There can’t be more than 100 pages of guff in this book. The other 275 pages make worthwhile reading.
This book doesn’t necessarily succeed in proving anything about the nature of entrepreneurs. But while it fails in this respect, it is packed full of very interesting examples of how start-ups get off the ground and the evolution of businesses like Starbucks, McKinsey and Walmart.
The book also contains some enlightening original research. BhidT crisscrossed the US interviewing some 100 entrepreneurs who had set up businesses in the late 1980s that had made it into the INC Magazine 500. Of those he met, a quarter tried to raise venture capital funding and failed and a quarter began solely with personal savings of less than $5000.
Most of those he met had set up businesses that were not unique. They differentiated their firms purely on the quality of their service. Only 6% had a unique product or service that was not already being served by existing firms.
Obviously any book looking at entrepreneurs will not be able to avoid heavy analysis of the type of person an entrepreneur is. So the book has a fair bit of behavioral analysis.
One experiment he quotes which I found particularly interesting involves ambiguity-aversion. Imagine two urns. Both contain red and black balls, but there is one where you know there are 50 red and 50 black and one where the distribution is unknown. You are told you will get $1 for every red ball you pick, and you are also offered an option of buying from the 50/50 urn. How much do you pay to pick from that urn?
In extensive experiments in the US it was discovered that, on average, people paid 36 cents for this option. In other words, the person would surrender 72% of the 50 cent expected value of the draw, just to avoid the ambiguity of picking from an urn where they didn’t know the probability.
Obviously, the rational response would be not to exceed 25 cents.
This led me to wonder. If this experiment was done in China, or India, would you get a very different response? Closer to 25 cents possibly? Is there a cultural element that governs entrepreneurial behaviour? I suspect there is.
Obviously, entrepreneurs do not conform to "normal" behavioral types, and are more open to ambiguity. They are often excessively egotistical and willing to take risks beyond that of the norm – often because of their sometimes irrational belief in their own personal abilities.
His chapter on venture capitalists cites some interesting numbers. He quotes a study that shows that 60% of VC profits come from only 7% of their investments. He also points out that in 1988, IBM spent three times as much on capital outlays and R&D as the amounts disbursed by all professional VCs that year.
One of the highlights of the book is the chapter devoted to Frederick Smith and his attempts to launch Federal Express at the age of 28. Did you know Fedex would have collapsed in 1973 if Smith had not forged a signature? "Apparently, because relations with his half-sisters had become so strained," writes BhidT, "Smith did not want to ask them to authorize a further Enterprise investment [the family holding company]."
Instead, he submitted a fabricated copy of a resolution of the Enterprise board to the Union Bank in Little Rock to obtain a $2 million loan. Smith forged the signature of the board secretary, Robert Cox, on the resolution. Later, when the forgery came to light, Smith would face serious legal consequences. As Sigafoos argues, "There can be no doubt that without the Union Bank loan, Federal Express would have collapsed."
In fact, when the case went before a court two years later, Smith was acquitted of fraud and forgery – although the jury took 10 hours to reach its verdict. It was in the same year that Fedex made its first monthly profit, four years after its establishment.
This book has enough anecdotes in it to override any disdain you might have for overly-theoretical books. It deals exclusively with America, however.
As a final point, BhidT also quotes extensively from A Cautionary Tale About Discounted Cashflow Analysis by William Sahlman. This sounds like an exceptional book, and I am quite keen to get hold of it. BhidT quotes a mouthwatering example where Sahlman looks at a food company that has a mean cost of capital of 15%. Sahlman demonstrates that there is a 50% chance that the true discount rate could be less than 12.6% or greater than 17.4%. This means that the mean estimated present value of $137 million, could be less than $73 million or more than $192 million. This assumes perfect knowledge of cashflows. If you add "mild" uncertainty, says Sahlman, that leads to a 50% chance that the true present value could be less than $28 million or greater than $226 million (versus the mean estimate of $137 million).
Is nothing certain in this world?
Reviewed by Steven Irvine
Rating: 3 stars
