The Daily Deal, January 26, 2000|
Present at the Creation
by Susan Webber
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
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 Amazon.com, 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