Thursday, January 14, 2010

What Makes an Entrepreneur Succeed?

This week's New Yorker features an article by Malcolm Gladwell (author of The Tipping Point, What the Dog Saw, and other really interesting reads) called "The Sure Thing". I've always liked Gladwell's writing - not just for its clarity, but the way his iconoclastic approach never sounds contrarian just for the sake of being different.

This article is more of this style. Its premise is that entrepreneurs don't succeed because they fit the romantic image of the reckless daredevil who doubles as a business savant, but rather from their innovative insights into an opportunity, combined with an aversion to risk and a predatory approach to getting the big deal done.

The article cites numerous examples to back up this belief, and spends quite a bit of time detailing the exploits of John Paulson (a hedge-fund manager who made a huge fortune on short-selling credit default swaps just ahead of the housing collapse), and Ted Turner (to whom the myth of the populist businessman-as-cowboy has been best - but wrongly - applied).

Here's my favorite quote - much of this might sound familiar to our advisors:

"The economist Scott Shane, in his book 'The Illusions of Entrepreneurship,' writes, yes, many entrepreneurs take plenty of risks - but those are generally the failed entrepreneurs, not the success stories. The failures violate all kinds of established principles of new-business formation. New-business success is clearly correlated with the size of initial capitalization. But failed entrepreneurs tend to be wildly undercapitalized. The data show that organizing as a corporation is best. But failed entrepreneurs tend to organize as sole proprietorships. Writing a business plan is a must; failed entrepreneurs rarely take that step. Taking over an existing business is always the best bet; failed entrepreneurs prefer to start from scratch. Ninety per cent of the fastest-growing companies in the country sell to other businesses; failed entrepreneurs usually try selling to consumers, and, rather than serving customers that other businesses have missed, they chase the same people as their competitors do. The list goes on: they underemphasize marketing; they don't understand the importance of financial controls; they try to compete on price. Shane concedes that some of these risks are unavoidable: would-be entrepreneurs take them because they have no choice. But a good many of these risks reflect a lack of preparation or foresight."

I'll be buying Shane's book shortly. Gladwell's article is not available for free online, but I recommend buying the current issue (or, better yet, reading it at your local library). There's much more to this than what I've written here, but this is at the very heart of what we do as an organization.

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