 |
October 2008
Missing
the point
Governments turn to academics on important issues yet The
Illusions of Entrepreneurship by Scott Shane, an American
university professor, is potentially damaging in its
apparent misunderstanding of small business and the vital
role start-ups play in an efficient and free society |
I was drawn to The Illusions of Entrepreneurship by a review from
Luke Johnson in the Financial Times.
Luke was hinting at a Damascene conversion having read the book and
as this new philosophy embraced some, to me, heretical thoughts I
logged on to Amazon to obtain my own copy. We receive several books
a month seeking reviews so my parting with hard cash gives a clue as
to how deeply Luke’s suggested heresies had impacted, though to be
fair to him he hedged much of his comment with caveats.
Let me say at once that it is a scholarly book. Author Scott Shane
sits at the pinnacle of the intellectual side of business, his
research, as is traditional with someone in his sphere of life, is
extensive, he possesses a sense of humour in describing himself as a
nerdy professor and none could argue that the conclusions drawn from
the data might not be valid in a one dimensional view.
The problem is that he has completely missed the point and sadly,
gives weight to views found in far too many areas of the civil
service which is distinctly sniffy about small business, government
which has not a clue about the subject, and academe, which
contributes vast ledgers of research to the debate without ever
quite grasping just what entrepreneurialism is all about.
Entrepreneurialism is about choice: a fundamental of a democratic
society: for a view of the obverse, look at the appalling economic
performance of societies where entrepreneurial opportunities are
nil, or very limited. Recall that the USSR in its pomp could not
feed itself through its collective farm and state controlled
distribution programme. A huge percentage of the population was fed
from, or sold or bought crops from, small patches of land allowed to
individuals.
If enlightened governments, be they national or local, encourage new
entrepreneurs into the arena with some hyperbole and financial
assistance they are the realists. They acknowledge that no amount of
centralised control is going to feed into their community those
essential props, often one-man bands, that not only provide a
service that the community needs, and here I am about to attack one
of the tenets of Scott’s summing up, they also provide that abrasive
element to the established entities with which they compete, to keep
their prices down, to keep their service levels up, or lose
business.
The one-man band, so low in Scott’s estimation, contributes far more
to the efficiency of USA inc, UK plc or any other country, than all
of the big accountants, McKinsey style consultancies, MBAs or
business schools in the world.
OK Scott, be dismissive about one-woman hair stylists, but try
telling a woman that the community does not need hair stylists with
flair and sharp pricing. I wish you well. Or how would your
community work without its one-man builders, window-cleaners,
decorators, car valets, gardeners? Your managing directors and MBAs
would be doing it for themselves when they could be completing that
next project assessment. Or they might wind up in hospital because
they are ill-equipped to be efficient and safety conscious in an
unfamiliar role.
It is this competitive abrasion at the bottom of the economic
pyramid that keeps the whole structure lean, mean, and competitive.
Take our one woman hairdresser. Because she will take custom from
the high street salon, it has to become more efficient, keep its
prices down. Because it keeps the cost of a hairdo down its
customers do not press their employers for a raise in pay. Because
of this the employer keeps its wage costs down so it delivers to its
bigger industrial customers without trying to pass on additional
wage costs. And so it goes on up the chain, wider across the
commercial base. It is called competition and competition is the
single defining factor that makes democracies and free economies
efficient.
And competition in business, as in football teams, as in everywhere
in life, depends upon a steady stream of new entrants, young
hopefuls, to keep the established players at their best or helping
them towards the exit.
Failure to address that defining element of entrepreneurial hunger,
the vital energy in business success and efficiency means that all
of the research in the world just produces statistics and those come
after damned lies in the fabled chain of incredulity.
Contrary to what many believe, a university education does not of
itself equip individuals to be entrepreneurs. Ask anybody involved
in monitoring a graduate recruitment programme in a thriving company
as to its outcome. Sure, one or two brilliant executives emerge but
they go on to sustain the momentum of a proven commercial winner and
perform an essential role. But they are premier league managers,
they are not entrepreneurs. Peruse the list of non-graduate
entrepreneurs, it is long and impressive, and their success provides
much work for the premier league managers I have just described.
Scott concludes his book by comparing:
-
A personal cleaning
business started by an unemployed high-school drop-out that is
pursuing the customers of another personal cleaning business
(heaven forbid – what is the world coming to?), is capitalised
with $10,000 of the founder’s savings and is set up as a sole
proprietorship.
-
An internet company that is
started by a former Microsoft employee with 15 years of
experience in the software industry, an MBA and master’s degree
in computer science, that is pursuing the next generation of
internet search, is capitalised with $250,000 from the founder
and Band of Angels in San Francisco, and is set up as a
corporation.
-
Speaking as someone with 28 years of banking behind him, someone
who backed hundreds of start-ups and SMEs, it is a no-brainer.
Despite being a high school
drop-out, our personal cleaner has managed to save $10,000 and is
prepared to put it on the line. He is also prepared to take
responsibility personally for the activities of his business. Two
plus points straight away.
Looking at his business plan, he is not frightened to take on an
established company so he thinks he can do what it does better, or
cheaper, or both. Another big plus point.
So the community benefits in many ways:
-
he is not unemployed and
costing it welfare payments;
-
it gets another competitive
personal cleaning service;
-
it keeps the prices down,
and the service up, from the existing player; and
-
he may make personal
cleaning available to those who could not afford it before –
free them up to go take an MBA course?
I would back this guy and others like him. I did, hundreds of times.
There are a few local multi-million turnover companies now as a
direct result. These mean much more to our community than another
Google. Certainly they attacked established businesses but if they
were ready to crumble anyway, the jobs and wage packets could have
gone to a competitor out-of-town. That is how capitalism works and
it is more efficient than any other system in delivering real
benefits to individuals and communities.
The second example I would walk away from.
Fifteen years at Microsoft so will Bill Gate’s lawyers be descending
in droves for one of their attritional court battles because our
man’s line of code bears a passing resemblance to something Bill did
and patented two decades ago?
Has the founder put in any personal money? I love a cushion of
personal pain between my commitment and a write-off.
Will he come up with something commercial? The annals of companies
such as this are littered with technologically brilliant products
that could never be commercial. Look at Concorde, the Sinclair C5.
Will some brat down the road, the next Bill Gates maybe, come out
with something that will trump our team’s product two days after
launch?
And, do you really want to spend too much time with an egotistical
nerd who stuck it out for 15 years with Microsoft before deciding
that his brilliance was more deserving of recognition than that of
Bill? Where is that naked commercial aggression? Been asleep for
along time has it not?
Above all it perpetuates the all-too-often heard myth that success
in business is academically formulaic. Just look at the ledgers of
the, much-vaunted in Scott’s book, venture capitalists. Sure, there
are one or two outstanding successes or they would not be here and
maybe the example he cites came up with a Google. But there are
regiments of living dead companies too and enough turkeys to supply
a small town on Thanksgiving Day.
Scott’s thinking is all too prevalent amongst governments that pack
their small business advisory bodies with civil servants, corporate
premier league managers, and academics: enough degrees between them
to fill a sizeable book. But not an entrepreneur in sight, where are
the guys who have been there and done it?
Two classic paragraphs on page 150 sum it up.
Scott writes: “One way to know if we would get more economic growth
by having more start-ups would be to look at the relative
productivity of new and existing companies.”
The next paragraph contains the gem arising from academic research
demonstrating that, unsurprisingly, firm productivity increases with
age:
“This means that the average new firm makes worse use of resources
than the average existing firm, which is not what you would expect
if economic growth benefits more from the creation of new firms than
from the expansion of existing ones.”
The over-simplistic, and one-dimensional, formula for productivity
is sales divided by employment so we can immediately divine just why
this flawed conclusion has been reached.
New businesses can only prosper by delivering more for the same
dollar, or the same for fewer dollars, than established competitors
so it is their customers that get the productivity benefits, the
wider business community.
But the statement also begs the interesting question as to how the
average existing company got there in the first place? Did it land
from Mars or was it, and heaven forbid yet again, once a start-up! A
debate re-ignited when we are told that only nine-year old companies
and older create real new employment.
And never, ever, repeat the folly of pouring state money into mature
businesses that lacked the wit, product or drive to find new markets
and expand themselves. We would have a fine array of gas mantle,
stage coach and buggy whip manufacturers: useless, living dead
businesses that should die.
A free and democratic society depends upon the vital entrepreneurial
energy that comes from the grass roots. It is the choice of the
individual to be employed or work for themselves. It is a hard,
cruel, unrelenting battle to succeed and only the fittest make it,
and only the fittest should. By the same creed, the established
businesses that fail to adapt to changing conditions or competition
should die when challenged by vigorous newcomers.
Scott’s excellent piece of scholarly, but very tunnelised, research
fails to explore the benefits to the broader community of the
productivity gains delivered by start-ups. He appears to have
ignored the indirect employment created by start-ups that succeed:
of golf club staff, restaurants, car hire companies, childcare
staff, personal cleaners even, or the degree to which start-ups hone
the efficiency of bigger companies by competing with them, or by
performing tasks that free up others to use their time for more
valuable activities.
Above all, the start-up epitomises the absolute right of a free
person to go out and try to better their lives and by so doing, that
of their community. It is the spirit
that took us out of the caves.
The cover of the book alludes to “Costly Myths”.
If the content is taken too seriously a few more might take root,
especially in areas where academic research is given more respect
than it sometimes deserves: government and civil service: ivory
towers where a sublime ignorance of the vital importance of the
small business sector to any community all too often prevails.
Read it, but challenge its conclusions too, if only to remind you
how vital it is that start-up businesses are encouraged.
Editor
Published by Yale University Press
Hardback £18
www.yalebooks.co.uk
Scott Shane is a Malachi Mixon III Professor of Entrepreneurial
Studies, Weatherhead School of Management, Case Western Reserve
University.
< Back
