Building on Bedrock

by Derek Lidow

  By luring more and more aspiring entrepreneurs to take the high-risk route, we are doubly undermining the essential bedrock foundations of our society. First, many of the high-risk entrepreneurs we’re leading on to failure could have been successful bedrock entrepreneurs and contributed to our society’s well-being in a more desirable way than by wasting their time and somebody else’s money. Second, the current hype is based on very narrow definitions of entrepreneurship and a glorification of failure that dissuades many potentially capable entrepreneurs from even trying: “I am not a coding savant and I need eight hours of sleep and I don’t want to lose money my family may need.” None of the entrepreneurial role models profiled in this book who changed society for the better were coding savants, walked around sleep-deprived for long periods of time (although they all did work long hours), or risked losing any money their families needed.

  Dangerous Myths

  As we’ve seen, many myths about entrepreneurship hurt us as individuals and hurt our society. To recap:

  Myth: It just takes a great idea. We’ve learned from William Shockley that ideas aren’t enough. Entrepreneurial success requires not just an idea but also all of the things discussed in the How To, How Good, and How Much chapters.

  Myth: All entrepreneurs innovate. Sam Walton was proud that he borrowed ideas from wherever and whomever he could.

  Myth: Entrepreneurs share certain essential traits. Entrepreneurs differ more than they resemble each other because entrepreneurial success requires leveraging your differences to distinguish your product or service from others.

  Myth: Entrepreneurs are risk-tolerant. Bedrock entrepreneurs work to minimize potential losses.

  Myth: Disrupting markets is the best entrepreneurial strategy. Significant happiness can be created by making existing things work better.

  Myth: Market forces always drive entrepreneurs to improve our society. Entrepreneurs look to deliver happiness, often where no market yet exists, and they sometimes deliver happiness that is fleeting that can cause long-term harm to society.

  Myth: Only one in ten entrepreneurs succeeds. This myth implies that we measure every entrepreneur’s success using the same metric regardless of what the entrepreneur really wants or cares about.

  Myth: Failure is always good because it always makes you better. Failing by taking unnecessary risk is just stupid. Savvy entrepreneurs never risk more than they can afford and they experiment with what they don’t know.

  Myth: The beginner’s mindset is essential for innovating as an entrepreneur. To succeed as an entrepreneur you need to have mastered the specific skills required to deliver your product or service more reliably and cost-effectively than others already in the business.

  Myth: Successful entrepreneurs are tech-savvy. Successful entrepreneurs deliver happiness. Technology can never be more than a tool to help an entrepreneur be more effective at delivering happiness or collecting the money received in return.

  Instead, we need to understand these truths about entrepreneurship:

  Entrepreneurs leverage their differences to make their products and services more valuable.

  Entrepreneurs make people happy and ask for money in return.

  Leadership and strong teams turn mundane ideas into entrepreneurial successes.

  Almost all of us can learn the essential skills of entrepreneurship.

  Risk-taking is a choice.

  Experiments avert failures.

  Most successful entrepreneurs start small and grow as they gain skills and confidence.

  Bedrock entrepreneurs fail much less often than high-risk entrepreneurs, yet have the same potential for impact and wealth creation in most markets.

  Making large numbers of people happy is exhausting and costs money, so unless you really love asking for money in return for making someone or some business happy, entrepreneurship is probably not for you.

  The Dividends of Ethical Entrepreneurship

  It’s time we told the truth about entrepreneurship. Entrepreneurship is a big deal; it involves big numbers, and it likely involves each of us directly or indirectly. About half of us will have attempted being an entrepreneur in our working careers. Most people know an entrepreneur, and many of us have been asked to invest in the business of someone we know. But the fantasies we have about entrepreneurship have discouraged many capable people with great things to offer from becoming entrepreneurs, and encouraged many of our aspiring entrepreneurs to choose paths that unnecessarily lead to failure.

  An estimated $530 billion—yes, billion—is spent on launching startups every year. Most of that money comes directly out of the entrepreneurs’ pockets, or from the equity in their houses, or from debt. Much of it also comes from gifts, loans, or investments from friends and family. Only 10 to 20 percent of this money, depending upon the year and the state of frenzy in venture investing, comes from complete strangers and professional investors. Spending on startups is an exceedingly measurable part of our economy. This is money that goes to buy equipment, pay contractors, hire help, and pay rent to landlords. And most of this money is wasted needlessly by ill-prepared entrepreneurs with virtually no chance of success. But many of these startups could have succeeded if their founders had realized the straightforward steps they could have taken to turn things around. Telling the truth about entrepreneurship will help many more entrepreneurs succeed, waste less money, time, and effort, and destroy fewer families, while at the same time increasing entrepreneurship overall.

  Furthermore, telling the truth about entrepreneurship to everyone as they begin to think about their careers will help focus entrepreneurship on increasing overall well-being while reducing the temptation for aspiring entrepreneurs to make their money from manipulating the lonely, weak, impressionable, and most of the rest of us into indulging fleeting pleasures.

  A great deal can be gained from refocusing our conversation about entrepreneurship, learning from great entrepreneurial role models, and exposing the myths that lead entrepreneurs to take on needless risks, waste large amounts of money and resources, and fail when they could have succeeded. We will be more competitive in more types of businesses. Our products and services will improve at a faster rate. More jobs will be created. Most importantly, living the truth about entrepreneurship will make us all happier in more meaningful ways.

  Notes

  Since this is not an academic treatise, I list only the most relevant sources rather than complete lists of references pertaining to a particular point.

  Chapter 1: Truth Matters

  By opening day … My version of the opening adds detail and differs in tone and perspective compared to the version cited in Sam Walton’s autobiography (page 58), Made in America, Bantam (New York), 1992. In his book, Sam quotes David Glass’ telling of his story about attending the opening. My depiction of the opening of Wal-Mart number 2 in Harrison, Arkansas was derived from my interview with Clarence Leis on December 16, 2016. Clarence was the manager of Wal-Mart number 1 at the time and helped personally with the planning and execution of the opening of store 2. I also added details based upon archival photographs of the event from the Walmart Archives. Additional details came from an interview with Grace McCutcheon, who participated on the team preparing store 2. She is quoted in Vance Trimble’s book (page 105), Sam Walton: The Inside Story of America’s Richest Man, Dutton Adult (New York), 1990.

  Over 60 percent of working men and women … This datum comes from a Gallup survey conducted March 18–20, 2005. The results of the survey can be found at: http://www.gallup.com/poll/15832/majority-americans-want-start-own-business.aspx.

  … if you’re male, the chances are about 50/50 … See page 13 of Paul D. Reynolds’ essential book, Entrepreneurship in the United States: The Future is Now, Springer (New York), 2007. Women attempt to be entrepreneurs at about half the rate of men—the reason for this disparity is hotly debated and remains an open question.

  More than 30 percent of the population at any point in time is either
engaged in entrepreneurship or directly related to someone that is. … This estimate comes from an extrapolation of data from the ongoing Global Entrepreneurship Monitor (GEM) program. In his forthcoming book, Business Creation: Ten Factors for Entrepreneurial Success, Edward Elgar (Gloucestershire, UK), to be published, Paul Reynolds extrapolates from GEM data that there 17.8 million nascent entrepreneurs—entrepreneurs actively trying to create a profitable business—in the United States as of 2016. I then use data from the sister study of GEM, the PSED (Panel Survey of Entrepreneurial Dynamics) II, as found in Reynolds, Paul D., and Richard T. Curtin. “Business creation in the United States: Panel study of entrepreneurial dynamics II initial assessment.” Foundations and Trends® in Entrepreneurship 4.3 (2008): 155–307. Using data on page 206, Table 5.3 we find that approximately 21 percent of these nascent entrepreneurs are teamed up with their spouse and another 7 percent with another direct relative. From the numbers we can estimate 74.9 million adults are directly related to a nascent entrepreneur. That represents 30.5 percent of population eighteen and above in 2016.

  … Since funding from friends and family constitutes an important source of funds for many startups you stand a great chance of being asked to invest in a startup sometime … For an overview, see http://www.kauffman.org/what-we-do/resources/entrepreneurship-policy-digest/how-entrepreneurs-access-capital-and-get-funded. These data on funding come from the Inc. Magazine lists of the 5,000 fastest growing companies in the United States. A more comprehensive analysis of where entrepreneurs raise their money can be found at: Robb, Alicia M., and David T. Robinson. “The capital structure decisions of new firms.” The Review of Financial Studies 27.1 (2014): 153–179.

  … bedrock entrepreneurs. That term describes 99.5 percent of all entrepreneurs who create more than 90 percent of all the new wealth generated by entrepreneurs … To estimate this number I equate high-risk entrepreneurs to entrepreneurs who seek early-stage funding from venture capital firms. Only 0.31 percent of the companies founded in 2012 received early-stage venture backing according to Gornall, Will, and Ilya A. Strebulaev. “The Economic Impact of Venture Capital: Evidence from Public Companies.” (2015), which you can download here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2681841. My 0.5 percent estimate takes into account the fact that entrepreneurs with very high aspirations start businesses with larger teams on average than entrepreneurs with lesser aspirations, with this data coming from Reynolds, Paul D., and Richard T. Curtin. “Business creation in the United States: Panel study of entrepreneurial dynamics II initial assessment.” Foundations and Trends® in Entrepreneurship 4.3 (2008): pages 204 & 248. This difference implies a high-end estimate of 0.44 percent of all entrepreneurs being high-risk that add any wealth (it excludes aspiring high-risk entrepreneurs that fail to get venture capital backing). The wealth creation percentage depends greatly upon both the definition of wealth creation and how it is estimated for the large number of private companies that exist. While stock market and venture capital valuations get all the publicity, stock valuations only represent the wealth created for investors and not for employees. Job creation is a better rough estimate of wealth creation for society as a whole. Puri, Manju, and Rebecca Zarutskie estimate in their article, “On the life cycle dynamics of venture-capital- and non-venture-capital-financed firms,” The Journal of Finance 67.6 (2012): 2247–2293 that VC-backed companies are responsible for creating between 5.3 and 7.3 percent of all the jobs in the United States during 2001–2005. Pundits often just focus on public company stock valuations and therefore can quote much larger numbers for the impact on VC-backed companies on wealth creation. Gornall and Strebulaev estimate that VC-backed companies account for 18 percent of the stock market capitalization, as of 2015, of all companies that have gone public. Public companies represent just 4,300 of the 5.8 million companies in the United States.

  Chapter 2: Who

  Collectively known as the Austrian School … This is the most all-encompassing definition of an entrepreneur I have come across: “In any real and living economy every actor is always an entrepreneur;” from Lugwig Von Mises, Human Action, Yale University Press (New Haven), 1949, p. 253. For an overview article of why the Austrian School thinks what they think you can read, Kirzner, Israel M. “Entrepreneurial discovery and the competitive market process: An Austrian approach.” Journal of economic Literature 35.1 (1997): 60–85.

  Meet Jordan Monkarsh … The information about Jordan Monkarsh comes from a series of interviews and email exchanges held from July 2015 through August 2017.

  … fifteen million full-time entrepreneurs in the U.S. today… See this summary of the latest information from the Bureau of Labor Statistics: https://www.bls.gov/spotlight/2016/self-employment-in-the-united-states/pdf/self-employment-in-the-united-states.pdf.

  … almost six million businesses that they started … See the tables listed at https://www.census.gov/data/tables/2014/econ/susb/2014-susb-annual.html. It should be noted that the latest count of businesses is from 2014 while the latest count of self-employed people quoted above is from 2016. Anyone wanting to develop theories or calculate statistical relationships based upon the available data concerning entrepreneurs has to pay close attention to the definitions used and the time ranges associated with when the data were accumulated. For our purposes the numbers of established firms in the United States changes only slowly with time so these comparisons are legitimate for the purposes of the arguments I make in this book.

  … Right now nearly 18 million people are actively trying to start about 9.5 million businesses … These data come from Reynolds, Paul. Business Creation: Ten Factors for Entrepreneurial Success, Edward Elgar (Gloucestershire, UK), to be published, based upon information from Reynolds & Hechavarria, [2016] Global Entrepreneurship Monitor: Adult Population Survey Data Set, 1998–2012. ICPSR20320-v4. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2016-12-14. http://doi.org/10.3886/ICPSR20320.v4.

  … and millions more are thinking about it … See Reynolds, Paul. “When is a Firm Born? Alternative Criteria and Consequences,” Business Economics, to be published, 2017. He discusses in this article that the GEM and PSED surveys define “nascent entrepreneurs” as people who are actively engaged in starting a company and exclude people in their statistics that have not accomplished a minimum set of tasks within prescribed time frames. This criteria resulted in 9.8 percent of the survey respondents that said they were involved in starting a company not being counted, implying that close to two million people are thinking about it but may not be doing enough to be officially counted using the PSED or GEM criteria and then many others that are only thinking and not yet taking any action.

  On average an entrepreneur is no smarter, stronger, more extroverted, or insomniac than the rest of us. … There is a rich and extensive set of data that describes entrepreneurs. The best place to get a summary of this research is from chapter 3: Who Becomes an Entrepreneur in Scott Shane’s, “The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By,” Yale (New Haven), 2007. I want to emphasize that this statement applies to all entrepreneurs as a group and may not apply to any group of specific entrepreneurs. We do not know and cannot say whether launching a successful cybersecurity startup may require some minimum level of IQ or whether starting a successful graphic design firm would preclude someone who is color blind. This broad statement is meant to be a strong statement that traits—psychological or physiological characteristics we are born with or that develop early in life—do not preclude anyone from being some type of entrepreneur. As we’ll discuss later, motivations are a far more important determinant of entrepreneurial success.

  … less than 10% of all entrepreneurs who are far richer than the rest of the working population … ibid. See Figure 6.4 on page 108. Scott Shane’s figure is derived from Quadrini, Vincenzo. “The importance of entrepreneurship for wealth concentration and mobility.” Review of income and
Wealth 45.1 (1999): 1–19. For an overview of the macroeconomics of how entrepreneurship concentrates wealth see: Quadrini, Vincenzo. “Entrepreneurship in macroeconomics.” Annals of Finance 5.3 (2009): 295–311.

  The wealth represented in the Forbes magazine list of 400 wealthiest Americans has been almost entirely created by entrepreneurial endeavors. … This derives from a report of an undergraduate research associate of mine, Yash Huilgol: “Tracking Wealth From Entrepreneurship Using the Forbes 400 List of Wealthiest Americans,” dated 19 June 2015, unpublished. The report showed that of the 396 people on the Forbes 400 list 124 inherited their wealth from an entrepreneur, 263 made their wealth directly from entrepreneurship, and only 9 had no direct connection to entrepreneurship—although those 9 include Steve Balmer, Meg Whitman, Eric Schmidt and others who helped grow entrepreneurial ventures.

  … the number of rich entrepreneurs is in the millions … This statement derives from the fact that here are fifteen million people who report their primary activity as being self-employed and as previously cited about 10 percent of them are far richer than the rest of the population. Retired wealthy entrepreneurs would add to these numbers.

  Ninety percent of entrepreneurs … make less than they could by offering the same sets of skills and experiences to an established employer. … See Figure 6.3 on page 107 the previously cited “The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By.” Shane’s figure is derived from Quadrini, Vincenzo. “The importance of entrepreneurship for wealth concentration and mobility.” Review of income and Wealth 45.1 (1999): 1–19.

  Stephanie DiMarco is a classic example. … The information about Stephanie DiMarco comes from a series of interviews and email exchanges held from July 2015 through May 2017.