Entrepreneurialism is
important. If you’re not convinced of it, look at the GDP of each country and
see how much of the national output is created by entrepreneurs and the work
they do. Most of the growth generated by stock markets over the past 15 years
has been due to innovation: new high-tech firms coming to light and adding
billions to the total market capital of stock markets like the NASDAQ index and
others.
However, if you were to
read the academic literature on entrepreneurialism, you might well be inclined
to forget about ever getting your business off the ground; the data they
provide does not paint entrepreneurialism in a very positive light. Some of
these papers, remember, are coming from the likes of Stanford University –
practically a breeding ground for the best young tech entrepreneurs in the
world.
It’s also worth
remembering that without innovation, risk-taking and entrepreneurialism, many
of the massive endowment funds held by the major universities would be a
fraction of their current size. Yale’s endowment fund was US$20.8 billion in
mid-2013, for example.[i]
And yes, a lot of that was generated by their investment rather than donations.
But even that was by investing in companies providing good returns – founded by
entrepreneurs.
The fact is that they,
like everyone else, benefit from the innovation that you entrepreneurs bring to
society. But they have an academic obligation to assess the whole process from
an objective viewpoint – and that can be of benefit to you too. Good
entrepreneurs distinguish themselves by taking on board information in a
different way to everyone else, so reading what the academic literature has
been saying over the past 5 years will hopefully prove to be an eye-opener.
Why
are you entering this market?
A 2014 paper by
Elizabeth Pontikes and William Barnett[ii],
analyse software firms entering new markets. Their research shows that software
firms have a tendency to enter so-called “hot markets.” (software firms are
probably no different to most, then). This means that where venture capital
goes, so do the entrepreneurs of software firms. Right now, solutions for the
“cloud” are probably fit this role, for example.
The paper states that
going against the gain might even be to the entrepreneur’s advantage: “Although
the non-consensus view may seem like foolishness at the time, it may turn out
to be the wise alternative – especially if the consensus view is exaggerated.” This
seems pretty intuitive, really. If a market is over-hyped, there will be
failure. Alternatively, if a new piece of software creates a demand that wasn’t
previously recognized (like Twitter or Fourspace once did), they’ll be huge
successes.
The paper finds
considerable evidence that there’s a herd mentality in the software industry.
The lesson for entrepreneurs is be weary that you’re not just another “me too.”
Look at your own motives for setting up a business. If you can be sure that
your idea is original and you can make a good case for its sales, then VCs are
going to love you anyway. Do not step inside their office and say, “this is
basically the same as x with a difference…”
Entrepreneurial
Over-Confidence
Probably the most
common theme in the academic literature surrounding entrepreneurs is their
innate over-confidence. Type “entrepreneur over-confidence” into Google Scholar
and there’s enough material there to keep you reading for days. Statistics
abound about the percentage of businesses who last beyond 3 years against the
number of entrepreneurs who expect that that their businesses will see out the
same timeframe.
A 2009 paper from the
Academy of Management Journal by Keith Hmieleski and Robert Baron[iii]
finds a negative relationship between entrepreneurs’ optimism and the
performance of their new firms (measured by revenue and employment). That is to
say – the more confident you are that your business is going to succeed, the
less likely it will succeed in terms of its growth revenue and employment.
This is a pretty
damning finding in one way but a damn useful finding in another. These findings
basically tell entrepreneurs to be self-critical. Every business idea should
start with you being over-confident. It’s the essence of the entrepreneur. If
you’re not over-confident to some extent, you’ll never have the impetus to come
up with ideas in the first place. But from then on, you’ve got to remember
these statistics and not become one of them.
Think of all the
obstacles that stand between you and your business becoming a success. What is
the absolute worst-case scenario for your business? How would that come about?
And after answering both these questions, go back and answer them with an even
more pessimistic outlook. You do not have to become one of the statistics in
the never-ending literature on entrepreneurial over-confidence. Just remember
them when you’re coming up with your numbers – view these studies as roadmaps,
not as roadblocks.
Rebounding
Entrepreneurs
It’s no fun thinking of
what the second business will be before the first one even gets off the ground
– but there is evidence out there that the over-confident entrepreneurs that
we’ve spoken of rebound from their failures and have a “second act” (to use the
expression often applied to what Steve Jobs did after being fired at Apple). A
2009 paper by Hayward et al[iv]
looks at this phenomenon in some detail.
The authors look at 149
ventures by MIT students who are “serial entrepreneurs.” The authors note that “experience
helps entrepreneurs develop new skills and generate social capital...greater
founding experience improves entrepreneurs’ ability to get timely financing and
better valuation from venture capitalists.” Is this positive or negative? Well,
like all of these studies, this depends on how you twist the data to your
benefit.
There’s a certain
amount of common sense here – you’ve done something before so logically, you’ll
be better at it. Do not start
thinking about your second venture before the first one. Make sure there is no
need for a second venture. The message from this paper is that you should learn
from the mistakes of others. Talk to serial entrepreneurs and ask them where
their first venture failed: learn from others’ mistakes instead of repeating
them if you can get away with it.
The
Importance of Entrepreneurs to Society
It’s natural that we’d
like to finish on a positive note – and a valid one. We’ve just outlined some
of the issues surrounding entrepreneurship and some readers might be discouraged
by the findings of the academic literature. But perhaps the most important
point of all is made in a paper by authors Koellinger and Thurick in a 2009
discussion paper[v]:
entrepreneurs are of huge importance to the business cycle and thus, to the economy
at large.
The authors conclude
that “entrepreneurs are agents of change and economic development, in a
Schumpeterian sense, who anticipate and maybe even trigger economic booms.
..(this) prevalence at the level of the world economy suggests an important and
much overlooked function of entrepreneurship in the recovery from recessions.”
Well, we couldn’t have put it better ourselves. The moral of the story? Keep
going – you’re doing an important job that will benefit everyone in society.
[i] http://investments.yale.edu/
[ii]
Pontikes, E.G, Barnett, W.P., (2014). “When to be a Nonconformist Entrepreneur?
Organizational Responses to Vital Events.” Yet to be published.
[iii]
Hmielski, K.M., Baron, R.A., (2009). “Entrepreneurs’ optimism and new venture
performance: A social cognitive perspective.” Academy of Management Journal,
Vol. 52, No. 3, pp. 473-488.
[iv]
Hayward, M.L.A., et al.,, Beyond hubris: How
highly confident entrepreneurs rebound to venture
again, Journal of Business Venturing (2009), doi:10.1016/j.jbusvent.2009.03.002
[v]
Koellinger, P.D.; Thurik, A.R. (2009). “Entrepreneurship
and the Business Cycle.” Tinbergen Institute Discussion Paper, No. 09-032/3.
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