Thursday, December 16, 2010

So What's an Entrepreneur?--The Sequel

I met up with Peter Worrell, Managing Director of the Bigelow Company, on a cold December day a few weeks ago at his office overlooking Portsmouth Harbor.  Despite a frigid wind whipping off the water, downtown Portsmouth was decorated for Christmas and bustling with shoppers.  
Pete's bio states that "Worrell has a particular interest in the intersection of psychology and finance and its relevance to building value in private capital markets."  In fact, Pete is a hugely accomplished M&A guy specializing, as does all of Bigelow, in addressing the particular (and often idiosyncratic) needs of the owner-entrepreneurs of privately-held companies.  

But Pete is also a serious academic, working hard to understand what makes entrepreneurs tick, and more importantly, what makes them successful.
As proof, in 2009 he published a paper which outlined the strengths of successful entrepreneurs.  The paper was conceived while he was attending the University of Pennsylvania in a psychology graduate degree program under advisor Martin E.P. Seligman, Ph.D., who works on positive psychology, learned helplessness, depression, and on optimism and pessimism. 
What says "entrepreneur" better than “learned helplessness” and “depression,” eh?  (Indeed, before I make too big a mess of Pete’s excellent work, a good summary of some of the paper’s key findings are on the Bigelow website here.) 
Pete worked with 200 seasoned, successful entrepreneurs and expert advisors (answering for successful entrepreneur clients) who completed an online survey measuring their character strengths, consistency of interest and persistence of interest.  These were people who had owned and operated businesses, created tens of millions of dollars of value, and employed hundreds of people over their working lifetimes. 
Now, think fast: What are the top two or three characteristics of successful entrepreneurs?  (Note that this is a very different question--"What is an entrepreneur?"--that we tackled earlier.)  Creativity, right?  Passion.  Focus. Risk-taking.
Here's the truth. Of 24 character traits, Pete’s survey found these to be the top five among successful entrepreneurs:
1.  Authenticity--speaking the truth, presenting oneself in a genuine way, without pretense.  This ranks far above the general population. (Pete: Some are "candid to the point of being blunt.")
What’s that you say?  Worked for one of those before?  Still pulling out the shrapnel?
2.      Leadership--encouraging a group to get things done while maintaining good relations within the group (which was also far above the general population).

3.      Zest--approaching life with excitement and energy, and the best predictor of "work as a calling."  Of the top measures, this characteristic shows the single greatest gap between successful entrepreneurs and the general population.  Because of zest, Peter writes, "The most successful entrepreneurs persist and adjust long after others might rationally call it a day."

4.      Fairness (about in line with the general population).

5.      Gratitude--being thankful for the good things that happen, which is also a predictor of life satisfaction.  (This is just slightly above the general population.)

Successful entrepreneurs show, by these strengths, Pete concludes, that they are strongly "outwardly focused."
The bottom five characteristics of the 24—which is not to say they are unimportant, but that they are less (and often far less)  important—are (24) religiousness/spirituality, (23) forgiveness/mercy, (22) creativity, (21) love of learning, and (20) appreciation of beauty.
I might point out that 19, 18 and 17 are self-regulation, modesty and prudence.  Except for creativity, does any of this “bottom list” surprise you?  
The other thing I learned from Peter’s work is that the single quality that may most distinguish successful entrepreneurs from everyone else is grit.  "Grit is perseverance and passion for long-term goals, working strenuously toward challenges, and maintaining effort and interest over years despite failure, adversity, and plateaus in progress."
Against the general population, entrepreneurs score high on grit and exceptionally high on "persistence of effort."  In fact, grit predicts the accomplishment of very high challenges among very high achievers better than self-discipline or intelligence.
And one other thing Pete discovered about entrepreneurs: “Profit motivated?  Hardly. . .They are more often occupied with trying to build sustaining organizations, ones that have longevity beyond themselves as mere individual owners."
I can think of lots of uses for this information, the most obvious being that an entrepreneur who knows himself or herself well could build a surrounding team that insures these key characteristics are well represented.
My thanks to Peter Worrell for a great piece of research, and taking the time to discuss it.

Tuesday, December 7, 2010

Catching an Edge

So this is how it happens.

It's the third or fourth day of your ski vacation.  It's been fantastic.  Superb conditions, long runs, no crashes.  This particular morning, had the snow not been so perfect, you might have rested your weary bones in bed and gone out for a late brunch.

Instead, you are on the slopes by 8, dodging the snowboarders and practically skiing up to the chairlift.  Again and again.  By 12 noon your stomach is growling but the lines are so long at the restaurant below that you just keep skiing, ignoring the burning thighs and desperately cold little toe.

Finally, at 1:30, you come off the mountain and head for lunch.  Feeling great.  You are king of the mountain.  You are Jean-Claude Killy.

And because of that, today is the day you finally go for the fries.  And the chocolate chip cookie.  And the hot chocolate, which courses through your veins like sap in spring.  (Whoa.)

And you think. . .Perfect day.  Time to head back, jump in the hot tub, take a nap, and have a great dinner.  Except someone, usually an offspring, begs to go back on the mountain.  "Just a few more runs." 


So, you stick your feet back in the hell that is your ski boots, bundle back up, and head for the lift.  Up you go.  Down the slope you start. 

But this time the sun is low and your old eyes can't see the terrain so well anymore.  Those damnable skiboarders have scraped the hillside to ice in little patches everywhere.  And that old hot chocolate is now coursing through your veins more like molasses in the dead of winter.  Your legs are so tired.  Your feet hurt.  Your tummy is pushing against your ski pants in a way that it didn't in the morning.  So you relax. 

And that's when it happens.

That's when you catch an edge.

That's when, with one boot now above your shoulders, your life flashes before your steamed-up goggles and you find yourself--if  you are lucky--in four feet of soft snow, ten feet left of and twelve feet below the ski run (that you mastered so handily this morning).  Among but not a part of the aspen and pine.

I used to have a Chief Operating Officer who would wonder, whenever we were in a bind, if we were on the verge or on the edge.

This question has, at least for now, been decided for you.  Indeed, if you really are lucky, both skis are still visible and within crawling distance.

And that's when you know, beyond a doubt, the most profound of life's few essential truths: You should be in a hot tub somewhere.

From now on, you swear, you will "know thyself" and  never catch an edge again--on the ski slope, at home or at work.  Tired is tired.  Done is done.  Retreat is not dishonor.  Men and women must have their cave and their cot and their mental-health day and their long weekend and even their occasional sabbatical.

Because, as Groucho might have said, a cold toe is a cold toe, but a great hot chocolate is still just a drink.

Thursday, December 2, 2010

So What's an Entrepreneur?

I was working on my book about entrepreneurs the other day when I had a brilliant (though tardy) insight: It might be a good idea to actually define the term.  After all, "entrepreneur" is used endlessly in the press, academia and in conversation, and we simply take it for granted that we're all talking about the same thing. 

But we're not.  Not even close.

Suppose I have a great job with IBM and can see my career path unfold over the next decade.  One day I decide I hate my boss.  So I quit my job, borrow money from my family, friends and 401K, mortgage my house, and open a McDonald's franchise in suburban Boston.  I have many a sleepless night.  If I'm unsuccessful I'm bankrupt and probably have to beg IBM for my old job.

Am I an entrepreneur?  After all, I'm willing to take on incredible risk.  I've put skin in the game.  I'll start my own business, work like a dog, and be my own boss.  Isn't that being an entrepreneur?

My bet is that many, or most people would agree.

I know that Scott Shane, author of The Illusions of Entrepreneurship (2008) agrees, writing that "I use. . .definitions of entrepreneur and entrepreneurship. . .most closely aligned with common sense. Entrepreneurship is. . .“the activity of organizing, managing, and assuming the risks of a business or enterprise.”

I enjoyed Shane's book, but found this definition of entrepreneur so broad as to be unhelpful.  In fact, by his own admission, it's hard to find anyone in the workforce who isn't, or won't be, an entrepreneur:
First, entrepreneurship is as a very common vocation, much more common than our myths suggest. . .In 2005, approximately 13 percent of people in the United States between the ages of 18 and 74 were in the process of starting a business.  In fact, each year in the United States, more people start a business than get married or have children.  And as much as 40 percent of the U.S. population will be self-employed for some part of their work life! . . .
The typical American entrepreneur is a married white man in his forties who attended but did not complete college. He lives in a place like Des Moines or Tampa, where he was born and has lived much of his life. His new business is a low-tech endeavor, like a construction company or an auto repair shop, in an industry where he has worked for years. The business that the typical entrepreneur has started is a sole proprietorship financed with $25,000 of his savings and maybe a bank loan that he guarantees personally. . .It. . .employs one person— the founder—and it isn’t innovative and has no intention, or prospects, of growing.
When most people say "entrepreneur," they are unintentionally describing a 40-something married white guy launching a low-tech endeavor that isn't innovative and probably won't grow.

Take the example above of the new McDonald's, the same location in suburban Boston, but this time it's launched, owned and operated by McDonald's Corporation.  Its placement is the result of a careful market study that shows, despite other McDonald's in the area, that this one can make money without cannibalizing nearby stores.  In other words, total McDonald's revenue in the area should increase.

Is that entrepreneurial?  It has precisely the same impact in the market as when our former IBMer does it on his own, creating precisely the same competitive dynamics and serving precisely the same consumers.  In fact, given the company's experience, it's likely McDonald's will make fewer mistakes, grow faster, and be more successful--a better "entrepreneur," as it were.

But here we get push back.   Having McDonald's simply open another restaurant seems hardly entrepreneurial.  Once a wildly entrepreneurial business, McDonald's is now simply repeating a formula that it's already perfected, in markets where it already does business?

You see the issue?  One person's entrepreneur is another person's Bacon Double Cheeseburger.

It Always Ends With Schumpeter

That's when I decided I'd better begin at the beginning.  That would be Richard Cantillon (1680-1734), an Irish-French economist who coined the word "entrepreneur," saying that entrepreneurship entails bearing the risk of buying at certain prices and selling at uncertain prices.  That's a good start, but still pretty much captures anyone who has gone into business.   A bit later, Jean Baptiste Say (1767-1832), a French merchant and economist, added that an entrepreneur shifts economic resources out of an area of lower into an area of higher productivity and greater yield.

Now we're getting somewhere. 

But it wasn't until Joseph Schumpeter (1883-1950) that I had the breakthrough I needed.  His 1934 work, The Theory of Economic Development, considers entrepreneurship something that disrupts market equilibrium--say, by offering something novel, or in a novel way, or in a novel place--and is the essential ingredient in moving an economy forward.  Schumpeter says entrepreneurs can come from any function and any type of company so long as they practice the carrying out of new combinations.

By new combination, Schumpeter describes some very specific activities:

  1. Introducing a new product, or new quality product
  2. Introducing a new method of production, or of handling a commodity commercially
  3. Opening of a new market, whether or not the new market has existed before
  4. Exploiting a new source of supply of raw materials or half-manufactured goods, whether the source already exists or not
  5. Introducing a new way of organizing any industry
Schumpeter's definition makes it crystal clear why new combination--or what we might call today innovation--is so closely affiliated with entrepreneurship.  Without it, we may be launching a business, and we may be taking on risk, and we may show great courage and have many sleepless nights, but we're still not being an entrepreneur

In Innovation and Entrepreneurship (1985), Peter Drucker echoes Schumpeter: "Entrepreneurs. . .create something new, something different; they change or transmute values." This makes them different, Drucker says, than most new businesses.

Based on Schumpeter, I've elected as a shorthand definition the following: 

An entrepreneur combines resources in a novel way to disrupt the status quo of a market.

This might involve intent, but it might not; I believe I will be able to describe at least one remarkable entrepreneur in my book who had no intention of being entrepreneurial. 

Being a successful entrepreneur may involve certain personality traits, but it is not uncommon to have a single person involved in a series of business ventures, only some of which are tried, true and traditional, and some of which are entrepreneurial. 

Being an entrepreneur may involve taking on risk, but it might also be largely risk-free: Malcolm Gladwell's Feburary 2010 article in the New Yorker quoted a recent study by two French scholars who claim that an entrepreneur "occupies a 'structural hole,' a niche that gives him a unique perspective on a particular market. . .[and] looks for partners. . .who undervalue what they sell to him or overvalue what they buy from him in comparison to his own evaluation.  He moves decisively. He repeats the good deal over and over again, until the opportunity closes, and—most crucially—his focus throughout that sequence is on hedging his bets and minimizing his chances of failure. The truly successful businessman. . .is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting."
It's not intent, it's not personality, and it's not risk 
that defines an entrepreneur. 

It's offering an innovation that alters the status quo.  Leibenstein (1968) called it an entrepreneur's ability to destroy pockets of inefficiency.  That makes sense to me, and is different than simply opening another auto parts store, gas station, bowling alley or fast food restaurant.  

Do you know who are brilliant at finding entrepreneurs?  Venture capitalists. 

Shane writes: 
Since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 start-ups—out of the more than 2 million efforts to start businesses in this country every year—have enormous economic impact. 
In 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4 percent of the private sector labor force in the United States, and generated $1.8 trillion in sales, or 9.6 percent of business sales in this country.  
In 2000, the 2,180 publicly traded companies that received venture-capital backing between 1972 and 2000 comprised 20 percent of all public companies in the United States, 11 percent of their sales, 13 percent of their profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7 trillion dollars. 
Between 2003 and 2005, venture capital-backed start-ups made up 23 percent of the companies that went public.  In short, almost all of the value generated by start-ups comes from this handful of firms.
Here's the bottom line: The definition of entrepreneur begins and ends with market impact.  We care about entrepreneurs for one and only one reason: They offer an innovation that disrupts an economic flow.  It's an outside-in view that cuts through all the clutter and eliminates the drama.  

That's an especially good thing to remember when someone asks, "What does it take to be an entrepreneur?"  It's not passion.  It's not risk-taking.  It's not being an extrovert, and sometimes not even intent.  (Some of America's most influential entrepreneurs didn't even see it coming.)  And most of all--as much as I like 40-something white guys launching barber shops, dry cleaning stores and fast food restaurants--if we confuse it with "people starting businesses," we draw all the wrong conclusions.