Do We Have One Success Standard For Venture Capital And Another For Small Business?

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In “Uberising Luck”, the Economist (October 5, 2019, page 57) notes a number of programs that help entrepreneurs and laments the fact that “schemes to make entrepreneurs more successful are hit and miss.” I have a high regard for the Economist, It is one of the best business magazines in the world, but this article misses the point. Here’s why?

Failure Rate in Emerging Industries and Silicon Valley: Failure is a given in emerging industries. Since entry has usually been easier in many emerging industries, such as PCs and the Internet, and the potential is high, many entrepreneurs enter them. In a 100-meter dash, you have one winner. Emerging industries are no different. Many enter. Few win. Look at Zuckerberg. Many entered the linking industry. He has dominated. Many failed. Does Silicon Valley cry for the numerous failures? No. They count the billions made in Facebook and the other winners.

Note to NGOs and governments: Train and encourage entrepreneurs to enter emerging industries. Many might fail but the few who succeed could start a whole new industry in your area, and more than pay for the failures. Look at Silicon Valley.

Failure Rate in Small Business: In a free and open society, there will always be high levels of failures in small business and you cannot judge a program based on losses because entry is usually easier in fragmented industries, such as restaurants, bars, and construction. The market may not be growing as fast as the entry of new ventures. If the new venture operators are better, they could beat the old ones and the old ones fail. If not, the new ones fail. To reduce level of failure, a country could license businesses, as India tried to do during the “License Raj.” It was a miserable failure where the unethical paid bribes and the entrenched businesses did well due to a lack of competition.

Note to all non-governmental organizations (NGOs) and governments: Stop fretting about small business failures. It is actually healthy and shows that competition is alive and well.

Focus on Capital. Business developers seem to assume that lack of capital is the key reason for failure, and the press seems to parrot that assumption. Richard Burke built UnitedHealthcare with no capital. He borrowed a few thousand against his house, in case he needed it. Same with Kevin Plank of Under Armour. He built the company with no venture capital and with his own efforts and meager savings. My research of 85 American unicorn-entrepreneurs found that 99% did not get venture capital until after they had proved their strategy, and 76% never used VC.

Note to NGOs and governments: Stop wasting money on early-stage venture capital. Train entrepreneurs to take off without VC just as about 99% of unicorn-entrepreneurs did, and then encourage the successful ones to expand globally. Capital is not the key – skills are.

Focus on Individual Components Rather than the Whole: Every business needs to look at all aspects of the business and not single components. All. Because your one weakness could destroy your business. The article notes that “good record-keeping and marketing” was found to be useful in a study. Well, I have seen many studies, and they seem to show that competitive advantage is important. And operations. And management. And the right finance. They all are important.

Note to NGOs and governments: Instead of relying on studies that try to figure out what is important, it would be more productive to focus on what every business needs – good products, the right customers, competitive advantage, efficient operations, and on and on.

Focus on common sense. We don’t need experts or expensive studies from consultants to show that stupidity can destroy companies. The article notes that some entrepreneurs were failing when they had non-contributing relatives on the payroll. When entrepreneurs fail because they are paying for someone (relatives) who does not contribute, it is because they don’t want to face reality. It does not take an expensive consultant to tell them to cut out the waste.

Here’s the basic point. Small, local businesses are mostly in a zero-sum game. If the size of the economy and the market does not grow, one successful business will lead to another failing. Or all of the small businesses pay in the form of reduced incomes. One small-business owner may benefit from a first-world consultant – but at the expense of another. What entrepreneurs in the third world need are the skills to export from the country. Will everyone succeed at this? No. But neither do all entrepreneurs succeed in the first world. By exporting, the talented and dedicated entrepreneurs can import wealth into the area. This will expand the pie, and more can benefit from an larger pie.

If we are going to spend NGO funds or government funds, let’s spend it where it does the most benefit – by expanding the pie rather than redistributing the existing pie.

MY TAKE: We don’t seem to have learned much in 50 years of venture development. We need well-trained, well-rounded entrepreneurs who know all aspects of a business to succeed. Advisors and mentors are a short-term solution or a solution for a few. Train all entrepreneurs (who are interested) in all aspects of the business. Offer capital (if needed) to the proven, smart entrepreneurs to expand their business to other corners of the world – after proof of success. Do what Silicon Valley does. Focus on developing entrepreneurs who build great businesses. There will always be failures.

A note to magazine editors – hire entrepreneurship writers who understand entrepreneurship in all its complexity. Managing a growth venture is as complex as managing a Fortune 500 company except you have to do it with no resources, no staff, no experts, no resources, no employees, and no history. One difference. In large companies you have plenty of employees. In growth ventures, you have plenty of growth. Hopefully.

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