The bruises of the bandwagon

Market Leader, Iwonna Dubicka, Margaret O’Keeffe. Pearson Longman, 2006.

Paul Tyrrell. Financial Times.

Is there a way to tell whether a business idea will fly rather than die? Everyone, it seems, wants to run their own business, but many are failing to prepare thoroughly before scrambling on to the bandwagon. The most widespread trait is a failure to appreciate that an entrepreneur’s personal qualities are just as important as their ideas.

Venture capitalists and business angels have always been more inclined to back a great team with a mediocre idea than a mediocre team with a great idea. They attach a lot of importance to what they term “scar tissue” – evidence that the person has learned from experience. Even high-street banks now focus more on individuals than their convertible assets when assessing applications for business loans. If a prospective entrepreneur applies for less than $50,000 – enough for about 90 per cent of UK start-ups – the lending decision is likely to depend on an analysis of their account history, and to a lesser extent on the cashflow predictions for their business, rather than the value of their property.

Ultimately, the success of a business idea rests on the ability of the entrepreneur. They must have basic business skills or acquire them via personal development or hiring. They must also have leadership qualities and, of course, their chances of success will also improve in proportion to the level of relevant knowledge they bring to their chosen market. This is particularly clear in product development situations – for example, where an engineer takes the knowledge he gains at a large company and uses it to set up a rival.

Research led by Dr. Rajshree Agarwal, associate professor of strategic management at the University of Illinois, suggests “spin-outs have a survival edge in the market over other entrants, as the result of a combination of entrepreneurial flexibility and inherited knowledge”. Dr. Agarwal surveyed the diskdrive industry between 1977 and 1997 and found that 25 per cent of new entrants were started by individuals leaving larger companies in the same sector.

Ultimately, though, what distinguishes successful entrepreneurs is their ability to spot commercially exploitable patterns where others cannot. Herbert Simon, winner of the 1978 Nobel Prize in economic sciences, suggests this process is intuitive: a good business idea stems from the creative thinking, or cross-association of know-how and contacts.

Radicalism has always been the domain of small businesses because they can move faster than larger rivals, and venture capitalists talk of looking for opportunities that are “disruptive” because they offer the best growth opportunities. The idea of the entrepreneur as a disruptive force dates back to 1934, when the economist Joseph Schumpeter argued that entrepreneurs were essential to long-term economic growth because they subjected monopolies or oligopolies to what he called “creative destruction”. Innovation – whether in the form of a new product type, production method or marketing medium – is a temporary source of market power that erodes the profits and position of old companies. This creates a new, competitive market that draws in their entrepreneurs until consolidation is required.

Subsequent research by Dr. Agarwal, in collaboration with Professor Michael Gort, has shown that timing is critical for entrepreneurs wishing to benefit from such a market: “Early entry during the growth phase helps survival, but is disadvantageous during the mature phase,” the pair suggest. In other words, jumping on a bandwagon is almost always a bad idea. Entrepreneurs should, in fact, be encouraged when they find there is very little data available about their chosen market. “It is frequently inversely related to the real potential of an opportunity,” says Jeffry Timmons, author of New Venture Creation.

This idea of combining ideas to find new solutions has become important over the past 20 years. As it has become harder to launch genuinely different products, consumers have become more value-conscious and less brand-loyal, while retailers have become increasingly powerful. “Many entrepreneurial ventures – derived from customer knowledge – can be considered as the “consolidators” of goods and services, suggests Richard Scase, a UK futurologist. Today, consumers want to be different … Meeting these more focused consumer needs gives small firms greater competitive advantage over their larger counterparts.

So if you have an idea that you think is sufficiently ground-breaking, how should you assess it? Popular benchmarks include an annual growth potential of at least 20 per cent; gross margins of at least 35 per cent; and free cashflow characteristics. Other positive qualities include: clear routes to market, the ability to create “post-entry barriers” (measures that prevent competitors from imitating your idea once it is commercialized); and comparatively low capital requirements.

Yet nothing is as important as demonstrable value to customers. As Daniel Muzyka, dean of the Sauder School of Business in Vancouver and a commentator on entrepreneurship, has written: “Opportunities are about creating value, not necessarily lowering cost … the failure of some entrepreneurs who believe they haven’t come in at the right cost is that they have not communicated value.”

2. After reading the text debate on the following issues:

- Leadership qualities

- Success of a business

- Running your own business

- Importance of ideas in business

- Customer knowledge in business

- Problems/failure in business

3. According to some business experts, to be a start-up entrepreneur you need to have huge self-confidence. You also have to be willing to risk your capital and, to an extent, your career. Do you agree with this view? What other qualities might you need?

4. Find out information from the books of internet on failure businessmen in your country. After finding out information about them, survey the type of business they have run; the problems they have faced; attempts they have made to save their business and give possible solutions or recommendations to them to overcome the obstacles in running business.

Reading 3

K-W-L chart

Divide into three groups and before reading the text fill in the “K” column to share as a group what you KNOW about the subject/issue. After fill in the “W” column what you WANT TO KNOW about the given topic/issue. After having read the article fill in the “L” column to share what you LEARNED about the topic/issue.