Entrepreneurs as Heroes

Stephen DeAngelis

April 2, 2009

In a recent special report, The Economist calls entrepreneurs “global heroes.” Long-time readers of this blog know that I have consistently touted the importance of entrepreneurs if one wants to strengthen the local economy — be it an economy in the now-struggling developed world or an economy in the ever hopeful developing world. As I discuss the Enterra Solutions® Development-in-a-Box™ approach with government leaders in developing nations, I stress that they should implement policies that foster local entrepreneurs. The Economist claims that the fears expressed in 1942 by Joseph Schumpeter — the economist and political scientist who coined the phrase “creative destruction” — that “the bureaucratisation of capitalism was killing the spirit of entrepreneurship” have now largely dissipated as “entrepreneurs are once again roaming the globe” [“Global heroes,” 14 March 2009 print issue].

 

The article notes that America remains the most entrepreneurial country in the world; but, thanks to globalization, entrepreneurs are now prevalent everywhere. In dark financial times, this news is a bright ray of hope. That’s probably why the magazine calls entrepreneurs heroes. It defines the term “entrepreneur” very narrowly. Most of us consider an entrepreneur anyone who is willing to risk resources to start a business. The Economist agrees that a willingness to risk resources is part of what it means to be an entrepreneur, but it also insists that an entrepreneur must be innovative.

“For most people the term ‘entrepreneur’ simply means anybody who starts a business, be it a corner shop or a high-tech start up. This special report will use the word in a narrower sense to mean somebody who offers an innovative solution to a (frequently unrecognised) problem. The defining characteristic of entrepreneurship, then, is not the size of the company but the act of innovation. … This narrower definition of entrepreneurship has an impressive intellectual pedigree going right back to Schumpeter. Peter Drucker, a distinguished management guru, defined the entrepreneur as somebody who ‘upsets and disorganises’. ‘Entrepreneurs innovate,’ he said. ‘Innovation is the specific instrument of entrepreneurship.’ William Baumol, one of the leading economists in this field, describes the entrepreneur as ‘the bold and imaginative deviator from established business patterns and practices’. Howard Stevenson, the man who did more than anybody else to champion the study of entrepreneurship at the Harvard Business School, defined entrepreneurship as ‘the pursuit of opportunity beyond the resources you currently control’. The Ewing Marion Kauffman Foundation, arguably the world’s leading think-tank on entrepreneurship, makes a fundamental distinction between ‘replicative’ and ‘innovative’ entrepreneurship.”

The distinction between replicative and innovative entrepreneurship is a good one. I admit that most of entrepreneurship I tend to support with Development-in-a-Box™ is replicative. The goal for most developing governments is job creation. Although innovative entrepreneurs will eventually create jobs, probably lots of them, replicative entrepreneurs generally create jobs faster and often those jobs require fewer skills. The Economist concentrates on innovative entrepreneurs because it finds them more interesting and they can obviously have a greater impact on society. The article notes that there are a number of myths that surround innovative entrepreneurs. It discusses five of them.

“The first is that entrepreneurs are ‘orphans and outcasts’, to borrow the phrase of George Gilder, an American intellectual: lonely Atlases battling a hostile world or anti-social geeks inventing world-changing gizmos in their garrets. In fact, entrepreneurship, like all business, is a social activity. Entrepreneurs may be more independent than the usual suits who merely follow the rules, but they almost always need business partners and social networks to succeed.”

As a self-confessed serial entrepreneur, I wholeheartedly agree with The Economist about the importance of partners and social networks. Orphans and outcasts seldom embody the optimism that defines successful entrepreneurs. The article notes that there are hotbeds or “clusters” of entrepreneurship that flourish because of the social nature of innovation — not in spite of it.

“The second myth is that most entrepreneurs are just out of short trousers. Some of today’s most celebrated figures were indeed astonishingly young when they got going: Bill Gates, Steve Jobs and Michael Dell all dropped out of college to start their businesses, and the founders of Google and Facebook were still students when they launched theirs. … But not all successful entrepreneurs are kids. Harland Sanders started franchising Kentucky Fried Chicken when he was 65. Gary Burrell was 52 when he left Allied Signal to help start Garmin, a GPS giant. Herb Kelleher was 40 when he founded Southwest Airlines, a business that pioneered no-frills discount flying in America. The Kauffman Foundation examined 652 American-born bosses of technology companies set up in 1995-2005 and found that the average boss was 39 when he or she started. The number of founders over 50 was twice as large as that under 25.”

Thank God. It’s nice to know that I’m not considered too old to innovate. Although I did start my entrepreneurial endeavors years ago, the skills and knowledge that I have acquired through the intervening years have been invaluable to the business success I now enjoy. Enthusiasm doesn’t trump experience.

“The third myth is that entrepreneurship is driven mainly by venture capital. This certainly matters in capital-intensive industries such as high-tech and biotechnology; it can also help start-ups to grow very rapidly. And venture capitalists provide entrepreneurs with advice, contacts and management skills as well as money. But most venture capital goes into just a narrow sliver of business: computer hardware and software, semiconductors, telecommunications and biotechnology. Venture capitalists fund only a small fraction of start-ups. The money for the vast majority comes from personal debt or from the ‘three fs’—friends, fools and families.”

Anyone who has watched the BBC program “The Dragon’s Den,” understands why most entrepreneurs stick to the “three fs” rather than seek out venture capitalists. Venture capitalists are willing to take chances, but for their risks they want high rewards. Most entrepreneurs aren’t willing to give away as much of their business as venture capitalists would like them to, even if they could persuade the venture capitalists that their business plan is sound. The Monitor Group, one of the companies with which Enterra Solutions works closely, is mentioned in the article because of a study it conducted that concluded that “angel investors,” a group that sits somewhere between VCs and friends, are another important source of funds.

“The fourth myth is that to succeed, entrepreneurs must produce some world-changing new product. Sir Ronald Cohen, the founder of Apax Partners, one of Europe’s most successful venture-capital companies, points out that some of the most successful entrepreneurs concentrate on processes rather than products. Richard Branson made flying less tedious by providing his customers with entertainment. Fred Smith built a billion-dollar business by improving the delivery of packages. Oprah Winfrey has become America’s richest self-made woman through successful brand management.”

For anyone familiar with innovation literature, this comes as no surprise. The Blitzkrieg was considered a innovative type of warfare; but the tanks, trucks, and airplanes upon which it was built had all been around for some time before the strategy was conceived.

“The fifth myth is that entrepreneurship cannot flourish in big companies. Many entrepreneurs are sworn enemies of large corporations, and many policymakers measure entrepreneurship by the number of small-business start-ups. This makes some sense. Start-ups are often more innovative than established companies because their incentives are sharper: they need to break into the market, and owner-entrepreneurs can do much better than even the most innovative company man. But many big companies work hard to keep their people on their entrepreneurial toes.”

Last year IBM became the first company to receive more 4,000 patents in a single year. Samsung Electronics was not far behind having surpassed the 3,500 mark. A couple of years ago I wrote a post about Innovative Companies. In that post, I mentioned BusinessWeek’s patent citations index that “reflects how often [a] company’s patents filed over the past five years have been cited as a basis for other innovation.” I found that index interesting because some studies have shown that companies with an active patent history (especially patents that others cite often in their patent applications) are generally valued higher than those with few such patents. I agree with BusinessWeek that it also shows how innovative a company is — and most of the companies on the list are large companies. The Economist article talks about how some companies create small internal divisions that act like start-up companies to keep the entrepreneurial juices flowing. The article also notes that big companies provide some of the funding that incentivizes entrepreneurs to press forward. “Procter & Gamble tries to get half of its innovations from outside its own labs. Microsoft works closely with a network of 750,000 small companies around the world. Some 3,500 companies have grown up in Nokia’s shadow.” To be global heroes, however, entrepreneurs must be able survive (and, hopefully, thrive) during the current economic downturn. Although it is harder for entrepreneurs to find funding and customers during bad financial times, the article points out that it is also easier for them to find opportunities as established businesses struggle. Dying businesses can release capital and labor and allow “newcomers to recombine in imaginative new ways.”

 

The article points out that half a century ago the business landscape was so stable that the composition of the Fortune 500 changed very slowly. In fact, “it took 20 years for a third of the constituent companies to change. Now it takes only four years.” The optimism that epitomizes entrepreneurs was clearly demonstrated in a survey carried out in eight emerging markets last November. Even though a vast majority of the entrepreneurs questioned admitted they had been impacted by the economic downturn (and an equally large majority indicated they thought that worse news was to come), “they also predicted, on average, that their businesses would grow by 31% and their workforces by 12% this year.” That’s what makes entrepreneurs global heroes in these dark economic times.

 

This is the first of five posts on The Economist‘s special report on entrepreneurship. In future posts, I’ll examine some of the other interesting articles found in the report.