Then I stumbled on to Forbes’ ranking of the 10 best small companies in US. Interestingly, lots of these companies were based on offbeat "techie” ideas. Frankly, a lot of the business ideas left me with the feeling "This is big?!!" (Rolls eyes) This set me thinking on entrepreneurship.
After almost six months into Management education, I get this nagging thought that all business decisions reduce to a random gamble whatever you do. To elaborate, say you are facing a business decision of some significance. Now, how much ever analysis you do, qualitative or quantitative or both, you will come to a situation where you will be confronted with a probability distribution of outcomes. At this stage, the decision maker is left with no choice but to choose one of the alternatives randomly. It is literally no better than gambling on a throw of dice.
Given this belief, how does one factor in entrepreneurship? To put it differently, the above argument seems to imply that entrepreneurs are pledging their lives on a random gamble? That cannot be right. For example, 7 of the top 10 richest individuals are self made men who built their fortunes in their own lifetime. That couldn’t have come by making random choices! However, in this case, the successful entrepreneurs may have tackled the uncertainty in their environment by simply controlling and manipulating it. That is one way of working around the problem. But in this blog, I am interested in that stage when the entrepreneur is actually gauging whether to stake his future and go on his own.
The mentality at this stage is very different from the mindset of writing a business plan. Business plans require believable projections and models with convincing assumptions. These formal approaches just lend a measure of discipline to your efforts and in my opinion, all the sophisticated business analytics in the world helps to better approximate the probability distribution confronting the decision maker. However, when one actually sits down and contemplates the costs of becoming an entrepreneur, then the probabilistic nature of the decision making process hits you on the face.
How does this impact decision making? Given that there is an element of probability in any significant decision, I believe that the second most important determinant of entrepreneurial success, besides the idea itself, is the ability of the entrepreneur to muster up liquidity.
Therefore, it is more important to have money to fund your mistakes, if they may occur, rather than being perfectly “right” in your business decisions. This is because, beyond a point, being “right” in business is outside your control. Here, I have assumed the individual would have done all the analysis possible.
This point is rarely ever mentioned. In today’s context, I guess one can take it as a given that if you have a good idea, you will get funding. However, in times of trouble, access to funding will become difficult and that is why I have used the word liquidity.
Extending this idea, we arrive at the following conclusions. If you are a first generation entrepreneur, besides just having an idea, you need to think deeply on how to get access to cash, especially in times of trouble.
This in turn, is a function of Institutional and Social norms. The attitude of financial institutions towards an entrepreneur is reflected in institutional norms. For example, in pre-liberalized
I admit, that at first glance, this appears to be a rather defeatist assertion. How many of the big guys thought of all this? Weren’t they driven by passion? But when I listen to all the hoopla on “that one great idea”, I become cautious and skeptical. There are thousands of ideas and there are even greater numbers of failed entrepreneurs. I would think the factor that separates the men from the boys is the ability to access liquidity.
Therefore, can people without an advantage in this respect not become entrepreneurs? Not at all!
- You can make your money in ventures that require low capital first, and once you reach a critical size, you will have all the money to gamble to scale up.
- To reach that critical size, it would help to start with an idea, where the profit is high and source of uncertainty is low. How does one do that? I don’t know… maybe an idea that alters the environment itself!
(P.S: Happy New Year!
My New Year Resolution: Blog more regularly!)
(P.S: Happy New Year!