Building on Bedrock

by Derek Lidow

  Disneyland, as with all of Walt’s major breakthrough projects, went way over budget, putting Disney Studios again on the brink of bankruptcy. But Walt’s conceptualization of an entirely new type of themed family entertainment, promoted brilliantly through his popular TV shows for more than a year before the park opened, was an instant success. The park was such a hit that its profits enabled Disney to pay off their loans in full, and once again put Walt in control of his company’s destiny.

  Disney’s journey is typical of the challenges faced by highly technical or highly creative entrepreneurs that insist on realizing their personal visions. As Walt’s entrepreneurial career progressed, he developed increasingly sophisticated production and technical skills in order for his entertainment products to compete at a national level, and then internationally. Walt’s example is pertinent for entrepreneurs that aspire to create local or regionally competitive enterprises. Many businesses require their leaders and workforces to master highly sophisticated skills even to compete locally. Cybersecurity software would be an extreme example of a demanding and competitive business for an entrepreneur to enter at any level. Developing cybersecurity software for big banks requires an entrepreneur who can assemble a team that knows as much about the security of banking systems as the most sophisticated hackers in the world. Staying ahead of both competitors and hackers requires a relentless pace of learning, which in turn requires sophisticated skills to be able to prepare and deliver world-class training to key individuals in a rapidly growing enterprise using rapidly evolving technologies. An entrepreneur who knows how to create such an enterprise can make even the most sophisticated banks in the world happy, gladly paying lots of money for something they are incapable of doing themselves.

  I have a friend, Barry, who founded and runs a successful, self-funded firm that manages the cybersecurity of small- to medium-sized enterprises on the West Coast. Barry knows much more about cybersecurity than his customers do; he was a star student in the subject area when he got his bachelor’s degree from a university with a great cybersecurity program. He sells his products and services to firms that don’t have cybersecurity experts on their staffs. They therefore don’t expect as much of Barry and his firm as would a major global bank. His customers like and respect him and his firm, feeling he gives them great attention and provides them expertise they could not afford to hire directly. Since Barry launched the firm fresh out of college, it has grown steadily. Along the way, he has had to learn new skills to motivate his growing team, to market his services more widely, and also to keep up with the latest cybersecurity techniques and technologies. Nobody can grow their business without a dedication to mastering new skills.

  Today it would be unrealistic for Barry to ask a large global bank to hire his firm to provide cybersecurity consulting or support. He and his firm lack the expertise to understand the computer vulnerabilities of banking systems. But what is important is Barry’s motivation—his “Why”—whether he wants to grow his firm to be a bigger West Coast provider of cybersecurity services to small- and medium-sized enterprises, or whether he should invest his profits into hiring world experts in banking systems and banking system hackers. Expanding on the West Coast will still require additional skills, likely in sales and marketing. Since these skills are more readily available on the talent market, this is a less risky growth strategy. But Barry’s personal motivation may drive him to achieve a higher status that can only be achieved by capturing a global “big league” banking client. It is entirely up to Barry to decide if being a leader in providing security to medium-sized firms on the West Coast feels satisfying. The risks and challenges of competing against more experienced and better-funded companies for this type of business greatly increase the chances of losing money and perhaps even failing entirely. Because Barry owns 100 percent of his company, the loss would be entirely his. If he had major shareholders, then the stakes would be different; if he failed to get banking customers after having invested considerable money and time in the effort he would also risk losing his job. In essence, Barry’s position is similar to when Walt got a local theater owner to hire his studio to make simple animations for local audiences. That wasn’t a big enough market and challenge for Walt, but it might be for Barry—time will tell.

  As in sports, entrepreneurship has graduated leagues. Most sports have leagues to suit every level of skill, from amateur after-work and summer leagues, to professional minor leagues, to big leagues for the best competitors in the world. To play, you need to be better than the worst athlete playing your position in the league. Learning a sport is initially frustrating. It takes practice to become decent enough to compete in a league. Some people play sports with almost total dedication in order to prove to themselves that they can be the best at something, while some people play merely to have a good time.

  The same is true of entrepreneurship. Breaking in and learning the ropes of entrepreneurship is challenging for everyone. It takes dedication, practice, and usually some coaching. Almost all entrepreneurs learn their business skills by trial and error on the job; the vast majority learn how to run and manage straightforward businesses like a sausage stand or a retail shop. Entrepreneurs can choose to compete locally—for example, by selling sausages on Venice Beach, or providing security to small businesses in LA. Barry, Jordan, and Sam started by competing in the entrepreneurial equivalent of a neighborhood after-school league, and Sam had a franchise owner helping him break in. Once established locally, entrepreneurs can practice and seek coaching to hone their skills, thereby enabling them to be highly compensated for serving the most demanding and sophisticated customers in their field. Some people sell things they produce for fun, turning hobbies into endeavors that generate some cash. But as with sports, entrepreneurs can only succeed and feel satisfied with their success if they compete in a league suited to their level of skill and ambition (i.e. motivation).

  What is an entrepreneurial league? Entrepreneurial leagues are determined by competitors who want to deliver to your customer the same product or service that you do. If you run a local coffee place, then your league contains the local Starbucks, as well as the other places to pick up coffee in the neighborhood. It does not include Starbucks the parent company. In essence, leagues get tougher as the number of potential customers expand and the number of companies that compete for these customers increases in scale, scope, and sophistication. Think of each of the over 1,000 government classifications for industry mentioned at the beginning of chapter 3 as a different sport, with each having leagues that start at the local level and others that reach up to national and multi-national leagues. This is true for practically all types of businesses. You can even compete in local car-making leagues. As of 2013 the Census Bureau reported 249 different “Automobile and Light Duty Motor Vehicle Manufacturing” companies in the US—far more than the number of brand name car manufacturers. This list includes companies that produce customized cars and specialized performance vehicles, like racecars or electric vehicles. You do not need to compete with Toyota and Ford to get into the car business. Elon Musk originally founded Tesla as a boutique manufacturer of a few dozen all-electric versions of an existing Lotus roadster. He did not jump immediately into the big leagues of automotive manufacturing.

  Which leads us to an important realization: Almost anyone with skills that make some group of people happy can succeed as a local entrepreneur, while no entrepreneur who is unskilled can succeed on a national or global level. This has several valuable corollaries that expose some widely accepted myths about entrepreneurship:

  Myth: You need to disrupt an existing industry.

  Several famous and wealthy entrepreneurs and venture capitalists have written bestselling books claiming that all entrepreneurs should shoot for the moon or else the effort is not worth it. They explain that being an entrepreneur is hard, so there’s no point in doing something small. Some go on to claim that to really succeed, entrepreneurs must be innovative enough to disrupt an
entire industry; otherwise, entrenched competitors will run you out of business. They claim that failure is good, so you might as well shoot high because it doesn’t matter if it doesn’t work out—the more audacious your goals, the more experience you’ll get. All these claims are made by people who have already made it big and who want to associate themselves with other people that they think are going to make it big. All these claims are self-serving—and misleading.

  As we have seen, most successful entrepreneurs started small and grew big only after they had demonstrated they could make money. Only a handful of high-risk entrepreneurs, virtually all of them with previous experience and highly developed relevant skill sets, can persuade venture capitalists to fund their high-stakes, winner-take-all, invest-as-much-as-you-can-as-fast-as-you-can-build-it-out business ideas. We are talking less than 0.1 percent of all entrepreneurs. If you say all entrepreneurs should eschew starting small, and instead immediately compete with well-established global competitors or well-financed and highly experienced and skilled entrepreneurs, then you’re needlessly leading lambs to slaughter, and you’re ignoring history and precedents that are as relevant and vital as ever. Every entrepreneur profiled in this book started in some form of an entrepreneurial minor league. So did Elon Musk, Mark Zuckerberg, and Bill Gates.

  Myth: Fresh ideas about how to disrupt a market spring from the beginner’s mindset.

  All entrepreneurs must have a minimum skill set to have the credibility required to assemble capable teams with the necessary skills. Without credibility, you can’t put together a team with the skills to know what’s wrong with an industry, let alone with the skills to fix it. Credibility is a signal that other people can trust you as a leader, and it comes with experience. Credibility also comes with a mastery of the skills that other people recognize could enable change in industry best practices. No one with significant experience is interested in working with somebody they don’t think will succeed.

  That doesn’t mean you must have direct experience in a market—as in having made a similar product or delivered a similar service—to successfully enter or change the market. A different mindset, free of the hidden assumptions that constrain the operation of almost all established markets, is an almost essential element in creating valuable innovations. High-frequency customers and suppliers form pools of people with considerable knowledge and expertise about how value is created at the enterprises they do business with. Estée Lauder was an innovative entrepreneur because she understood cosmetics from the perspective of a power user and a power salesperson, as well as someone who had been tutored in cosmetics’ formulation and production. Estée’s greatest innovations were in how to sell cosmetics, something she understood better than the department stores she sold to.

  From time to time, entirely new businesses are created where no leagues yet exist and there are no hidden assumptions about how business should be transacted. This is analogous to new sports being formed. As a new sport emerges and becomes accepted by both players and spectators, the skills required to excel at the sport evolve and develop. The new stars of the sport are virtually always those with the physical and mental traits that align well with the sport, and who also have the motivation to train more diligently and shrewdly than anyone else. While there were no leagues in personal computer software when Bill Gates and Paul Allen began Microsoft, both of them possessed considerable skills in programming. They also invested more hours of their time than any others to become the world experts in developing programs for computers with small memories. Such emergent industries offer great opportunities for diligent and motivated entrepreneurs to develop new world-class skill sets—new industries just don’t emerge very often.

  Far more entrepreneurial opportunities arise because of the constant changes experienced by every business in existence and the fact that no business is able to react to every change in such a way as to please every customer. Every change creates at least two niche opportunities. One, to find and take away those customers who are dissatisfied by the changed condition and are no longer satisfied with the existing product or service and want the product or service modified: “I want bigger, less expensive packaging.” “I want smaller serving sizes.” Addressing these dissatisfactions can be challenging, but they are always there and they are always growing. Sam Walton captured these sorts of opportunities, as did Estée Lauder.

  Two, opportunities always arise to help existing businesses adapt to the changed environment, maybe by providing a new service or a new product (like a new software program). Changing is difficult for established businesses. If you can help them adapt more but change less, then you’re going to make them extremely happy. Stephanie did this very well; so did Vidal.

  Fortunately for entrepreneurs, the almost infinite number of new opportunities start out as niche products or services. As a result, an entrepreneur can develop skills, assemble teams, and confirm profitability as the niche demand develops, while often not being perceived as a threat by the entrenched players in the broader market. This positions the entrepreneur to enter “adjacent” markets once the company has become profitable as well as reliable in the eyes of customers. Again, Sam Walton did that; so did Jordan Monkarsh.

  Myth: To compete as an entrepreneur, you need masterful programming skills.

  Walt Disney’s experience is telling. He started in animation by producing the animations himself, but did not achieve any traction or notoriety until Ub Iwerks actually took over the drawing and Walt focused his efforts on producing and managing the relationship with the distributors. Animation skills to Walt are directly analogous to what programming skills can mean to a software entrepreneur today; they can help you get started in a software business and help you understand how to manage other programmers in such businesses, but they are not what will make or break the business. As we saw with Stephanie, even in a business that creates and sells sophisticated software, the success of the entrepreneur and the enterprise rests not with the coders but with the people that understand the needs of the customer. Even the big leagues, software and otherwise, never require the entrepreneur to have world-class coding skills. Programming skills support just about any business of scale today, but programming does not in itself make anyone happy, other than maybe the programmer. Entrepreneurs tell programmers what to program.

  As we’ve seen from Walt, Vidal, Jordan, and Estée, starting out in the entrepreneurial minor leagues requires very little in terms of assets, though it certainly imposes no limits as to how successful you can become. There is, nonetheless, a minimum set of required assets every entrepreneur needs to possess in order to launch a successful business, regardless of league. That’s what we need to discuss in the next chapter.

  * * *

  [17] Charles Mintz had married Walt’s original distributor Margaret Winkler. By the time of the Oswald contract Mintz had taken over all dealings with Walt.

  [18] Walt dropped “Brothers” from the name of the studios, without consulting Roy, when Oswald became a hit.

  CHAPTER 8:

  How Much

  Aspiring entrepreneurs are continually asking me, “How much money will I need to make sure my ideas succeed?” or, “How much money should I raise?” Money is quite literally the last thing an entrepreneur needs. Money is the fill in. Money is what you need after you’ve pulled together all that’s already available to use to start your enterprise.

  As we saw with William Shockley, the Nobel Prize–winning inventor of the transistor, if there’s something critical you lack, no great idea and no amount of money can make you successful, not even with the best idea of the twentieth century. Shockley had more than enough of everything he needed, except for two essential qualities: leadership skills and motivation. Without those, neither money nor all the smart, dedicated people he hired could help. Shockley lacked the motivation necessary to create a company that focused on customers rather than on him. He couldn’t accept ideas that were not his, nor could he invest the time and e
motional energy required to master new skills. Any entrepreneur without enough of all the right stuff is in danger of losing everything.

  How Much Depends on the Test

  Whatever you want to prove to the world as an entrepreneur, and however you want to change the world, you must, to some degree, possess the following assets:

  A strong enough implicit motivation to succeed,

  An idea that makes a large group of people happy,

  Leadership skills,

  The attention of a large number of potential customers,

  A team with mastery of the skills required to reliably deliver and market the product or service,

  Enough time to grow the idea into something that creates value, and

  Enough money to develop the idea into a product or service that can be reliably delivered and ultimately makes lots of people happy.

  To estimate specifically how much of each of these things you need, you must first understand your motivations.

  How Much Motivation

  As we discussed in chapter 4, no one is forcing you to start an enterprise. In becoming an entrepreneur, you are asking the world to change to suit your needs. The world will get along just fine without you. Entrepreneurship is ultimately a test that you impose on yourself to satisfy some core implicit motivation. The quantity and quality of the assets you need to pass your test depend on the test you feel the need to put yourself through.

  It would be best for you and for the world if you ultimately balance the severity and riskiness of the test you choose with the amount of emotion, effort, time, and money you’re able and willing to invest. This is equivalent to saying that it’s best for everyone that you choose to compete in the entrepreneurial league where you have a good chance of succeeding rather than failing. If you create a rational balance between what you are able to invest with the amount of change you feel compelled to make in the world, then you will create the most good and the least waste.