Amar V Bhide, The origin and evolution of new businesses
(Oxford University Press, $35).
Review by Geoffrey Owen
Amar Bhide has come up with one of the few clear analysis of what it
means to be a start-up and why so few make the next step up to become
a substantial enterprise.
Entrepreneurs, everyone agrees, are a good
thing. Governments in all the industrial
countries are eager to promote start-up firms,
regarding them as a source of employment,
innovation and economic dynamism. European
governments, in particular, look enviously at
the extraordinary abundance of
entrepreneurial activity in the US, especially in
high-tech industries. The inadequate provision
of venture capital is often seen as a crucial
European weakness, and this has been a
major preoccupation in Britain and on the
Continent over the last decade.
What has been missing in this debate is a clear analysis of what start-up
firms are actually like, what contribution they make to the economy, and,
most important of all, why so few of them grow to become substantial
enterprises. The great value of Amar Bhide's new book is that it provides
this analysis, and it does so in a way which policy-makers, entrepreneurs
and their financial backers will find highly instructive.
One of the central themes in the book is the distinction between the
'average' or 'marginal' start-up business, which constitutes the vast
majority of the genre and has no prospect of significant growth, and the
relatively small number of 'promising' ventures, which have the potential
of lifting themselves into a higher league.
The former category includes the many thousands of businessmen who
operate in such fields as restaurants, construction, dry cleaning or
newspaper distribution. These are predictable industries in which the
scope for radical innovation is small or non-existent.
Promising ventures, on the other hand, are generally found in industries
that have a higher level of uncertainty, perhaps because consumer tastes
are changing or because a new technology has recently been introduced.
Here there are opportunities for new firms to find a niche which has not
already been staked out by powerful incumbents, and there is at least a
possibility that some of these niches could develop into large markets. A
well-known example is the personal computer, made possible by the
invention of the microprocessor. This market was pioneered, not by the
established companies such as IBM, but by 'amateurs' - the Steve Jobs
and Steve Wozniak, the founders of Apple - most of who had little
previous business experience.
The Apple story is revealing in other ways. Bhide shows, with numerous
examples, that the typical entrepreneur in a promising business does not
start out with a clear idea of how he or she is going to change the world.
'Imitation or mundane adaptation is the rule'. When David Packard and
Bill Hewlett started working together in a Palo Alto garage in 1938, they
experimented with a wide range of products, including a bowling-alley foot
fault indicator and a harmonica tuner, before eventually finding their
calling in scientific instruments. What was attractive about this field was
that it did not require much working capital or a sizeable investment in
research laboratories or a manufacturing plant, and the newcomers did
not have to confront large rivals.
Most entrepreneurs start without a proprietary idea, exceptional training
qualifications, or significant amounts of capital. The successful ones do
need distinctive qualities - Bhide emphasises decisiveness,
open-mindedness, tactical ingenuity and the ability to manage internal
conflict - but this combination is unusual rather than extraordinary. Nor is
it correct to think of entrepreneurs as irrational, over-optimistic
risk-takers. Founders of promising businesses usually face low risks
because of their low opportunity costs; they are mostly inexperienced and
lacking in credentials, and they do not have to give up secure,
Bhide puts companies like Intel and Compaq, started by experienced
businessmen with substantial support from venture capitalists, in a
different category. These companies seek to exploit larger and less
uncertain ground and rely more on prior planning and research and less
on opportunistic adaptation.
Intel and Compaq are members of an elite group, which has attracted
considerable - and probably disproportionate - attention from
commentators. What interests Bhide more - and this is the most original
part of the book - is the process whereby the typical start-up business
converts itself into a large corporation. Managing this transition calls for a
very different set of attributes on the part of the entrepreneur than those
needed in the start-up phase.
The three key tasks, according to Bhide, are the articulation of audacious
goals, the formulation of a strategy for achieving those goals and the
effective implementation of the strategy. The first implies a greater
willingness to take risks - 'promising firms have to emerge from their
niche and compete with large companies in mainstream markets'. The
second involves imagination, together with what Bhide describes as a
capacity for creative synthesis and abstraction. The entrepreneur 'has to
go beyond solving a concrete problem and distil (from often quite sketchy
data) a general rule that guides subsequent investments and initiatives'.
Finally, effective implementation calls for 'constancy, the capacity to
inspire and to intimidate, and the ability to learn new skills'.
Is there anything that governments can do to enable more firms to make
this transition? Not much, according to Bhide. Throwing money at start-up
firms is unlikely to be helpful, since governments have no power to
identify which of them will be successful. Indeed, as Bhide points out,
much of the distinctive contribution of promising start-ups derives from
their capital constraints. 'Meagre funding forces entrepreneurs to conduct
low-cost experiments that help resolve market and technological
uncertainties and prepare the ground for subsequent large-scale
investment'. Bhide sees no reason why public policies should favour new
or transitional businesses over established corporations. 'An interest in
the overall climate for economic enterprise seems more worthwhile than a
focus on any particular manifestation of entrepreneurship'.
One of the merits of this book is that it shows how the four different
of business - the start-up, the transitional firm, the VC-backed enterprise
and the established corporation - differ. Each of these types is dealing
with different problems, and needs a different approach to management.
By stressing the importance of the entrepreneur's personal qualities,
Bhide also brings to the fore a factor which is too often ignored in the
economic analysis of firms and industries. His evidence is qualitative
rather than quantitative, but nonetheless rigorous for that.
Geoffrey Owen is Senior Fellow at the Institute of Management, London School