Filed under: entrepreneurship
What makes entrepreneurs great?
A ton of research exists of this question, and two traits that frequently come up are low risk aversion and a high tolerance for ambiguity.
Breaking that down a bit...
Risk is something we intuitively understand as betting on the unknown. However, the specific definition of risk applied by economists (esp those of the Knightian variety) is directly linked to quantifiable expected outcomes. For example, a horse-racing track gives you the odds of your horse winning, and you know/can control the amount of money you will wager on the horse. With that information, you can calculate the expected outcome of betting lots of money on the long shot (hint: it's probably a very small number). You are taking a risk, but its a relatively known and well-understood risk.
Ambiguity, on the other hand, is tied to uncertainty, which Frank Knight was sage enough to help us understand as situations in which the odds of winning and expected outcomes can't be quantified. So having a tolerance for ambiguity is about an ability and willingness to move forward and make decisions despite lots of unknowns.
Ok, good stuff so far. But are both required for entrepreneurial success? Authors like Amar Bhide have shown us, using empirical research, that a willingness to take big risks is not something that most entrepreneurs are endowed with. Real-life entrepreneurs start with a simple idea that requires little investment and, therefore, does not constitute a major risk. To boot, entrepreneurs, even those who have founded Inc 500 companies, have low opportunity costs. They are generally not turning down great job opportunities and big money elsewhere in order to start their business. They tend to have limited experience/skills and often are creating a business as much out of necessity and a desire to be self-employed as out of raw ambition. In fact, a low risk aversion doesn't seem to be necessary for entrepreneurial success until massive inflows of cash are needed to scale and/or the business has grown to a size where future failure would destroy the entrepreneur's small fortune.
What about a tolerance for ambiguity? That does seem critical, as great entrepreneurs are generally operating in new and developing markets where unknowns abound and effective opportunism often determines success.
But there is one piece missing here - a critical one - that ties into that idea of opportunism. On the one hand, being opportunistic relates to making decisions and moving forward despite perfect information and a coherent strategy. It requires a leap of faith and tolerance for ambiguity.
On the other hand, opportunism is very much "destructive." It often requires throwing out a formulated plan of attack and way of thinking about the entire business. It requires a shamelessness and lack of pride in opinion/authorship that allows the entrepreneur to wholly re-design his/her company around new information and opportunities. Those are unique skills and traits that fall under the categories of "humility" and "adaptability" that traditional ideal types of the entrepreneur generally fail to fully explore and consider.
The lesson here is this...If you are interested in starting your own business but are the kind of individual who has a hard time changing course once you've committed (publicly or privately) to a plan, you've got a problem. It's not a downside that can't be overcome, but it's one that needs to be acknowledged, understood, and compensated for if you hope to make your company a success.
Some recent self-reflection and mentoring of soon-to-be alumni of my alma mater, St. Olaf, have caused me to think hard about those traits that make a person successful, regardless of the road they pursue.
Reading Amar Bhide's " The Origin and Evolution of New Businesses" has prompted me to think about what assets might allow a business to be successful, no matter what road it pursues, both initially and over time. Here is a try at three:
Human Capital - Intelligent and open-minded people are more capable of adapting to the major external changes that determine the life or death of a company, both initially and when it is well-established. Execution and process-oriented people ensure that an organization (profitably) realizes whatever vision it sets out to achieve. Hire and retain people like this, and you'll be well on your way.
Social Capital - This all about reputation and relationships. Build a strong brand, and do good by your customers, vendors, and employees. If you do, your ability to introduce new products and transform your business will be greatly facilitated.
Financial Capital - Money, like people and relationships, is fungible. If you can build a strong cash base and/or develop the reputation and relationships required to readily raise money, you can be much more strategic and planful in your execution.
Sorry for the lame play on words, but I could't resist.
I just finished Roger Martin's "The Design of Business" and loved it. I am a huge fan of Taleb and his Fooled By Randomness/Black Swan ideas, as well as an ardent student of innovation literature (everything from Moore to Christensen, Chesborough, Prahalad, Slywotzky, etc.). And I work with a consulting firm whose offerings are founded in org psychology and behavior. Martin's book is a beautiful and relatively no-nonsense amalgamation of some of the more poignant ideas from all of these disciplines. His theory of The Knowledge Funnel fits very neatly with the innovation literature and is based in James March's idea of exploration vs. exploitation in organizations. And his description of " abductive" vs. inductive/deductive reasoning and the logical fallacy that too frequently results from linking validity and reliabiliy would make Taleb proud. But that's all esoteric jibberish. For those of you just looking for a neat summary of the book, here is a great quote from the book that pretty well sums it up.
"The path of the reliability-based [(i.e. dependent on analytical reasoning)] CEO is clear: when faced with a decision about investing in something new and promising, but not in the current budget, just say no. Argue that if something cannot be budgeted and planned in advance, it is not worth doing. Make sure that all jobs have to be formally installed into the structure of the company. And if the project does somehow get the go-ahead, pile it on top of the ongoing activities of someone with a permanent assignment or give it to someone who is unimportant, an underperformer, or on the way out. This way, the organization can read the signals: projects are not important. The CEO can continue to grant highest status and compensation to those running the biggest businesses, even if they are highly stable algorithms that run like clockwork, and to devalue the tackling of wicked turnaround challenges by giving the managers assigned to them lower status and lower compensation. It is a time-honored formula for enshrining reliability atop the company's heirarchy of values."
All in all, it's a great book and a quick read. Martin puts forward the theories, tells a few interesting and related stories, and then wraps it up. Little fluff, plenty of substance.
Let me know if you like it.
Kurt Elling is an amazing jazz vocalist out of Chicago (schooled right here in MN). "Never Never Land" is definitely one of his lighter pieces, but has a fantastic message. Particularly this bit at minute 3:25... "My friends, everyday we sit in our everyday chairs and go to our everday work and drink from our everyday cup. But we never allow ourselves to go into the extraordinary places in our minds, in our hearts. I ask you my friends, how do you think a book is written, how do you think a song is sung? How do you think a picture's painted, how do you think a race is won? How do you think the world gets started? If a little daydreaming is dangerous, the cure is not to dream less, but to dream more, to dream all the time." Enjoy!
That's is the conclusion of a very long essay on startups by Paul Graham, and it's an insightful quote.
The reason you feel most comfortable with a job (unless, like me, you're in the minority--a job would destroy my psyche) is that you've been brainwashed by many years of school, socialization and practice. I pick the word brainwashed carefully, because it's more than training or acclimation. It's something that's been taught to you by people who needed you to believe it was the way things are supposed to be.
This is exactly the conclusion I came to over the summer after having the opportunity to collaborate with a host of young social entrepreneurs and seeing colleagues struggle with getting laid off.
I realized that we are raised to think that work is something that is provided to us by a benevolent corporate body. But that view denies the humanity of the reality that a livelihood is something that people for millenia have created for themselves.
Check out the documentary Lemonade for great testimony to this idea.
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