What makes a great entrepreneur? Is running a successful business a skill you're born with, or is it one you can learn? Over the course of three columns, Your Business guest contributors Michael Wade and Mark Arnason will attempt to answer those questions. Here is part one:
Are great entrepreneurs born or are they built?
It's a critical question for any aspiring owner who wants to start a business.
The process theoretically goes something like this: An entrepreneur has a brilliant idea, writes a business plan, gets start-up funding, puts together a team, creates a product or service, and sells out to a Fortune 500 firm. It sounds logical, but reality paints a different picture.
Let's start with the brilliant idea. There are many stories floating around about entrepreneurs whose empires were sparked by blinding insights that occurred during some mundane activity, like waiting for a bus or taking a shower. We call this the myth of the epiphany, and the truth usually differs from the myth.
Most great ideas start out extremely rough and half-baked, and they are only chiselled into greatness over time. Howard Schultz's flash of insight was to bring Italian coffee bistros to the United States, but in his original concept, customers stood or perched on stools (there were no chairs), listened to opera music, and were served by baristas wearing bow-ties – certainly not what a customer would expect to experience in today's Starbucks.
Jeff Bezos had a good idea -- selling books online -- but his real insight was turning his store into a global marketplace for other people to sell their goods, even when they competed with Amazon.com's products.
Ideas are important but they are not pivotal. We have conducted many brainstorming sessions in our classes, and the results have been intriguing. Teams of students and executives consistently come up with more than 100 start-up ideas in five or 10 minutes. Some of the ideas are absurd, but at least a dozen really good ones are generated each time we run the exercise. Ideas, as they say, are cheap.
Most great entrepreneurial ventures begin with a problem, which could be an unmet need, a bottleneck in a process, or an inconvenience. The idea is simply a solution for how to solve the problem. MIT professor Eric von Hippel found that more new profitable lines of business came from customer complaints than from research and development departments.
A recent study by Duke University Professor Vivek Wadhwa examined scores of personal and professional characteristics of successful entrepreneurs and found one common element: a university education. It didn't seem to matter what degree was awarded, or what school it came from.
Another study, by IMD professor Stuart Read and colleagues, suggested it is more important to look at how successful entrepreneurs behave (what they do) than to look at their characteristics (who they are).
According to this research, conducted at the Switzerland-based business school, successful entrepreneurs consistently follow four basic principles:
- They start with what they have: who they are, what they know, and who they know. They typically don’t worry about raising millions in seed capital or trying to figure out something new. They start close to home with something they already know and understand.
- They set an affordable loss. This means that they are more concerned with how much they can afford to lose than they are with how much they can make. Most entrepreneurs only quit their day jobs after a venture has been in operation for longer than a year, sometimes much longer. In fact, surveys of the INC 500, the 500 fastest-growing private companies in the United States each year, suggest that 18 months is the typical length of time entrepreneurs take before they establish their first offices. We have personally seen this in our own interactions with hundreds of founding CEOs over the past 15 years.
- They are great at taking advantage of unexpected situations. Most management textbooks regard surprises as anomalies that should be avoided or minimized. Successful entrepreneurs, by contrast, are able to adjust their strategies on the fly.
- They are skilled at forming partnerships. Despite what you may think, successful entrepreneurs do not stay at home tinkering with their inventions all day long – they cannot generate sales this way. Instead, they spend a great deal of time developing and nurturing a steady stream of formal and informal partnerships.
The entrepreneurs in Prof. Read's study are really successful – they have all built at least two ventures that have grossed $100 million (U.S.) or more. They are adaptive thinkers who are willing to adjust and modify their strategies based on constant feedback from a shifting set of partners. The entrepreneurs understand that failure is a part of building and developing ideas, and they are willing to switch gears when better opportunities arise.
This differs radically from the guidelines set out in most entrepreneurship textbooks.
Good entrepreneurs are talented at recognizing problems, but their first ideas are usually not very good. Lucky for them, most are also tenacious – they don't give up easily. Ideas get tested, prototyped, revised, stretched, shared, prototyped again, and then retested until they evolve into a workable form. This process is the central concept behind a new field of entrepreneurial research called effectuation, the core principles of which are about adapting your business model to opportunities as they evolve.
April 21: Another icon of accepted entrepreneurial wisdom – the business plan.
Special to The Globe and Mail
Michael Wade is professor of innovation and strategic information management at IMD in Switzerland. Prior to that he was academic director of the Kellogg-Schulich Executive MBA Program at York University in Toronto.
Mark Arnason is senior vice president of product development and strategy at Longview Solutions and he has taught entrepreneurship for the past 15 years as an adjunct professor at the University of Waterloo.