Entrepreneurship is dead: long live entrepreneurship

Thomas R. Ulbrich and G. Lawrence Sanders

There are television shows, numerous blogs and endless social media posts all focused on entrepreneurship. It is finally “cool” to be an entrepreneur. Virtually every academic level from grade schools to high school talks about entrepreneurship. So goes the government. All levels of government are jumping on the entrepreneurship bandwagon. Billions of dollars have been thrown at startups and incubators by families, friends, angels, managed funds, universities and the government. Local, state and the federal government also have the ability to give the gift that keeps on giving, tax breaks.

According to research by the Kaufman Foundation, Austin, Miami, Los Angeles and San Francisco, Las Vegas and New York, and Boston have the best startup ecosystems in the world. These ecosystems have the funding, the talent, and competitive density to facilitate new business development.

Despite the fact that the thought of becoming an entrepreneur is more popular than ever, some reports paint a slightly gloomier picture. The bad news is that the startup rate has fallen from 14% to 8% of total companies over the past 30 years. Unicorns, companies with a $1Billion valuation, are also on the decline and a  growing concern. The Financial Times attributes the decline to a lack of access to capital, stifling regulatory requirements, increases in entrepreneurial activity by large companies, and increases in student debt and a very cautious workforce. A recent article in Forbes echoes these sentiments and adds, the Walmartization of America due to Walmart’s infrastructure and buying power.

Part of the decline relates to the nature of the beast. Startups fail. And the workforce is well aware of the situation. It is common to hear of failure rates between 80 and 90%. Other sources paint a somewhat rosier picture.  According to Scott Shane, in Small Business Trends, larger and older companies have a better chance of survival. About half are still around after five years.

Entrepreneurship is not dead.

It is morphing, changing and penetrating every aspect of traditional business as we know itMarketing, finance accounting, organizational behavior, and operations have assimilated the entrepreneurship. Marketing for startups focuses on engagement via viral and social networking strategies. Startups eschew traditional channels used for legacy and mature products.  Using traditional capital budgeting is just not appropriate for startups. Financial analysis for startups uses a combination of real options theory and qualitative models for evaluation. The ideal composition of startup teams draws on a different literature than traditional team literature. Startups need engagement marketing specialists, product designers and prototyping specialists, experts with infrastructure knowledge for configuring cloud-based applications that are scalable and of course the charismatic visionary. Accounting for startups is all about forecasting and cash-flows. Operations involve a constant struggle to scale production up and down.  And how to leverage and address the Amazonification and Walmartization  of supply chains.

Oh, and don’t forget strategic planning. Traditional planning approaches are confusing, cumbersome, take too long and just not agile. One-page business plans, pitch decks, lean startup approaches and the numerous templates to assist in identifying an opportunity are replacing the traditional strategic planning approaches.  This simplified planning allows entrepreneurs to react quickly in response to customer feedback, providing an iterative process that spirals in on the best products and services.

No, entrepreneurship is not dead. It is being assimilated into every nook and cranny of successful businesses. Many large organizations have embraced entrepreneurship because they understand that products and technologies have a life-cycle, that consumers will always be attracted to the next big- thing, and because large companies have the resources to invest in entrepreneurship.   Being entrepreneurial is the best way to delay and even prevent, the natural decline of business.

Using Pivoting and Real Options to Evolve a Business Model

Nothing is certain, except death, taxes and business decline. It does not matter how much money the current business is making; there is a life cycle for products and technologies, and eventually the business will decline without constant re-priming. Re-priming is essentially an investment decision involving the selection of the right product, the right people, and the right technologies at the right time. Real options theory can help with that decision.

Real options theory can be traced to a 1977 paper by Stewart Myers. They are called real options because they are investment decisions in tangible, real things such as a tangible asset, a product, machine or even a process since a process can be perceived. The real options investment decisions for a startup are:

  1. Concentrate on executing the existing business model. Focus on selling your existing products and versions.
  2. Add more versions to your exiting product line. The current product line looks viable, but needs fine tuning and freshening.
  3. Redirect the business in a new direction. Use existing competencies and acquire additional competencies to develop a new product line. Your existing products are not attracting customers.
  4. Abandon the current business. Fail fast and go back to the drawing board.

A real option is a decision or choice to invest a little or a lot in a corporate asset such as a business model, a product, or a technology. Real options look very much like the relatively recent concept of pivoting a startup. Eric Ries introduced the concept of pivoting and changing business direction in his 2011 book The Lean Startup.

“Companies that cannot bring themselves to pivot to a new direction on the basis of feedback from the marketplace can get stuck in the land of the living dead, neither growing enough, nor dying, consuming resources and commitment from employees and other stakeholders but not moving ahead. pp. 151-152”

The problem with the pivot concept is that it is a bit simplistic and parochial. The problem with the real options concept, when it is applied rigorously in its academic manifestation, is that it is too abstract and mathematically complex because it is based on stock options concepts.

An Enhanced Pivoting Model that Draws on Real Options

I have expanded on the pivot concept to take advantage of the more comprehensive real options approach by extending the basketball analogy. In basketball the pivot gives you the opportunity to get into the triple threat position. In the triple threat position the player can either pass, shoot or dribble. Check out Kobe Bryant in the triple threat position.). Each game is a continuous series of decisions to shoot, pass or dribble. Each season involves games against some of the same opponents and new opponents with the same shoot pass and dribble decisions. Finally, if the game is too tough, the player and the entire team can just walk off the court, albeit a radical, though sometimes prudent strategy in some situations.

The essence of the model (see Figure 1) is that founders should modify their business model based on the market potential and the degree to which the current founders and employees have core competencies and domain expertise in a particular area.

  1. Shoot: Go with the current business model and grow the business as quickly as possible.
  2. Dribble: Try to get in a better position by modifying and tweaking the current business model using versioning and identifying appropriate market niches. Identify mashup artists, and marketing expertise. Focus on product design and prototyping.
  3. Pass: Dramatically change the current business model. Use some or all of the core concepts of the existing model. Conduct intense R&D and acquire talent and perhaps even acquire a business with the desired core competencies. Get ready to receive the ball and be in the triple threat position develop a new and improved business model.
  4. Abandon the game & fail fast. Leave the game and walk off the court. Your position and perhaps your game is not good enough to compete effectively in this situation. Try to improve your game (domain knowledge).  You might even have to find a new court to compete on and introduce a new business model that draws on previous experience and new domain knowledge.

Triple threat

Figure 1: The Triple Threat Pivot Model

Market Potential and Core Competencies

Market potential refers to the size and the growth rate of a market. The size and growth potential of a market accounts to a large extent the attractiveness of a market and often drives the decision making process for startups and legacy businesses. Questions to be answered include determining the absolute size of the market, how much of the market can be reached and your potential to gain market share.

Core competencies are the knowledge, expertise and capabilities of the founders, employees and contained in existing processes. Pivoting and going in a new direction and embracing a new business model is often the key to business survival. But there are implications, because new investments can interact positively or negatively with existing skills and assets of the firm.

(The basic idea behind the model was published in Decision Support Systems.) 

Examples of pivoting over the last 150 years

As noted earlier, nothing is certain, except death, taxes and business decline. As illustrated in Table 1, many old and new economy companies have pivoted their way to success. Survival requires adaptation. It is truly a pivot or perish world and pivoters will inherit the revenues.

Real options analysis can be very technical, requiring a significant amount of financial and technical scrutiny. However, using complicated calculations is overkill for startups and small to medium-sized businesses. Real options concepts are nevertheless important.

The takeaway from the perspective of the entrepreneur is that you need to experiment and also need to diversify your portfolio of products and projects under consideration. You need to be constantly aware of the pivot. This does not mean that you have to actually buy machinery, make products, and constantly modify your business processes, but it does mean that you should learn-about many products and technologies related to your business and learn-by-doing and experimenting when an opportunity looks promising. As noted in the previous post, you might consider implementing a Chief Illuminati Officer function and start investing in options to keep your company viable.

Table 1: Old and New Economy Pivots

Company Name Initial Business Current Business
American Express Started as express mail business in Buffalo New York 1850 with merger of Wells and Company and Livingston, Fargo and Company Financial services corporation
Apple Launched in 1976 they introduced the Apple I computer. Sells computers, phones software and  sundry electronics items
AT&T Telephone company established in 1874 to protect Bell patent Currently a voice, data and internet communications company
Blockbuster Video and Entertainment Started in 1985 as a home movie and game rental business. Company is non-existent. Casualty of Netflix and Redbox. Had an unsuccessful pivot to online rental.
Coca Cola Launched in 1886 to combat morphine addiction. French Wine Coca made of coca, kola nut, and alcohol. Multinational manufacturer, distributor, and retailer of beverages, concentrates and syrups.
DuPont Launched as a gunpowder company in 1802. Chemical company producing neoprene, nylon, Corian, Teflon, Mylar Kevlar, Tyvek, Lycra and refrigerants among others.
Facebook Started in 2003 as Facemash it was used to compare the hotness of people pictures Large social networking company
Flickr Started in 2004 as a developer of MMORPG tools and migrated to a chat room with photo sharing Video and photo hosting
IBM Established in 1911 as Computer-Tabulating-Recording Company.  Sold scales, time recorders, meat and cheese slicers, tabulators and punched cards. Designs & manufactures hardware and software, and offers infrastructure, hosting and consulting services for IT and emerging technologies.
Nike Started in 1964 as Blue Ribbon Sports by when Phillip Knight distributed Tiger and Asics shoes out of his car. Designer, manufacturer and distributor of sports footwear, apparel, equipment and sports services.
PayPal Started in 1998 as Confinity a Palm Pilot and cryptography company After merger with Elon Musk’s X.com focused on money service
Pfizer Established in 1849 and produced an anti-parasitic for expelling worms and citric acid as a flavoring and preservative Multinational pharmaceutical.
Procter and Gamble Launched in 1837.  Sold soap and candles. Sold Pringles in 2009 and, Jif and Folgers around 2001 Multinational consumer goods company selling pet foods, cleaning agents, & personal care products.
Twitter Launched in 2005 as a podcasting syndicate for audio and video content. Large microblogging company
YouTube Initially conceptualized in 2005 as a video version of online dating site. Video sharing website

Using Thought Experiments to Develop Innovative Products and Business Models

The most intriguing aspect of Walter Isaacson’s biography on Einstein was his numerous discussions of thought experiments. Einstein conducted many, many thought experiments. Thought experiments helped Einstein to understand and disentangled complex concepts and to develop theories.

“He made imaginative leaps and discerned great principles through thought experiments rather than by methodical inductions based on experimental data. The theories that resulted were at times astonishing, mysterious, and counterintuitive, yet they contained notions that could capture the popular imagination: the relativity of space and time, E=mc2, the bending of light beams, and the warping of space. [2007, W. Isaacson, p. 6]”

“Over the years, he would picture in his mind such things as lightning strikes and moving trains accelerating elevators and falling painters, two-dimensional blind beetles crawling on curved branches, as well as a variety of contraptions designed to pinpoint, at least in theory, the location and velocity of speeding electrons. [2007, W. Isaacson, p. 27]”

Thought experiments need to be rhetorical in a good way.  A good thought experiment should be artful, eloquent, effective and persuasive in conveying the ideas, but not too pretentious or bombastic There is a downside to rhetoric in that the innovator, the scientist or the storyteller may be too good in developing  a colorful and vivid description at the expense of gathering facts and testing the veracity of the theory.  Sometimes thought experiments can actually confuse more than illuminate. The thought experiment may not work because of differences in the eyes of the beholder, because it needs more refinement or because it is invalid. Here are some guidelines for developing your own though experiment in order to tell a clear and cogent story.

  1. You need to be able to explain your concept in 3 or 4 sentences.
  2. You should eventually write your ideas in a paragraph.
  3. You need to use pencil and paper to illustrate your innovation. (Tablets are also Ok, but the interface should not get in the way of your creativity.)
  4. You should try to present your thought experiment on 1 page. It should be self-explanatory.
  5. You should present your thought experiment to many people.
  6. You should refine your thought experiment over and over after you receive feedback.
  7. You should sometimes return to your original iterations and ignore some of the feedback.
  8. You should let your ideas incubate. Layoff the idea for several days and do this often.
  9. You should be obsessed with the project and the compulsive about the details.
  10. Go back to 1, 2, 3, 4, 5, 6, 7, 8 or 9. Remember this is a nonlinear iterative process

I believe that thought experiments are the genesis of all innovations and creative process. This includes new products and new business models. Sometimes scientific thought experiments are verified by real-world experiments, data collection, and mathematical proofs.  The innovator progressively validates a thought experiment with the pitch and the business plan. The plan and the pitch are the refinement and incarnation of the entrepreneur’s thought experiment. The ultimate validation is when the business or the innovation goes live.

Figures 1 and 2 illustrates the migration of a thought experiment involving tracking individuals, pets and expensive assets. The initial drawing and narrative was started on Sunday evening and 3.2 was completed by 7am on Tuesday. Feedback from several individuals helped to refine the drawing.  Most of the time was spent futzing around with the interfaces of the two apps and locating symbols and graphics. The idea was derived from several student projects and from watching my son crack our Wi-Fi password in less than an hour using Backtrack. I think similar cracking code could be implemented in a very small unobtrusive device.  CPU, memory, Wi-Fi, cellular and GPS chipsets are shrinking in size and price. This technology has undoubtedly been developed in some form. But, there is always room for improvement and a thought experiment can be used to drive that process.

Here are some additional references on thought experiments:

  • Walter Isaacson’s 2007 biography entitled Einstein: His Life and Universe, Simon Schuster is one of my favorite books. It does a good job of describing how thought experiments influenced Einstein’s ideas.
  • As expected Wired Magazine has an interesting twist on thought experiments by Greta Lorge
  • Great animations of thought experiments can be found at Brain Pickings. BTW some of these animations don’t really help me to understand the ideas.
  • Very nice overview of thought experiments can be found at the Stanford Encyclopedia of Philosophy
  • Horowitz and Massey present a detailed discussion of how thought experiments have influenced scientific reasoning and philosophy.
  • Here is an interesting discussion of Einstein’s chasing a beam of light thought experiment by John Norton and go here for more of his philosophy of science work.
  • Another good philosophy book on the what, how and whys of thought experiments was written by Roy Sorenson.
  • Here is an illustration of a brute force method for cracking WiFi access points. This type of tool is available on a number of free digital forensics and penetration testing tools such as Backtrack. No, we are not safe from intrusions.

Figure 1: Thought Experiment 1.0

Kidnapping 1.0

Figure 2: Thought Experiment 3.2

Kidnapping 3.2

Design is an Attitude and a Behavior

Design is the most important activity for the development of products, services, theories, algorithms, recipes, business plans, pizza and homework reports.

In the past 9 months I have read 2 books and watched a video that have forever changed the way I view the design process.

I read and listened to Walter Isaacson’s 2011 biography of Steve Jobs and his 2009 biography entitled Einstein: His Life and Universe.  I also watched the 2009 video Objectified by Gary Hustwit at least five times.

Objectified is an incredible view into the inner workings of contemporary designers. There are many insights to be gleaned from Objectified, but the interview with Joanathan Ive, the Senior VP of Industrial Design and the head of the Human Interface development at Apple is remarkable. I obtained more insight into the Apple Design Lab during that five minute interview than reading all of the magazine stories about the lab. Sir Jonathan Paul Ive is unabashedly obsessed with design and compulsive about details. (BTW Objectified is free to view if you have Amazon Prime.)

Then there are the two biographies by Isaacson. Einstein was obsessed with the physics of matter and energy and compulsive about the details  related to proving his theories. Jobs was obsessed with developing new products and compulsive about  design details. An on/off switch in the wrong place could unleash Job’s Kraken.

The take-away from these books and the video is that we need to be sort-of-obsessed with our projects and sort-of-compulsive about details. Extreme obsessions and compulsions are not good as psychologists will tell you and it appears that Jobs and Einstein had these traits in spades. So let us just scale it back a bit and be sort-of-obsessed and sort-of-compulsive.

There are two other activities that are essential for innovation to occur. Innovative people read and search for solutions and they learn-by-doing. They prototype with paper, objects and even conduct thought experiments, as Einstein did. This is essential. As noted in the last post, the designer uses the prototype to create a virtual product, a virtual service or virtual world.

Designers have to constantly attend to solving two equations when seeking innovation (see Figure 1). They are easy to write, but hard to achieve.

Figure 1: Solve for Innovation

The Best Business Plan Creates a Virtual World

A good business plan should draw on prototyping to create a virtual world that looks and acts like the real thing. Developing product and process prototypes is the cornerstone of developing a virtual business model because prototypes facilitate the understanding of how the business will work.

I see between 30 and 40 students business plans each year. It is not unusual to hear the following complaints at least five times each year: “They just don’t understand our business model.” orThey just don’t understand what we are doing.” There are many reasons that they do not  understand, including the idea might be flawed, the business idea needs to be refined, or they have simply not communicated their business concept in a clear manner.

The business plan is often the centerpiece of communicating the business model to outsiders such as investors, family, friends and other interested parties (see Figure 1). A more important use of the business plan and the executive summary is that they serve as communications platforms among the founders. It is, after all, the interplay and social dynamics among the founders that are the keys to success ( see Jennifer Houser on How to Build an Insanely Great Founding Team).

The evolution of the business model and the business plan involves hard work, but there are tools that can improve communication and facilitate the process. Prototyping, in one of its various incarnations is the centerpiece of these tools.

Prototypes are usually associated with the development of products and services. With successive iterations, or stepwise refinement, a prototype becomes more and more like a real product or service. Prototyping can also be applied to the development of the business model. With successive iterations, or stepwise refinement, a prototyped business becomes more and more like a real business. It is rarely feasible to build the product, service or entire business without some type of stepwise refinement. The executive summary, the business plan pitch and the business plan itself are not the actual business, but are actually models of what the business will produce and how it will function.

Ideas evolve over time. Prototyping is a very powerful tool because it facilitates learning and understanding and it reduces the length of time of the evolutionary process. Prototyping involves experimentation and encourages the evolution of ideas and leads to insight into the design of a viable product, a service and the business model. A blend of learning-by-doing (prototyping) and learning-about (education, reading, searching and synthesizing) is necessary and the foundation of the creative process. Research has cosnsistently shown that prototyping and collaboration facilitates the mutual and concurrent learning processes of all of the individuals involved and that it results in strong feelings of ownership towards the product, service or business model.

There are a variety of ways that prototyping and stepwise refinement can be used to develop a business model and new products and services. Here is one approach that is characteristic of how prototyping can be implemented.

  1. Initial Prototype: In the early stages, develop a pencil and paper picture of the product, the application or the process. The key is to focus on the vital and essential functions of the product or service.
  2. Review by Interested Parties: Let business stakeholders, family, friends and potential customers provide feedback on the product or service.
  3. Revise and redesign prototype: Use the feedback to refine and improve the design of the product or service. Use more advanced tools as the prototype becomes more refined and detailed. This usually leads to the use of graphics, drawings and mock-up software. Towards the later stages of development, the prototype might be a functioning product or service or an actual application with some level of functionality.
  4. Go back to step 2 after revising and redesigning the prototype.

Services and businesses processes can also be prototyped. There are a number of tools that can be used to conceptualize, design, and test the design of the service including drawings, sketches, scenario analysis and task structuring, mock-ups, storyboarding, systems, Lego mock-ups, and other tools including simulation (see http://www.servicedesigntools.org/repository ). One popular tool for designing services is service blueprinting. It is a visual and descriptive tool for modeling visible customer interactions with employees and processes that also illustrates how the hidden processes support the customer interactions.

In summary, prototyping and prototypes are very effective tools for facilitating the evolution of ideas and for presenting a virtual world, a virtual business, a virtual product or virtual service to interested parties.

In the last couple of years I have focused on having the student groups develop prototypes for their business plans. The results have been outstanding. Check out the business plans and presentations on my SkyDrive here. Also check out Chapters 6 and 7 for additional discussion on the role of prototyping in innovation and creativity.

Figure 1 Innovation, Learning and New Product Development

What Would Midas, Atlas and Hermes do?

Figure 1: Midas, Atlas and Hermes

In their book on developing creative approaches for solving problems Barry Nalebuff and Ian Ayers describe the “What Would Croesus Do?” approach [1]. The gist of the approach is to consider how a consumer would solve a problem when she has unlimited resources.  Need tech support, have the tech sit outside your office and enter when called.  Bored, become a cosmonaut. This approach can help to identify products and services for the high-end where the consumer is not price-sensitive and is interested in many different features (see Figure 1). We have renamed Croesus to Midas products because it is easier to remember and because it imparts a very colorful and explicit image of high-end features. Midas products and service are designed for consumers that are not price-sensitive and demand high-end features. Products that are designed with high-end features for individual’s that are affluent or for individuals that are simply interested in high-end products are designed using extravagant engineering. Extravagant engineering is less concerned with costs and more concerned with using new technology and concepts to develop innovative and perhaps even radical products and services.  In general, products and services that are extravagantly engineered contain advanced features and attributes.

There is another part of the demand curve where the consumers are price-sensitive.  This could include students, seniors, and in general individuals with low levels of discretionary income or individuals that are value conscious [2]. In designing products and services for this group you can use the “What would Hermes Do?” approach. Hermes was the god of the traveler, the shepherd, the athlete, the merchants, the cunning, and was linked to invention and commerce. We are now designating Hermes as the patron for the part of the demand curve that does not have a patron. Hermes products and service are designed for consumers that are price-sensitive and demand features that are functional for the task at hand. Hermes products and services are still functional, but they have reduced and scaled-back features. There are a variety of very interesting products and services that have been developed for Hermes customers occupying the price-sensitive end of the demand curve. An important reason for offering Hermes products and services is to acquire customers that might eventually become Midas consumers. For example, students become less-price sensitive as they enter the work force and generate more discretionary income. Consumer’s tastes can also change as they become more familiar with a product line or because they get caught up in the hype around fashionable product. Designing Hermes products requires skills in frugal engineering.

Midas and Hermes product have an important role in developing new ideas for product and services for the middle of the demand curve. Midas gives product developers the license to create ideas that are unique and perhaps superfluous.  Hermes products and services establish a minimal baseline for a product or service with the additional prompting of being inexpensive to produce. Hermes products should be less expensive to produce because they are used to attract price-sensitive customers.

From the producer’s perspective, the idea is to get the creative juices flowing and use the top and bottom of the demand curve to generate new ideas for products and services by drawing on both extravagant and frugal engineering approaches to develop Atlas products.  The mass appeal or mainstream products in the middle are called Atlas products. Atlas was a Greek mythological figure that supported the weight of the heavens on his shoulders. Atlas products support the broad-based customer segment in the middle that requires products that have standard features and also have slightly differentiated features to meet the demand of monopolistic competition.The result of this dynamic tension between frugal and extravagant engineering is the development of Atlas products and services[1]. Atlas products and services have attractive features and an attractive contribution margin. The result of this dynamic tension is a robust process for continually inventing and reinventing products and services to stave off the competition and establish a strong foundation for survival.

Here are some interesting “What Would Hermes Do” ideas:

[1]Barry Nalebuff and Ian Ayers, Why Not?: How to Use Everyday Ingenuity to Solve Problems Big And Small, Harvard Business Press; 1 edition (December 1, 2006), http://www.whynot.net/main/about_book.php. Also visit Wikipedia for a discussion of Croesus http://en.wikipedia.org/wiki/Croesus

[2]I realize that there are many patrons for this large segment of humanity. The goal is to have a question for the bottom of the pyramid. Please see C.K. Prahalad, Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Wharton School Publishing, 2005 and many others that have been committed to this group.

[3] Dynamic tension was an exercise approach developed by Charles Atlas, but it also works here.

Steve Jobs

Steve Jobs was the prototypical example of failure leading to success. Steve Jobs was always an experimenter and a doer. Although some of Apple’s products, such as the Newton, Power Mac G4 Cube, Next computers  the Lisa, and Apple TV, were considered  failures, he bounced back numerous times and introduced dazzlingly exceptional products that have and still are dominating the market. He was a superb example  of an experimenter who sometimes failed in the marketplace, but learned from his mistakes and achieved subsequent success. This is the hallmark of the serial entrepreneur. He realized that technology does not just die out or become obsolete, it just becomes part and parcel of a new technology. His  entrepreneurial mojo will be difficult to replace.

{Adaptated from book}