Burn the Business Plan

by Carl J Schramm

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  A 2013 global survey reported that successful entrepreneurs are among the happiest people on earth. Making money by improving, or even just making more enjoyable, the lives of millions of others with something that you created is the reason that entrepreneurs tackle the unknowns and risks that they do. If your destiny is to become an entrepreneur, you should know how to achieve success, which involves avoiding failure. Ahead, you’ll meet people who figured this out and who are sure that their chosen path has made them, and others, happier.

  CHAPTER 2

  Twelve Things Every Aspiring Entrepreneur Should Know

  At one point in my career, I was recruited to be the CEO of a health insurance company, a subsidiary of an international behemoth. It was the most frustrating job of my life. I saw the health insurance industry as one that could be transformed by new techniques to analyze data, push ahead on innovative coverage and claims processes to provide better and less complex service to customers, and get a better handle on how insurers paid hospitals and doctors.

  Instead, I learned firsthand that success often is the enemy of innovation. The holding company chairman repeatedly told me, “Don’t mess with the formula. You are running our most profitable company. Just keep paying the claims.”

  I eventually quit and started a firm through which I could invest in promising startups in health informatics and risk management. Soon, I also was scouting for new, innovative startups for major companies as well as venture funds in Silicon Valley. Perhaps because I was trained as a researcher, I was curious about whether there were any obvious traits or characteristics of new startups and their founder-entrepreneurs that could predict success or failure. Venture investors spoke with certainty about being able to discern a great idea by reading business plans and talking to entrepreneurs, but when I asked about the criteria that they used to judge the good from the bad, they offered formulaic answers. A common one was, “Is the company’s product like aspirin?” That is, does it solve an existing problem? Or does the entrepreneur have to invent the problem, too?

  When I became a limited partner in a famous venture fund, I was puzzled to learn that, after years of experience, they were still stuck at achieving only one real hit for about every ten companies they’d backed. Five or six of every ten picks failed quickly and a few limped along like zombies, never growing but never collapsing. What literature I could find to explain how startups could be more successful reminded me of cookbooks: “Stick to your business plan,” “Keep your investors happy by giving them information,” “Get to know your customers,” and “Be good to your employees.”

  The curious economist in me kept looking for answers. While still running my company, I took an unpaid part-time post as entrepreneur-in-residence at a university business school. Students seeking my advice told me what they’d been taught about becoming an entrepreneur: in a nutshell, it was to write a business plan and sell your idea to a venture capitalist. This didn’t reflect either my own rocky road or the paths that I knew successful entrepreneurs had taken, a conundrum that I discussed at length with the school’s dean and other entrepreneurs. So, when the opportunity arose, I couldn’t resist the chance to go back to my research roots and attempt to discern the empirical facts about what makes a startup prosper and grow.

  At the Kauffman Foundation, as well as through past and subsequent experiences, I had the extraordinary privilege of meeting and learning from thousands of entrepreneurs. In every interaction, I’ve asked what they learned in the process of creating their ideas and starting their companies. What were the most valuable lessons that they’d gleaned from their successes and from their setbacks and failures?

  The stories were of unexpected twists and turns, of vanishing customers, slammed doors, financing roadblocks, being beaten to the punch by another entrepreneur, and being swatted away by skeptical so-called experts, not to mention cheap eating, disapproving in-laws, missed ballet recitals, foregone vacations, and, of course, those sleepless nights. I also heard accounts that began with, “If I’d known then what I know now . . .” and of serendipitous decisions that somehow snatched success from certain failure. I also learned from my own successes, failures, inspirations, and frustrations.

  What follows is distilled from the themes recounted by many of these experienced, successful entrepreneurs.

  1. You Can Learn Only by Doing

  Ewing Kauffman, whose fortune endowed his eponymous foundation, left behind enlightening, personal, and sometimes cryptic writings about building a business. He didn’t believe that entrepreneurship could be taught, and he thought that business plans were pretty much bunk. As Kauffman saw it, events that appeared critical to success in one company had little relevance to another. When once asked the secrets of starting a successful business, he is reported to have replied, “You have to start a company to learn how to start a company.” To put Heraclitus’ words in Kauffman’s own brand of prose, every startup is different because no entrepreneur steps into the same river as another entrepreneur.

  Kauffman started one of history’s most successful drug companies by understanding that, to successfully break into a mature industry, he would need to take a new approach. His choice was to emphasize sales and relationship building over science and manufacturing. Kauffman saw the mastery of customer relations as critical. While his competitors set up massive research laboratories, Kauffman manufactured new over-the-counter drugs under licenses from other companies. When most of his competitors advertised their nonprescription products directly to patients, Kauffman bypassed consumers and concentrated on hiring and training salesmen to develop trusting personal and professional relationships with doctors, pharmacies, and drug wholesalers.

  Like Kauffman, Steve Jobs decided upon a different approach to sales than had his competitors. Instead of selling through authorized retail channels, as do most computer companies, Jobs created his own stores. He believed that Apple could better serve customers, and get a better sense of what they wanted from Apple products, by buying only from him. Through these direct experiences with customers, Jobs learned to make his products user friendly, durable, and beguilingly beautiful. Through his stores, he has made fierce loyalists of his customers, who continue to camp out on sidewalks to buy Apple’s newest products the minute that they appear.

  Ted Farnsworth, who started one of the first successful TV marketing firms, told me that he believed success for entrepreneurs boiled down to a simple formula: “For any new company there is only one thing to do: devise a new product and just put it out there. Then you can answer the only two questions that count: Are there customers? How much will they pay?” He went on to tell me, “As an entrepreneur, I’m constantly involved in relearning the answers to these questions. For me, experience is the only way to learn.”

  2. Starting a Company Is Not for Kids

  How is it that our stereotype of entrepreneurs suggests that, if someone hasn’t created a brilliant new company before age thirty, it’s unlikely that it will ever happen? This is the “Mozart Myth” of entrepreneurship. It is reinforced every year by one or two entrepreneurs barely out of their teens who create remarkable startups and garner breathless publicity. Stripe, an online payment service founded in 2010, was started by brothers Patrick and John Collison, both of whom dropped out of college and became billionaires in their twenties. This is a great story, and congratulations to them, but the Collisons don’t represent the typical story of entrepreneurship, or even the big picture of new product development. Theirs was one of the unicorns or supernovas—beautiful to behold but rare.

  Reality, however, is quite different. Data first collected by the Kauffman Foundation shows that about half of all entrepreneurs never went to college in the first place, and most do not start their companies until they are well along in their careers. The average entrepreneur is nearly forty years old when he launches and more than eighty percent of all new companies are started by people over thirty-five.

  Not only
are most entrepreneurs middle-aged, but entrepreneurs are getting older, and fast. Twenty years ago, people twenty-five to thirty-five started nearly twice as many companies as they do today. Now, more entrepreneurs are between forty-five and fifty-five than any other age group. Interestingly, entrepreneurs over fifty-five now create more companies than those under thirty-five. And, importantly, the probability of success of a new company surviving rises with the age of the entrepreneur.

  While most innovations are the products of much older individuals, youthful innovators do enjoy certain distinct advantages in some areas: they are more conversant with cutting-edge technology, and they are not yet burdened by a lifetime of exposure to various cultural norms. A midcareer traveler, for example, probably would have dismissed the idea of spending a night in the spare bedroom of a complete stranger’s home. It is difficult to imagine Airbnb being invented by someone over forty.

  3. You Will Learn More in a Company Than at a College

  Every entrepreneur you’ll meet in this book, with one exception, worked for an established company before starting his own. Kauffman was a drug salesman, Jobs worked at Atari, and his co-founder, Steve Wozniak, at Hewlett-Packard. The average entrepreneur works for someone else for nearly fifteen years before starting his own business.

  Every aspiring entrepreneur should consider spending time working in a big company. It may seem counterintuitive to suggest that a big company can operate as a de facto school that pays you to learn. Consider, however, what an employee can see in a large company. How does the business test and manufacture its products? What are the elements of pricing, and how is a marketing plan developed and tested for its effectiveness? How does it organize and pay its workforce and suppliers, comply with legal and regulatory requirements, and assess its needs for equipment and facilities? How has management learned from its mistakes (or maybe not) and pivoted (or maybe not) to meet changes in market forces? How does it innovate?

  Some big companies deserve their reputations as clunky bureaucracies, but many others rival our best research universities in producing innovations. Usually, that means that company management has decided that growth must be achieved through innovation, and that innovation either can be produced internally, as a result of a corporate culture that purposefully encourages employee’s, or brought in from outside of the company by an entrepreneur, perhaps in the form of a younger and smaller firm purchased by the larger corporation. Shareholders, too, represented by sophisticated fund or money managers, judge companies by their innovation “pipelines” and have the clout to drive innovation by voicing their dissatisfaction with sluggish growth and penalizing companies that don’t innovate.

  Joseph Schumpeter, the economist who wrote authoritatively about entrepreneurs, long ago identified innovators as threats to big companies. Corporate behemoths—“incumbents,” as Schumpeter called them—were so large that their products often defined entire markets, allowing companies to ignore the promise of evolving technology as a means to meet the changing demands of their customers. More nimble startups—the companies that came up with better products, or faster or cheaper ways to make them—were engaged with what Schumpeter called the “creative destruction” of the plodding giants.

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  Well-known examples of creative destruction include IBM’s near-death experience at the hands of Microsoft and Apple, whose personal computers displaced the mainframe product that was IBM’s foundation, and the fate of Blockbuster, which didn’t hear the hoofbeats of Netflix approaching from the other side of the hill. Such upheavals helped shape a revolution in management thinking. In the last three decades, big companies have been the source of many cutting-edge technologies, doubling their production of patentable discoveries.

  This is one reason that some large companies have embraced startups, sometimes developing symbiotic relationships1 and seeking out promising innovators.2 In the 1980s, startups backed by venture-capital investors were thirteen times more likely to go public than to be bought by a large corporation. Today, however, is a mirror image; a venture-backed startup is seven times more likely to be bought by a big company than to go public.

  As we will see later on, many entrepreneurs who started their careers in large corporations regarded them as critical to their subsequent success. Most important, they learned the culture of business, how big companies did or did not do a good job of serving their customers, and their customers’ continuously changing needs.

  4. If You Go to College, Choose Your Major Carefully

  This is a fact: the only college preparation for aspiring entrepreneurs that holds as much promise as working and learning in a company is majoring in engineering. The number-two major on that list is any of the physical sciences: chemistry, biology, physics, computer science.

  The manner in which engineering is taught in universities is focused on how engineers solve real, everyday problems. Student engineers are somewhat like surgical residents, immersed as partners in the process of discovery, working in laboratories with professors to develop and test new and practical ideas. Consider that companies started by the faculty and graduates of MIT alone, engineers and scientists, if measured in terms of aggregate sales, would represent the world’s seventeenth largest economy.3

  Many engineering schools, including Cincinnati, Cornell, Drexel, Georgia Tech, Northeastern, Purdue, and the University of Southern California, have built co-op experiences into their undergraduate curriculums. The model requires students to work full-time in companies at regular intervals while pursuing their degrees. Dean Kamen, perhaps America’s most respected inventor, and Mary Barra, the CEO of GM, both were co-op students at Kettering University, which was founded in 1926 as General Motors Tech to train future engineers and executives.

  Without reference to personal knowledge and experience, it is the rare entrepreneur who can see a need for a new product, and simultaneously understand how to bring the resources together to respond. To be effective in building a business requires knowledge that can be leveraged to make something new. Without this knowledge, synthesis is impossible. When I was studying Latin in high school, our teacher always reminded us of why we had to endure the horrible task of mastering vocabulary. Declaring, “You can’t paint a barn with a dry brush,” she reminded us that translation, the why of studying Latin, was impossible without knowing what the words meant.

  Engineering and science majors also learn how to accurately and concisely articulate their work in written and oral form. These disciplines require that results be documented and processes demonstrated. While most engineers are unlikely to be mistaken for literary giants, their training requires them to develop a clarity in communication that is a significant asset for an entrepreneur.

  5. Good Companies Don’t Happen Overnight

  Of course, because of the media-driven narrative of entrepreneurial success, many entrepreneurs dream of starting an Instagram-like company, selling eighteen months after launch to Facebook for $1 billion, or a WhatsApp, for which Facebook paid $19 billion when it was five years old. In fact, nothing could be less like the experience of the average startup. Instead of making their founders rich, you now know that most fail.

  As the numbers suggest, formulating a successful startup takes time. When the founders of successful companies look back on their beginnings, the candid ones admit that they didn’t really know what they were doing, or where they were headed. This is an important observation as it suggests a different way to look at startups. In reality, every new company exists to search for a product that, developed through iteration and market testing, will achieve scale. While many aspiring entrepreneurs think that starting a company is all about one good idea, in fact, successful entrepreneurs know that their first idea was seldom what made their company successful. Just as in the big company environment, every startup has to constantly and continuously improve its products if it hopes to survive.

  Google provides a good example. At first, it foundered in a sea of search engin
e companies. Many observers didn’t give it a chance in the face of Excite, Webcrawler, Altavista, Infoseek, and Yahoo. (Other than Yahoo, do you recognize those names?) It was not until Google’s founders, Larry Page and Sergey Brin, hired a professional CEO, Eric Schmidt, who in turn recruited Hal Varian, that the company found a way to make money. As an economics professor at Berkeley, Varian had developed the algorithms that enabled Google to devise targeted advertising. That business competence allowed it to rapidly rise to dominate the search industry.4

  It took Google seven years to be able to tell a convincing story to public investors. Similarly, many companies that we routinely think of as having enjoyed overnight success took at least ten years to develop what ultimately became their signature products. GoPro was twelve years old before it was in a sufficiently strong position to persuade public investors to back it. Microsoft and Oracle each were eleven, and Amazon was ten. The average company that has sales revenue strong enough to interest public investors to buy its shares, to go public, is fourteen years old.