Missing the point

Many of todays most successful companies were launched by entrepreneurs during particularly inauspicious economies (Microsoft is one oft cited example) or in the most inauspicious markets. One estimate is that half of the Fortune 500 and half of the Inc. list of fast growing companies started in such circumstances. On the surface, this should seem strange to us because one of the most important skills we want entrepreneurs to have is the ability to assess markets for their attractiveness prior to entering into new business lines or ventures: the more attractive, the better. Obvious, right? Evidently, this lesson does not hold for entrepreneurs, who, failing to listen to the experts, time and again transform unattractive industries in unattractive times into attractive opportunities. Entrepreneurs thrive in adversity; I guess they didnt get the memo!

There are several possible explanations for the relationship between entrepreneurship and bad times: One is that exiting competitors leave a less crowded market. Another is that as a result, entrants can pick up people, companies, property, and other assets cheaply. A third is that the swelling ranks of the unemployed leave many people no choice but to strike out on their own. And a fourth is that starting a company in a recession allows only the hardiest ventures to succeed based on a particularly compelling value proposition, while at the same time inoculates the venture against future downturns by creating toughness and frugality.

All of the above explanations are good candidates, but regardless of which we prefer, there is a surprisingly ubiquitous relationship between adversity and entrepreneurship. The overarching reason is that the process of entrepreneurship is seeing value where no one else does, and persistently refusing to cave to the naysayers. That means that entrepreneurs are always bucking the current, going against fashion, doing what the rest of us think is not worth doing.

That also implies that even those who make their living backing big winners get it wrong a lot by betting on losers or by missing some huge wins because the ventures just seemed too ridiculous or even crazy.

One of the worlds oldest and most successful venture capital firms, Bessemer Venture Partners (BVP), has invested in some of the worlds biggest winners, such as Staples, Skype, and Celtel, and the partners are justifiably proud of these wins. But with uncharacteristic humor for often dry hard-headed venture capitalists, BVP also wryly publicizes its anti-portfolio, all of the now wildly successful companies that the firms partners thought were too ridiculous to invest in. [BVPs] long and storied history has afforded our firm an unparalleled number of opportunities to completely screw up.

Google was one such huge miss. One of BVPs partners had a friend who rented her garage to founders Sergey Brin and Larry Page for their first year. In 1999 and 2000, she tried to introduce the partner to these two really smart Stanford students writing a search engine. Students? A new search engine? In the most important moment ever for Bessemers anti-portfolio, the partner asked her, How can I get out of this house without going anywhere near your garage? Another miss: eBay. Stamps? Coins? Comic books? Youve got to be kidding. No-brainerpass. BVP passed on Intel, Apple, FedEx, and PayPal. FedExs Fred Smith approached BVP seven times and was turned down every time.

It should give us pause that even the most highly trained professionals, with decades of experience in sorting the truly crazy no-brainer passes from the true game changers, frequently miss the boat. This huge difficulty in distinguishing value from folly in early stages is one of the big entrepreneurship puzzles.

As BVPs admirably honest anti-portfolio shows, very frequently the bigger the opportunity, the bigger the contrarian element. Entrepreneurs pursue, create, and capture extraordinary value in spite of overwhelming negative feedback from the best professionals, the tops in their fields, not to mention helpful friends who know with certainty that the idea will never work. As it turns out, it is exactly those outliers that have the potential to become the most successful (and the least successful as well). And these statistical aberrations are doomed to elude systematic selection processes. Entrepreneurship, and the process of betting on it, may be impossible to systematize, precisely because of its contrarian nature. It requires an enormous leap of faith by.the entrepreneur that he or she has seen something that others miss.

WORTHLESS, IMPOSSIBLE AND STUPID: HOW CONTRARIAN ENTREPRENEURS CREATE AND CAPTURE EXTRAORDINARY VALUE
AUTHOR: Daniel IsenBerg
PUBLISHER: Harvard Business Review Press
PRICE: Rs 995

Reprinted by permission of Harvard Business Review Press. Excerpted from Worthless, Impossible, and Stupid: How Contrarian Entrepreneurs Create and Capture Extraordinary Value. Copyright 2013 Daniel Isenberg.

All rights reserved.
 

Entrepreneurship is about extraordinary value creation and capture: Daniel Isenberg

 

A big challenge is to help entrepreneurs and investors 'discover' that it is mutually beneficial to engage, Isenberg tells Ankita Rai

You say, 'Entrepreneurship and the process of betting on it are contrarian in nature'. Does that explain the scarcity of capital for new ventures?

It depends on the environment. In general, however, it does not require much capital to scale in any given market. All the low-income markets that I have seen have sufficient liquidity to support the growth. The bigger challenge is to help entrepreneurs and investors 'discover' that it is mutually beneficial to engage. In many cases, the ecosystem (for example, exit or liquidity possibilities for investors) is also limited as to retard the flow of capital to entrepreneurial ventures. The role of the government is to make exits easier. The easier the exit, the more natural the entrance will be.

Entrepreneurs are often mistaken for inventors. Do entrepreneurs have to be innovators to succeed? Do imitators make good entrepreneurs?

Entrepreneurship is about extraordinary value creation and capture. In the book you will find many examples of successful entrepreneurship without any innovation at all. These two processes can be considered conceptually distinct. The copy cat ventures - see the section on Cinemex in the book - can also create a tremendous amount of value for consumers, investors and societies. Imitators can make good entrepreneurs. So can innovators. But both can fail.

Is the first mover advantage over-hyped?

Even in technology-based enterprises, the technology per se only gives a temporary competitive advantage. If it is not supported by good leadership, organisation, marketing and finance it will be useless.

There are many times when being the first mover can be a disadvantage. The critical variable is not technology, but how much behaviour change is required to bring a product to market. In many cases, so many parties have to change their customer behaviour that the barrier to create a market is either too high or requires too much time and money to be effective.

Daniel Isenberg
Professor of Entrepreneurship Practice, Babson Executive and Enterprise Education