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Thinking Like An Entrepreneur

Thinking Like An Entrepreneur
Table of Contents

Chapter 3
Men Are Cheaper Than Guns

Chapter 4
Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur


Decision-Making, The Shakeout, and Entrepreneurship

  As entrepreneurs drive rapidly down the Information Super Highway, today, they are needing to slow down and swerve often to avoid Entrepreneurial Road Kill. Failed ventures, abandoned ventures, and pained ventures running around without a CEO, waiting for the next, oncoming entity to mercifully finish it off, are among the clutter.

  Every so often an energetic entrepreneur gets caught in the oncoming headlights, freezes, and wonders why. Why is it that their idea which seemed so fundable only months ago fails to dazzle investors today? The team is the same. The company's market is the same. Operationally, nothing has changed for the worse within the company.

  The only difference is that darn stock market and the lower valuation it is giving to Internet ventures. And, that makes all the difference. Whether we take it from a Stephen Covey Maxim, or elsewhere, we must remember the first thing about decision-making: "Begin with the end in mind."

  More appropriately, when we are trying to understand the actions of others, ask what their objective is. The goal of many of the venture capitalists and some of the entrepreneurs was simply to take a company public to have highly-valued shares to sell on the open market. Long-term viability of the business model meant little, compared to the salability of the "story" of the company.

  This is why so many Internet, consumer-retailing companies sprouted up and received funding. It's not that they were great long-term opportunities with sustainable, solid profit margins. Rather, retail investors understood: "There are a lot of toy buyers. Internet sales have advantages over mortar stores. WOW! Internet toy sales will be big! Here's a great market opportunity! BUY!"

  Then, these dubious companies found their way into established mutual funds. Why? What is the motivation of the professional money managers? Not to underperform the broader stock market. If the market tanks and all mutual funds do poorly, people won't blame their money manager. It's the market's problem, not the manager's.

  But, if overvalued stocks continue to go up, and a manager is left behind, because he wouldn't buy overvalued stocks, money pours out from his mutual fund. Possibly, he is replaced as the fund's manager. This creates a strong incentive for professional money managers to be momentum players in a bull market, buying stocks of any quality that appear to be going up.

  Finally, some of these companies are turned into "business failure" case studies to show what went wrong operationally and where the company failed. This misses the point. Multiply number of shares sold times the sold-at price to decide if these ventures really failed their founders and early backers. Don't always chalk up "failure" to bad decision-making.

  How do entrepreneurs make good decisions that will enhance the chances of building a successful business? What separates good decision-making from bad decision-making?

  H.W. Lewis, author of Why Flip A Coin? The Art and Science of Good Decisions, summarizes decision making:

  1. List your possible actions.

  2. List the possible consequences of each action and the desirability (sometimes called "utility") of each consequence.

  3. Try to evaluate the probability that each action will lead to a given consequence.

  4. Choose the action which has the best expected outcome or utility.

  Lewis writes, "It sounds complicated, but really isn't, and even trying to go through the process can force us to think. We don't have to do it perfectly to stay ahead of the game. In the real world, we don't have to do anything perfectly to stay ahead of the game."

  Why Flip A Coin? is a fun-to-read book that will get you thinking. It should be required reading for all entrepreneurs. It discusses hedging (betting against yourself to come out ahead), Lancaster's Law (bigger armies tend to win, so, maybe, an uneasy partnership is better than no partnership), and decision-making in the face of competition. Plus, you'll learn all sorts of interesting tidbits, like the folly of the sacrifice fly in baseball, and the inherent difficulties in group decision-making.

  Lewis says that one problem is not really knowing what we want to achieve through the decision. This is a problem with many product-based companies. Their goal is to create profitable products, but too often they do inadequate market research to know what their customers really want. It's difficult to create a high-demand product by guessing.

  John Vinturella, author of The Entrepreneur's Fieldbook, writes about the value of focus groups. A struggling company with repeated product failures was being kept afloat by their one profitable product—a fish finder.

  So, the company hired a market researcher who carefully selected a focus group. With her guidance, writes Vinturella, "They talked about the solitude, about the struggle of man versus fish, about the camaraderie with their buddies. With her nudging, they talked about depth finders: what they liked, how much they spent, where they bought them. Then she had the tapes transcribed and analyzed the contents, searching for oft-repeated verbs and common emotions."

  Vinturella tells us two key factors emerged. The fishermen thought that fish finders were difficult to read in bright light and that they were too difficult to use. Previously, the company thought fishermen liked pushing buttons, the more the better. Knowing their market, the company's new product addressed the real concerns of the people who used it. The company went from struggling to being an industry leader.

  Other companies, however, have had dismal results with poorly-led focus groups and customer surveys. Part of the problem is that to make good decisions people need to care about the outcome. Creating customer incentives to give useful marketing information is part of the market researcher's job.

  Some entrepreneurs instinctively know a certain product or service is likely to be successful. But, this only comes from much industry experience. Vinturella says, "The process of creating or seizing an opportunity is less the result of a deliberate search than it is a mindset of maintaining a form of vigilance that is sensitized to business opportunity. This frequently relates to the prospective entrepreneur's current profession or interests...."

  Vinturella also points out that many new entrepreneurs fail to distinguish between ideas and opportunities. He writes, "... A business idea is not a business opportunity until it is evaluated objectively and judged to be feasible. You may wish to choose two to five of the ideas that seem most promising for more detailed study. Trying to consider too many would spread your time, energy, and focus too thin. At the same time, if you focus too early on only one business idea, you are more likely to become attached to it, and could lose your objectivity."

  Lewis agrees about the need to sample options and discusses The Dating Game in Why Flip A Coin? A person wishes to choose the most desirable mate (you can set your own criteria of desirability!) from among a pool of a hundred willing, potential spouses. You can only date each person once.

  How do you select your mate? If you just select the first candidate who comes along, or randomly select one for that matter, your chances of getting the best is only 1/100. But, if you sample the first thirty-six candidates to get an idea of the quality of the field and select the next candidate that ranks higher than any of the first thirty-six, you have a 1/3 chance of winding up with the best. This is a tremendous improvement in your chances!

  That's something to keep in mind when courting companies for investment. New angel investors should read many business plans before deciding where to commit their capital.

  The same lesson applies to hiring potential employees, or even to bidding on items on eBay. Don't fear missing the great buy. Be thankful for the experience of sampling the population. Consider bidding on a gizmo. Buying the first gizmo will seldom give you the best gizmo deal. You don't know what gizmos tend to sell for. But, if you watch a few gizmo auctions, when the next gizmo comes up for auction, you'll have an idea of the range of prices at which gizmos tend to sell. And, you didn't have to do any math to enhance your chances of success!

  I pointed out to Lewis that studies of successful entrepreneurs tend to show that they are overly optimistic, relative to what reality objectively seems to justify. If this is true, couldn't we conclude that more knowledge (and, hence, more effective decision-making) won't necessarily lead to more success? Isn't optimism conducive to success?

  Lewis replied, "I don't really disagree that ignorance is sometimes bliss. On the other hand the argument that successful entrepreneurs are often successful because they took irrational risks misses the point that many unsuccessful would-be entrepreneurs are unsuccessful precisely because they were irrational. There are usually more failures than successes, so you have to be careful about how you normalize your data.... I once chaired a committee that looked into the rate of pilot error in the cockpit. The data, obtained by interviewing pilots, showed that they rarely made mistakes, and usually responded effectively to in-flight emergencies. Of course only surviving pilots were interviewed for the study."

  Similarly, five years from now, much of the Internet Entrepreneurial Road Kill will have vanished from the stock market. Those investors and entrepreneurs who remember the ride will be a bit wiser for the experience.

  Peter Hupalo