across the globe, government remains impervious to creative destruction. "You can have a thousand satisfied Uber customers show up at the Seattle city-council meeting," says Mr. Baehr. "In taking on the federal government, it's a 500,000-person organization."

Given Messrs. Baehr and Davis's backgrounds, perhaps it's no surprise that the industry they tried to disrupt was the USPS. Both are former staffers for Republican congressmen who left Washington disenchanted with politics. They are similarly out of sync with the digerati in that it's hard to imagine either of them in flip-flops and a hoodie, and they are apt to talk enthusiastically about their favorite New York City pastor— Tim Keller of the Redeemer Presbyterian Church. The still Austin-based duo attend Redeemer on visits to Manhattan (they sat for an interview during a recent one).

So what's it like being conservative in the tech world?

"Everyone in their day job is building innovation that is not part of government," Mr. Baehr says of tech entrepreneurs. "They love seeing scale, they love raising capital, they love seeing customers, they love driving transformational social change. And they turn around and pull the lever and they vote for every single Democrat down the ticket. There are certainly Democrats that like innovation. But that it's like nearly 100% is curious," says Mr. Baehr. Mr. Davis puts it more bluntly: "The level of communist and pro-liberal sentiment that Cambridge has, that New Haven has—that's what Palo Alto is."

But Messrs. Baehr and Davis say that they can't imagine working in another industry—not if they're going to change the country. And all the real change they see is happening outside of Washington, particularly in startups. Still, it's hard for them to square their fellow entrepreneurs' love for innovation with their belief "that government is the best answer to solve societal problems," as Mr. Baehr puts it.He adds: "What several early Facebook founders and the team that went on to power social media for Obama did was creatively use innovative products like Facebook,Twitter, etc. . . . so that they could send someone to Washington to bring a lot more power to Washington. Which is just weird. Because the people that created Facebook did not create Facebook by going to Washington."

Messrs. Baehr and Davis want to create businesses that do the opposite. Next on their agenda: Able, a collaborative small business lender that they plan to launch in the fall. Small business credit has dried up, says Mr. Baehr. "Since 2008, the number of loans to small businesses under $250,000 has decreased 92%," and during the same period more small businesses were destroyed than created. Thanks to banking regulations, he says, small regional banks are "no longer really able to take these bets on small business. And if they do take a bet that's deemed too risky, their state regulator or their federal regulator will give them the stink eye, so to speak."

Able intends to fill in the gap, and unlike crowdfunding (usually based on donations) or angel investors (who take equity), it is based on small businesses taking on moderate debt. Messrs. Baehr and Davis say they have a new model of pricing risk, one that takes into account social-media data, like Yelp reviews and Facebook likes. It's the kind of information, says Mr. Baehr, "that gives us insight that a traditional bank just wouldn't look at." Critically, to quality for a loan through Able, a business must get its "fans"—family, friends and customers—to cover the first 25% of the loan. Messrs. Baehr and Davis say that they have already used the Able model to make more than 40 loans, ranging from $5,000 to $150,000, to businesses including a hair salon, a landscaping company, a bike shop and a soap company.

"If Able works," Mr. Baehr says, "and we're able to bring billions of dollars of loans to the 'Fortune Five Million,' it is democratizing innovation and moving some of that power away from Washington."

Ms. Weiss is an associate books editor at the Journal.