Some initial thoughts on entrepreneurship, business, wealth and innovation.

Recently, I’ve been teaching a subject at AFTRS on Entrepreneurial Finance. This has been a useful exercise in exploring ideas about what an entrepreneur is and who identifies as an entrepreneur. Before I outline a few ideas which have sprung from that class, I must thank my seven students who have been willing to be dragged in a new direction, as I moved the subject from being purely accounting based, to include looking at stories of entrepreneurship, to thinking about types of finance available and to pitching for finance.  Their contributions have been insightful and informative.

In this subject, we have talked about entrepreneurship, but we’ve also been lucky enough to talk to four creative industries entrepreneurs about their careers and about what they do. This has resulted in an ongoing discussion about the personal attributes of entrepreneurs, such as risk-taking, passion, vision and perseverance. We have been hearing about the relationships between entrepreneurship and other social constructs, which seem to share the same space, like overlapping segments of a Venn diagram.

So, this post is a quick summary of a few thoughts about the interdependent relationships which entrepreneurship has with business, wealth and innovation. The blog equivalent of scribbled reminders on post-it notes.

Entrepreneurship and business

As part of Entrepreneurial Finance, I interviewed a film producer with a string of prominent feature credits to her name. Parallel to a successful producing career, she has also established, grew and sold a film related company. But when asked if she identified as an entrepreneur, she said no because in her view, to be an entrepreneur, you have to be in business.

The job of a film producer seems to me to be all business. It involves a range of tasks which are inherently entrepreneurial: raising finance, negotiating with talent, striking distribution deals and so on. Yet for my interviewee, this storm of production duties required to get a film made doesn’t feel like being in business. Business is not just busy-ness, but doing and something that looks and feels like a permanent, ongoing profit-making activity.

Are entrepreneurship and running a business essential companions? For me, the answer is no. I see entrepreneurship, and the ability to be entrepreneurial, active in a whole range of fields: in the arts, in not-for-profit organisations, in social enterprise. These are fields which may or may not be “in business.” Fields in which the participants (like this film producer) may not identify as being “in business.”

It seems to me like “entrepreneur” and “business person” are different roles. Like the person who has run a service station for thirty years, you can run a business without being an entrepreneur. Like someone who renovates and sells houses for profit, you can be an entrepreneur but not have a business. But there’s a set of implications about being in business – being self-directed, generating profit, financial risk taking, growing a company over time – which seems to sit comfortably alongside business as complementary ideas. They just seem like they go together, but they can and do exist separately.

(I’m grateful to my supervisor Kate Bowles for finding that term entrepreneur has its origins in 19th century France as “the manager or promoter of a theatre production.” Who’d have thought we’d have the creative industries to thank for the term?)

Entrepreneurship and wealth

Over on Radio National’s Big Ideas program, the Class Act podcast has detailed issues about Australia’s class system – insisting on its existence, detailing its complexity and talking about its effect on people and on. In its second episode, ANU’s Frank Bongiorno talks about the image of Australian entrepreneurs that developed in the 1980s. (Relevant section starts at 19 min 26 sec)

Australia became more unequal in the 1980s. Indeed, it was becoming more unequal from the 1970s, with the end of the long post war boom. And many of the long standing economic opportunities that existed within Australia, within industry and manufacturing, within the farm sector were closing off. During the 1980s, as Australia de-industrialised, as farm incomes and the farm economy came under increasing pressure, unemployment was very high, persistently high, much higher than today right through to the 1980s. Home ownership was declining and so, in many ways, that old image of Australia as a workers’ paradise or a working man’s paradise which goes right back to the 19th century… seems to be belied by the ways Australia was being transformed in the 1980s.

And so, you have the emergence of the figure of the entrepreneur, a term which was used in a non-pejorative way for most of the 1980s and then became more pejorative with the corporate collapses of the late 80s/early 90s and the recession. But you had this image really of the entrepreneur as a kind of public benefactor a public hero. Figures such as Alan Bond, for instance, or Robert Holmes à Court, Christopher Skase and they were held up as people to be emulated. The great irony of this, of course, is that it was a period of Labor government and, in many ways, the Hawke government and Paul Keating as treasurer held up these entrepreneurs as models to be emulated. They were new money as distinct from old money. They had a bit of “get up and go” about them. And, in many ways, a different kind of mass in popular culture where such figures, for the first time really in Australian history, I think, are being held up as real heroes. Their conspicuous consumption, their lavish lifestyles, were seen as admirable, because somehow or other we were able to share in them.

It is interesting to consider how our image of the entrepreneur in early 21st century Australia has changed since the time Bongiorno describes. Certainly, I think they are still held up as figures for emulation. We still think they have that bit of “get up and go” and that’s to be admired. But I think the connection to ostentatious displays of wealth is not so strong. The pervading image of an entrepreneur is much more likely to be of startup owners, app developers and hipsters in incubators. Their values seem to be presented as hard work, self-direction and innovation. Their wealth is mostly invisible and mostly presented, I’d suggest, as existing only as a future possibility.

We seem to have extended the definition of entrepreneur beyond the stratified giants of the AFR Rich List. But we’ve retained the idea of heroism and of an entrepreneur’s story being the highs, lows and ultimate triumph of the classic hero’s narrative.

One further thought: linking entrepreneurship and the drive to grow personal wealth is a challenge to the use of the term in the creative industries, where many activities are pursued without the desire to create wealth (in some cases, without the potential to create wealth). As noted previously, there’s a profit/not-for-profit divide within the creative industries and personal wealth creation sits on one side of it. Further, in the field of social entrepreneurship, I suspect it is absent entirely. It’s another example of how the concepts of wealth and entrepreneurship are drifting further apart from each other, through our wider definition of who an entrepreneur is.

Entrepreneurship and innovation

An ongoing conversation in Entrepreneurial Finance was around the role of innovation in entrepreneurship. One of my students, Daniel Punton, works in the startup space and saw innovation as fundamental; to be an entrepreneur, you must be creating something new. My discussion with Daniel and the rest of the class followed the stories told by our guest speakers, but also sprang from this definition of entrepreneurship from Howard Stephenson of Harvard Business School: “entrepreneurship is the pursuit of opportunity beyond resources controlled.” This definition, which doesn’t mention innovation, business or wealth, allows a wide range of activities to be classified as entrepreneurship.

But here’s another definition from Scott Shane and S. Venkataraman: “Entrepreneurship, as a field of business, seeks to understand how opportunities to create something new (e.g., new products or services, new markets, new production processes or raw materials, new ways of organizing existing technologies) arise and are discovered or created by specific individuals, who then use various means to exploit or develop them, thus producing a wide range of effects.” It mentions the word new five times, so they must really mean it.

For these researchers, newness can be explored in lots of different ways (it need not, for example, be a new product) but it is essential to entrepreneurship as a process. But how new is new? To take our aforementioned service station owner as an example, his business is not, a new idea. But the personal challenge of starting a business, the need to raise resources and to execute a strategy, may be a new opportunity for him/her. And if a service station in a new (geographic) market, for instance, could fit within Shane and Venkataraman’s definition, and certainly within Stephenson’s.

If we’re looking for a set formula for entrepreneurship, I don’t think we’ll find one. And, to speculate for a moment, the lack of a clear-cut definition seems to allow personal bias to influence perceptions of what entrepreneurship is. Viewed in this way, the extent to which any one aspect of entrepreneurship (newness, risk-taking, profit-making) is seen as essential, would be subjective, depending on each individual’s personal values. You might think of innovation as being essential to entrepreneurship, if you value innovation highly, and so forth. This allows Stephenson, Shane, Venkataraman and Punton to all be correct – but signals (another) a difficult definitional journey ahead.

Australian Broadcasting Corporation (2018). Part 2: How we got here. [podcast] Class Act. Available at: http://www.abc.net.au/radionational/projects/class-act/ [Accessed 20 May 2018].
Baron, R. and S. Shane (2007). Entrepreneurship: A Process Perspective, Cengage Learning.
Eisenmann, T. (2013). Entrepreneurship: A Working Definition, HBR.org, available at: https://hbr.org/2013/01/what-is-entrepreneurship [Accessed 20 May 2018].
Shane, S., & Venkataraman, S. (2000). The Promise of Entrepreneurship as a Field of Research. The Academy of Management Review, 25(1), 217-226. Retrieved from http://www.jstor.org/stable/259271

 

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What made the creative industries different then, may not be so potent now.

Management consultants tend to come in two types; generalists and industry specialists. I’m the second type. If I was of the first type, I might tell you (as many have told me) that all businesses are essentially the same – you can consult as effectively to a chair maker as you would to an international arms dealer, because all businesses boil down to the creation of profit via a production process of some kind.

I have always maintained that creative industries businesses are different (well, I would, wouldn’t I? I’m an industry specialist). My point is that a creative work constructs value in a very different way. The profit generated by a chair can be traced through the cumulative addition of each of its components, up to completion when it can be sold for an amount which covers the cost of its production and then some. The profit created by, say, a hit song, is a dependent on a far more complicated formula, with many more unpredictable variables.

Richard E. Caves’ (dauntingly brainy but still pleasingly readable) book Creative Industries: Contracts between Art & Commerce starts with tackling this issue of what makes the creative industries different from all the other industries. He takes an economist’s view of this question, dispassionately considering the sellers and buyers of creative transactions and assuming the perfectly rational decision-making process which underlies economic theory. He lists 7 basic economic properties of creative industries, which, I think, describe the unique combination of complexities which influence the production of creative work.

Caves’ basic economic properties of creative industries

Name of property Summary Detail
Nobody Knows Demand is uncertain. It is almost impossible to tell how a creative product will be valued until it is completed, and by then the costs of producing the good have already been met.
Art for Art’s Sake Creative workers care about their product. Creatives are not indifferent to the traits and features of their work. Instead, they are deeply invested in aspects such as originality, technical prowess, resolution and harmony. In short, artistic achievement.
Motley crew Some creative products require diverse skills. A creative work such as a film requires the cooperation of many different collaborators. But unlike some other collaborative endeavours, a creative work is more than just the sum of the efforts of each part of a production line. It has a “multiplicative production function”, where each input must be present and “do its job – if any commercially valuable output is to result.”
Infinite variety Differentiated products. Creative work can be simultaneously vertically differentiated (a buyer will choose between two similar products on perceived quality) and horizontally differentiated (a buyer will choose between two similar products on personal taste). And the array of choice an artist has in producing a work, and the array of creative products a buyer can choose from, making this variety infinite.
A list/B list Vertically differentiated skills. Creative producers are ranked based on quality, reputation and so on – creating a hierarchy of artists.
Time flies Time is of the essence Maximising profitability of a creative product is dependent on it being finished by a certain date.
Ars longa Durable products and durable rents Creative work can continue to generate revenue after its initial production with no additional inputs, through the exploitation of copyright.

 

I can’t recall seeing these characteristics of the creative economy expressed so clearly. I can add one more:

Name of property Summary Detail
Inspiration knows no timetable How long it will take to come up with a creative concept is unknown. Unlike other industries, where the time taken to produce a good can be accurately predicted, creative concepts can emerge quickly or slowly, and you can’t tell which it will be. This matters because the creative concept is often the component of a creative work which consumers value most and increases profitability – but it’s the part of the process which is the least predictable.

 

Meanwhile, I have been prompted by my tutorial class of Management Consulting students to think about startups and their relationship to entrepreneurship. They have been asking about the threat which start-ups might present to bigger, more established companies, and the predilection of some multi-national corporations to acquiring start-ups. I suspect that this conversation, as with so many on this topic, is actually defining “start-ups” as newly established tech companies. It’s that subset of companies which we, as a society, seem particularly enamoured of.

That particular definition, personified in sneaker wearing, tablet wielding, young tech nerds, successfully raising capital to accelerate their SAAS product’s growth, has become an early 21st century archetype. That archetype is a kind of start-up rock star; the version of an entrepreneur where everything has gone right. I worry that the far more common experience of tech start-ups – the long, lonely slog with no money, no angel investors and time rapidly running out before they need to go get a job – is rarely talked about. If there’s a rerun of the 1990s dot com crash, this time starring exhausted start-ups which never accelerated beyond a brief canter, and with investors looking for their money back – what will this do to our current idolisation of entrepreneurship?

But putting that aside, it struck me that when Caves was writing about his economic properties of creative industries, it was in the immediate shadow of that dot com crash. Caves sought – as I have done – to differentiate the creative industries from the non-creative industries, and in 2000 he could clearly do that.

Would it be so easy now? Because if we consider the new breed of tech industry startups, typically pushing an online software product, across multiple platforms but addressing distinct, almost niche, customer needs… don’t all Caves’ properties apply to them? Is it possible that the distinction between creative industries and non-creative industries (the definition of creative industries, as I’ve been describing it) is actually getting harder over time?

If so, the reason why may be that today’s emerging industries look and feel more like creative industries than traditional industries; that the promising, rock star tech industries which we all have such a crush on, actually operate more like creative industries than anything else. In which case, studying what makes creative industries tick may have much wider future use and significance.

Caves, Richard E. Creative Industries: Contracts between Art & Commerce, Cambridge, Mass.: Harvard University Press, 2000.

Decisions, visions, brain functions and storytelling

Recently, I’ve become interested in decision making. My job is frequently about helping people make decisions which impact their businesses and their lives. It’s also about selling services, which requires some clue about how and why people make purchasing decisions. And these professional interests in decision making, and underscored by the constant stream of decisions contemplated every day, both large and small. What shirt will I wear? What car should I buy? Where should my kids go to school?

With all this bouncing around my prefrontal cortex, I’ve found much insight in Jonah Lehrer’s book How We Decide. It’s about what happens in our brains when we’re making decisions, the roles played by rationality and instinct. It’s also about which parts of our brains are used when making these decisions. As you’d expect for a popular science book, narrative accounts play an important role in bringing the various examples of decision making to life. When you’re kicking around terms like ‘stochasticity’, ‘posterior cingulate’ and ‘dopamine receptors’, it helps if you can relate it to stories about football matches and Deal or no Deal.

There’s a couple of stories about mid-flight incidents on board passenger jets, a topic which can always be relied upon to raise the heart rate. One is about a United Airlines flight from Denver to Chicago, which was interrupted by an internal explosion which took out all the hydraulics, leaving the pilots without the ability to steer the plan. The story is about decision making under pressure, and the ability to invent a tactic for landing the plane on the run.

“…[the pilot] needed to solve his problem, to invent a completely new method of flight control. This is where the prefrontal cortex really demonstrates its unique strengths. It’s the only brain region able to take an abstract principle – in this case, the physics of engine thrust – and apply it in an unfamiliar context to come up with an entirely original solution. It’s what allowed [the Pilot] to logically analyse the situation, to imagine his engines straightening [the plane’s] steep bank.”

This last phrase, about imagining an end result and creating a process to achieve that result, caught my eye. This is, I think, what many creatives do. They imagine the end result and corral the resources (time, capital, labour etc) to bring about that vision. Some will be able to design prototypes to communicate that vision to others in the production process; a fashion designer will do so through sketches and patterns. Others will have to do so without visual tools; a screenwriter has to imagine what a film will look like and sell that vision to others, long before a frame is shot.

Entrepreneurs do this too. They have to imagine a version of their business which fulfils what they want from it: money, lifestyle or whatever it is that sparks their motivation for being in business. They have to imagine the end result and ‘see’ it long before others can. Then they invent a way to achieve it. And ‘invent’ is really the right word because although they can follow the steps others have taken in the past, each business’s journey is unique, with its own ups and downs.

The Pilot’s story is about the suppression of emotion (in this case, panic) to focus on rationality.( It’s not always like this though; the book also highlights decision making which is enhanced by instinct and emotion). But it’s also about the ability to screen out all unnecessary information in order to concentrate on the crucial data. For example, the Pilot had no time to focus on the hydraulics – they were gone and never coming back. He had to focus on the elements he could control – in this case engine speed –and block out the rest.

Again, there’s something in this for entrepreneurs. I met this week with a fellow who runs a creative industries business and he told me that his company now focuses less on small, labour intensive jobs and more on larger scale jobs for corporate clients, on which he can spread his resources more evenly. Such is the dream of many a small business owner, so I asked him how he achieved it.

He didn’t really know how; there had been no deliberate strategy, other than to adopt a vision for his company which involved work with large corporate clients. He was inspired to do so by a presentation by a Hindu priest he met at a bank’s innovation conference (I know, right?). The priest talked about balancing a peacock feather on your finger. If you look at your finger, apparently it’s really hard to balance the feather. But look at the top of the feather, and it’s much easier. (Peacocks are hard to come by at my place, so I have yet to try this for myself.)

Choose the metaphor you like – looking at the top of the feather, forgetting about the plane’s hydraulics – the point is that focus on an end goal and screening out distractions count for something. And that there’s nothing like telling a good story to illustrate abstract concepts.

PS. Talking of good stories..While adding some links to this article, I discovered that How We Decide has been withdrawn from sale by its publisher. The story’s here.

Ref: Lehreh, J. 2009, How We Decide. Houghton Mifflin Harcourt, New York.

 

Decision making and electing entrepreneurs

In preparation for something else entirely, I have been reading up on decision making. Through that, I’ve come across numerous references to Thinking Fast and Slow by Daniel Kahneman, and the theory discussed within of two cognitive systems employed in decision making.

System 1 is fast, automatic, frequent, emotional, stereotypic, subconscious. It’s the gut feel. System 2 is slow, effortful, infrequent, logical, calculating, conscious. It’s the long hard look. System 1, so the theory goes, is pervasive. Even if you’re deliberately trying to employ System 2 you naturally fall back on System 1.So gut feel governs our decisions far more than we may realise.

I can’t help but consider how this theory applies to the results of the recent US election. Perhaps one of the factors in the Trump campaign’s success was its understanding of the importance of the gut feel and its blitzkrieg communication style, concentrating on emotions, stereotypes and subconscious fears.

Understanding decision making must surely be crucial to understanding entrepreneurship. What is entrepreneurship if not a series of decisions concerning the creation and growth of a business? There are initial decisions to pursue a set of goals, despite the inherent risks. And subsequent decisions about strategies to attain those goals, making smart use of existing resources. Linked together, those decisions form an entrepreneurial chain.

This article here details the similarities between entrepreneurship and moral decision making. It argues that the two share a common set of ingredients: imagination, creativity, novelty, and sensitivity.

The entrepreneur creates something new in society, something novel, that meets a need that is latent in consumers. Successful entrepreneurs have to be attuned to the needs and desires of those who constitute potential markets for their products and services. The entrepreneur has to have imagination in abundance to envision a new product or service and bring it to market. The product entrepreneurs introduce into society is new and its impact on humans and the environment is unknown. It takes imagination to envision the possible impacts a new product may make and develop novel and creative solutions to potential problems that may arise. …these same qualities are crucial for moral decision making, and the issue of moral decision making is critical for entrepreneurship.

I think what this description of entrepreneurship lacks is the element of self-interest. Entrepreneurial decisions might be about a lot of things, but at their core, they are surely about improving the lot of the entrepreneur in question (or at the very least, not damaging that position). Moral decision making does not necessarily need this element; in fact self-interest work against a moral decision making framework.

Not that self-interest is bad. It might be a crucial element which counteracts the level of risk involved in being an entrepreneur. So self-interest might be an essential element of entrepreneurship, and perhaps it permeates all entrepreneurial decisions, in the same gut feel way of System 1.

A bit later in the same article, there’s a small section which brings us back, in a funny way, to President-Elect Trump.

In a society that promotes entrepreneurship, change and newness are highly valued and elevated. Such a society will encourage the desire for new things and a willingness to replace old things. Everything in an entrepreneurial society is open to change and modification, to replacement through various entrepreneurial experiments.

In Trump’s rise, and that of Prime Minister Malcolm Turnbull, we see entrepreneurship communicated as a virtue; that an entrepreneur is a well qualified person to assume high political office. They are seen, I suppose, as people who have made personal decisions which have served them well, and presumably as people who can repeat that trick for their respective nations. This is one of the results of the idolisation of business success, that change and newness are highly valued and elevated. In a society where entrepreneurs are hero worshipped, is it surprising that we choose leaders who embody that breed’s particular strain of change and newness?

And if we have prioritised entrepreneurship over an ability to make decisions within a robust moral framework, let’s hope the two really do have some things in common.

Ref: Buchholz, R.A. & Rosenthal, S.B. 2005, “The Spirit of Entrepreneurship and the Qualities of Moral Decision Making: Toward A Unifying Framework”, Journal of Business Ethics, vol. 60, no. 3, pp. 307-315.