The Daily Deal, January 26, 2000
Industry Insight Technology

Present at the Creation

by Susan Webber

A Harvard professor examines new businesses and his conclusions challenge conventional wisdom about startups

Amar Bhidé is going to tell you that much of what you think you know about startups is wrong.

In his The Origins and Evolution of New Businesses, Bhidé, a Harvard Business School professor, explores the largely unexamined world of startups and reaches controversial conclusions. Most entrepreneurs are neither pioneers nor risk-takers. Better access to funding won't help most new ventures. Most new businesses do not and should not research their markets in advance. And corporations are successful innovators, with procedures well suited to their capabilities and constraints.

Those who don't read this book are likely to dispute such findings. Those who do read it are almost sure to be persuaded. His opus, which is articulate, well-reasoned, and thorough, is path-breaking in its methodology as well as its insights.

Despite the popularity of entrepreneurship in business schools and the press, the field is intellectually bankrupt. Prior to this work, there have been no studies focused on how start-ups evolve. Chandler dealt with small-scale manufacturers that grew into large enterprises, and had little interest in their formative years; the vogue of contemporary economics is to rely on mathematics and models, which have little power to explain the messy reality of fledgling enterprises. Other scholarly efforts have examined venture capital-backed enterprises, a small and unrepresentative sector.

Bhidé starts with fundamental research. He has done considerable fieldwork, including large-scale interviews of Inc. 500 companies, supplemented by case studies by his students, and extensive study of the growth of successful large companies like Hewlett Packard, Wal-Mart, and Microsoft. His use of qualitative analysis, a departure from academic norms, probably comes from McKinsey, where he and I both once worked (we know each other but have never collaborated professionally).

Many of his observations are novel and the resulting framework, which makes explicit the tradeoffs among uncertainty, capital required, and likely payoff, is elegant. At one extreme are "promising enterprises." They seldom start with a radical idea or proprietary technology, instead drawing on an existing model, which is typically found through happenstance rather than research. Business plans are counterproductive for these enterprises, for their opportunities are too small and fleeting to support the effort required. Firms grow instead through a process of adaptation, learning as they go.

The other extreme is the corporate initiative, where the high fixed cost of investigation and limited flexibility in implementation requires that they focus on large-payoff opportunities where the risks and the launch process can be charted in advance. Venture capital falls in the middle, targeting moderate-sized opportunities and rewarding a mix of planning and opportunism.

Success depends upon the will and skill of the entrepreneur. He must persuade customers to deal with a risky, unknown quantity; train not-very-able employees; and gain vendor support One of the best sections discusses the psychological ploys founders use to secure resources. Bhide also highlights previously overlooked qualities that entrepreneurs need: tolerance for ambiguity (which differs from tolerance for risk) and exceptional self-control (for dealing with difficult customers and staff).

Despite its strengths, Origins suffers from a major flaw. Bhide targets academics and laymen, but addressing both audiences may leave neither satisfied. From the mainstream perspective, Bhide spends far too much time in Part 2 of his book, on how promising enterprises grow into long-lived businesses, critiquing existing theories. This discourse may be important to his peers, but the general public will find it largely a waste of time. Admittedly, Bhideés insights, for example, into the personal qualities of entrepreneurs who build large-scale enterprises, still make this part of the book worth the effort, but it is considerably less rewarding than Part 1.

Another criticism is that Bhide barely mentions the Internet. One might attribute the oversight to the relative youth of Internet companies. However, I believe the real reason is that most Internet companies are not in the business of creating lasting enterprises but (knowingly or not) of exploiting a financial bubble.

The appeal of the Internet to businessmen and investors is the opportunity to become staggering wealthy quickly. The flood of capital chasing Internet deals has actually reduced the likelihood that these businesses will succeed in the long run. Deals are being funded with less scrutiny and on more favorable terms than ever before. Tales abound of start-ups getting $5 million without developing a business plan. And tanking an Internet venture carries no stigma.

The ready supply of capital means that Internet businesses spend considerable time to "selling the vision" rather than serving customers; an IPO market that values companies at absurd multiples of revenues rather than cash flow or earnings means that companies can persist in fundamentally flawed strategies, while entrepreneurs have to adapt quickly or perish. Let's face it: a business model like that of, which spends its entire gross margin on advertising, simply doesn't work. Everyone recognizes that it's only a matter of time before the music stops, yet the lure of easy money is so tantalizing that no one wants to exit prematurely.

While the Internet end-game is uncertain, that of Bhide's book seems assured. It will be required reading for anyone with a serious interest in entrepreneurship.