EBF Bookshelf

                                        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 or
                                        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,
                                        high-paying jobs.

                                        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 types
                                        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
                                        of Economics.