Growth

Rich and Co.

Inc. Mag – Behavior of Entrepreneurs vs. Corp Execs

We are against glamorizing entrepreneurship.  We do not subscribe to the pop ideology of entrepreneurship or start-ups.  The market is always smarter than any of us — alone or in a group.

The simple fact is the vast majority of new businesses fail often with tragic consequences for individuals, families and supporters.   This fact is (conveniently) a taboo subject in most business schools and press.  Survivorship bias takes care of the rest with seductive myths like the “Social Network” ( Become a multi-mega-billionaire, overnight from your dorm room, by 25, just sitting at your computer looking at pictures of hot girls, dude!) striking us as similar to Greeks myths, e.g. Hercules.

Our, multi-generational, experience with business-owners is that having one’s own business demands everything – family life, friendships, money, health, time, physical and emotional energy, etc – and then demands more.  There is never enough — of anything.  No one wants to hear those stories. 

So it is with a (big) grain of salt that we share this.  However, there is some evidence cited.  We have abbreviated the article to get you the main points.  It is till long.

There is a distinction here made between corporate leaders and entrepreneurs.  We propose there is an important distinction:

  • Established companies (CEOs) serve established and existing demand.  Their job is to deliver products/services
  • Entrepreneurs wander in that “wilderness” of not knowing what demand we will pay time, attention and money for.  Scary. 

Very different kinds of needs and roles.

How Great Entrepreneurs Think

Think inside the (restless, curious, eager) minds of highly accomplished company builders.

What distinguishes great entrepreneurs? Discussions of entrepreneurial psychology typically focus on creativity, tolerance for risk, and the desire for achievement—enviable traits that, unfortunately, are not very teachable. So Saras Sarasvathy, a professor at the University of Virginia’s Darden School of Business, set out to determine how expert entrepreneurs think, with the goal of transferring that knowledge to aspiring founders. While still a graduate student at Carnegie Mellon, Sarasvathy—with the guidance of her thesis supervisor, the Nobel laureate Herbert Simon—embarked on an audacious project: to eavesdrop on the thinking of the country’s most successful entrepreneurs as they grappled with business problems.

Sarasvathy concluded that:

  • master entrepreneurs rely on what she calls effectual reasoning
  • Brilliant improvisers, the entrepreneurs don’t start out with concrete goals. Instead, they constantly assess how to use their personal strengths and whatever resources they have at hand to develop goals on the fly, while creatively reacting to contingencies
  • By contrast, corporate executives—those in the study group were also enormously successful in their chosen field—use causal reasoning.  They set a goal and diligently seek the best ways to achieve it.

Early indications suggest the rookie company founders are spread all across the effectual-to-causal scale. But those who grew up around family businesses will more likely swing effectual, while those with M.B.A.’s display a causal bent. Not surprisingly, angels and seasoned VCs think much more like expert entrepreneurs than do novice investors.

The following is a summary of some of the study’s conclusions…..

Do The Doable, Then Push It
Sarasvathy likes to compare expert entrepreneurs to Iron Chefs:

  • at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest
  • Corporate leaders, by contrast, decide they are going to make Swedish meatballs. They then proceed to shop, measure, mix, and cook Swedish meatballs in the most efficient, cost-effective manner possible.

Entrepreneurs Have Goals, They Just Change — A Lot
Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle called affordable lossRepeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research. (Inc.’s own research backs this up. One survey of Inc. 500 CEOs found that 60 percent had not written business plans before launching their companies. Just 12 percent had done market research.)

When asked what kind of market research they would conduct for their hypothetical start-up, most of Sarasvathy’s subjects responded with variations on the following:

“OK, I need to know which of their various groups of students, trainees, and individuals would be most interested so I can target the audience a little bit more. What other information…I’ve never done consumer marketing, so I don’t really know. I think probably…I think mostly I’d just try to…I would…I wouldn’t do all this, actually. I’d just go sell it. I don’t believe in market research. Somebody once told me the only thing you need is a customer. Instead of asking all the questions, I’d try and make some sales. I’d learn a lot, you know: which people, what were the obstacles, what were the questions, which prices work better. Even before I started production. So my market research would actually be hands-on actual selling.”

Here’s another:

“Ultimately, the best test of any product is to go to your target market and pretend like it’s a real business. You’ll find out soon enough if it is or not. You have to take some risks. You can sit and analyze these different markets forever and ever and ever, and you’d get all these wonderful answers, and they still may be wrong. The problem with the businessman type is they spend a lot of time with all their great wisdom and all their spreadsheets and all their Harvard Business Review people, and they’d either become convinced that there’s no market at all or that they have the market nailed. And they’d go out there big time, with a lot of expensive advertising and upfront costs, because they’re gonna overwhelm the market, and the business would go under.”

The corporate executives were much more likely to want a quantitative analysis of market size:

“If I had a budget, I could ask a specialist in the field of education to go through data and give me ideas of how many universities, how many media, how many large companies I will have to contact to have an idea of the work that has to be done.”

Sarasvathy explains that entrepreneurs’ aversion to market research is symptomatic of a larger lesson they have learned: They do not believe in prediction of any kind.

“If you give them data that has to do with the future, they just dismiss it,” she says. “They don’t believe the future is predictable…or they don’t want to be in a space that is very predictable.” That attitude is a bit like Voltaire’s assertion that the perfect is the enemy of the good. In this case, the careful forecast is the enemy of the fortuitous surprise:

“I always live by the motto of ‘Ready, fire, aim.’ I think if you spend too much time doing ‘Ready, aim, aim, aim,’ you’re never going to see all the good things that would happen if you actually started doing it. I think business plans are interesting, but they have no real meaning, because you can’t put in all the positive things that will occur…If you know intrinsically that this is possible, you just have to find out how to make it possible, which you can’t do ahead of time.”

(Important “but”) That said, Sarasvathy points out that her entrepreneurs did adopt more formal research and planning practices over time. Their ability to do so—to become causal as well as effectual thinkers—helped this enduring group grow with their companies.

Woo Partners First
Entrepreneurs’ preference for doing the doable and taking it from there is manifest in their approach to partnerships.

While corporate executives know exactly where they are going and follow a prescribed path to get thereEntrepreneurs allow whomever they encounter on the journey—suppliers, advisers, customers—to shape their businesses.

“I would literally target…key companies who I would call flagship: do a frontal lobotomy on them. There are probably a dozen of those I would pick. Some entrepreneurial operations that would probably be smaller but have a global presence where I’m dealing with the challenges of international sales…Building rapport with partners, with joint-venture colleagues as well as with ultimate users….The challenge then is really to pick your partners and package yourself early on before you have to put a lot of capital out.”  (This is called the “lean Start-Up” model)

Chief among those influential partners are first customers. The entrepreneurs anticipated customer help on product design, sales, and identifying suppliers. Some even saw their first customer as their best investor.  (Amen brother!)

“People chase investors, but your best investor is your first real customer. And your customers are also your best salesmen.”

Sarasvathy says expert entrepreneurs have learned the hard way that “having even one real customer on board with you is better than knowing in a hands-off way 10 things about a thousand customers.” Merely gathering information from a large number of potential customers, she says, “increases all the different things you could do but doesn’t tell you what you should do.” Toward that end, many of her subjects described their preference for an almost anthropological approach to customer interaction: observing a few customers as they work or actually working alongside them.

“You can’t go out and survey customers and say, ‘OK, what kinda car do you really want?’ I believe very much in living it. If you’re gonna write a book about stevedores, go work as a stevedore for a period of time. My company was going to design and sell products for physical therapy, so I worked in rehab medicine for two years.”

Corporate executives, by contrast, generally envisioned more traditional vendor-customer interactions, such as focus groups.

“I would like to get from them…by meeting with them or getting their input on what they think of the limitation of existing programs….just kind of sit and listen to them telling me…what new features they’d like. And I’d just listen to them talk, talk, talk and then be thinking and develop something between what they want and what’s possible technically.”

Sarasvathy says executives rely less on firsthand insights, because they can afford to place bets on multiple segments and product versions. “Entrepreneurs don’t have that luxury,” she says.

Sweat Competitors Later  (We say competitors are the entrepreneurs best ally – they help identify who’s going to pay and for what.)
The study’s corporate subjects focused intently on potential competitors, as eager for information about other vendors as about customers. “The corporate guys are like hunter-gatherers,” says Sarasvathy. “They are hired to win market share, so they concentrate fiercely on who is in the marketplace. The first thing they do is map out the lay of the land.”

“What information do I want about my competition? I want to see what kinds of resources they have. Do they have computer programmers? Do they have educational experts? Do they have teachers and trainers who can roll out this product? Do they have a support structure in place? Geographically, where are they situated? Have they got one center or lots of centers? Are they doing this just in English, or do they have different languages? I’d be wanting to look at the finances of these companies….I’d probably be looking at their track record to see what kind of approach they take to marketing and advertising so I know what to expect. I might look and see what people they hire, see if I can hire away someone who might have experience.”

By the time entrepreneurs start seeking investment, of course, they should be as far inside competitors’ heads as they can get. But the study subjects generally expressed little concern about the competition at launch.

“Your competition is a secondary factor. I think you are putting the cart before the horse…Analyze whether you think you can be successful or not before you worry about the competitors.”

And:

“At one time in our company, I ordered our people not to think about competitors. Just do your job. Think only of your work. Now that isn’t entirely possible. Now, in fact, competitive information is very valuable. But I wanted to be sure that we didn’t worry about competitors. And to that end, I gave the annual plan to every employee. And they said, ‘Well, aren’t you afraid your competitors are gonna get this information and get an advantage?’ I said, ‘It’s much riskier to not have your employees know what you need to do than it is to run the risk of competitors finding out. Cause they’ll find out somehow anyway. But if one of your employees doesn’t know why they’re doing their job, then you’re really losing out.’”

Entrepreneurs fret less about competitors, Sarasvathy explains, because they see themselves not in the thick of a market but on the fringe of one, or as creating a new market entirely. “They are like farmers, planting a seed and nurturing it,” she says. “What they care about is their own little patch of ground.”

Don’t Limit Yourself
Corporate managers believe that to the extent they can predict the future, they can control it.  (Wrong!)

Entrepreneurs believe that to the extent they can control the future, they don’t need to predict it. That may sound like monumental hubris, but Sarasvathy sees it differently, as an expression of entrepreneurs’ confidence in their ability to recognize, respond to, and reshape opportunities as they develop.  Entrepreneurs thrive on contingency. The best ones improvise their way to an outcome that in retrospect feels ordained.  (Simple cognitive dissonance, ho hum.)

So although many corporate managers in Sarasvathy’s study wanted more information about the product and market landscape, some entrepreneurs pushed back on the small amount of information provided as being too limiting. For example, the description of the product as a computer game for entrepreneurship:

“I would cast it not as a product but as a family of products, which might perform a broader function like helping people make career decisions. I always look for broad market opportunities.”

And:

“I wanna use this product as a platform to attract other products literally to build a market-share play. I see this as a missionary product, an entrée into some of the best users and buyers.”

The most fascinating part of the study relates to the product’s potential. Asked about growth opportunities, the corporate managers mostly restricted their comments to the game as described:

“It depends on how it’s marketed. I’m a little bit skeptical….I’m not certain entrepreneurs would go for that. Maybe they think they already know everything. But in terms of simulations for business schools or in further education, they seem to be very popular. And entrepreneurship degrees seem to be very popular as well. So, yeah, it could well be a lot of growth.”

(When There is Significant Uncertainty – Overconfidence Is Rational (Maybe))
Here is where the entrepreneurs really let loose. Starting with the same information as one another and as the executives, they collectively spun out opportunities in 18 markets—not just academic institutions but also venture capital firms, consultancies, government agencies, and the military. As much as the ability to concoct new products, it is this tendency to riff off whatever ideas or materials are handy that defines entrepreneurs as a creative breed. Reading the transcripts, you can almost hear the enthusiasm mounting in their voices as the possibilities unfold:

“This company could make a few people rich, but I don’t think it could ever be huge…You might have a successful second product about how to succeed and get promoted within a large company….That would give you a market of everybody with aspirations at IBM, AT&T, Exxon, etc….You could make another product for students. How do I graduate in the top 10 percent of my class at Stanford or Harvard or Yale?…A lot about how to be a good student is teachable. Now you’ve got a product you can sell to every student in the country. Next there is negotiation. You could practice being a good negotiator. There’s not a salesman in the United States who wouldn’t buy one of those. Then you could genericize the thing to any situation which requires some sort of technical knowledge. Or learning situations within companies where you are trying to get people to understand that company’s methods or objectives. So maybe I’m gonna change my opinion about the growth potential. It’s easy to see how within an hour you could name 10 products that would each address huge markets, like all employees in Fortune 500 companies, who are rich enough to pay $100 for it. It could be a hit on the scale of the Lotus spreadsheet. You can see a several-hundred-million-dollar company coming from it.

You might also glean from the preceding that entrepreneurs are eternal optimists. But 

http://www.inc.com/magazine/20110201/how-great-entrepreneurs-think_Printer_Friendly.html

Advertisements

Written by Rich and Co.

February 11, 2011 at 3:49 pm

Posted in Uncategorized

%d bloggers like this: