Where Einstein Meets Edison

Do You Have the Right Stuff? The Five Labors of the Entrepreneur.

Do You Have the Right Stuff?  The Five Labors of the Entrepreneur.

Dec 30, 2010

Researchers have developed different – sometimes conflicting – perspectives on entrepreneurship. However, beyond the debates opposing various academic schools of thoughts, many deep insights have been developed over time.  These insights have shown that entrepreneurship is precisely not an option like many others. Here is why.

Linking

“Entrepreneur” is originally a loanword from the French and is composed of the words “entre” meaning between and “preneur” which means taker. As its etymology indicates, linking is a crucial activity in entrepreneurship. The French economist Jean-Baptiste Say (1767-1832) described entrepreneurs as coordinators e.g. as “the center of many bearing relations” (Barreto 1989). For him, not only do entrepreneurs link consumers and suppliers, but they also link different classes of producers together. For instance, today’s MIT spin-offs typically bring together individuals from particular scientific labs (often more than one lab to profit from complementary skills and networks), with legal institutions (patent lawyers), funding organizations (such as venture capitalists or business angels) and reach out to potential customers or technology licensors. Socializing and being introduced is therefore an important – often under-estimated – source of success.

This situation as “the center of many bearing relations” can be difficult to create. However, once built, this position of bridge or broker can be a powerful source of economic rents (Burt 1992). Indeed, this position leads to access to both information and control benefits as unique link between otherwise disconnected others.  The typical example is the real-estate agent who can charge for bringing together buyers and sellers who otherwise would not easily hear about each other. In the high-tech world, this is exactly the business model of E-bay or Amazon.com.

Uncertainty-Bearing

Another French economist (this time with Irish roots), Richard Cantillon (1680-1734), argued that entrepreneurs perform the crucial economic function of buying input without having a clear idea of the demand for the good that they are offering. The key here is not as much the fact of linking two disconnected others (sellers of input and buyers of output) but to support the uncertainty associated with this bridging activity – therefore enabling the development of a market system. The idea was later refined by Frank Knight who argued that entrepreneurs do not only take risk (which would be measurable statistically) but face what Knight calls uncertainty: unquantifiable, unpredictable probability of success or failure (Knight 1921). 

More recently, researchers such as Amar Bhidé (Bhide et al. 2000) or Michael Cusumano (Yoffie and Cusumano 1999) developed the idea of a sharing of the tasks in the economy. While large firms specialize in initiatives requiring large investments and involving little uncertainty, entrepreneurs evolve in a world of high uncertainty and the investments they make are relatively small.  As a result, much agility or opportunistic adaptation is necessary for entrepreneurial success.

Farseeing

Starting with the observation that information is not equally distributed in society (Hayek 1948), the Austrian school of economics has developed the idea that entrepreneurs are visionaries. The first users of the internet were also the first to start internet start-ups. People who see entrepreneurial opportunities in a given sector are a very particular subset of the population (I. M Kirzner 1973). Researchers usually think of them as individuals with the right professional background (Scott Shane 2000) or the right social network (Sorenson and Audia 2000) or even as user-innovators (Von Hippel 1988). Because of their very particular background, relationships and/or activity, these individuals have the right information at the right time and can therefore see entrepreneurial opportunities where others cannot.

Having access to the right information is however not always enough in order to discover entrepreneurial opportunities. Cognitive properties matter too (S. Shane and Venkataraman 2000).  Israel Kirzner described entrepreneurs as “routine-resistant” market participants (Israel M. Kirzner 1997). It is not enough to have the right information; one also has to think creatively to see an opportunity. David Sarnoff from RCA was the first to understand that the radio technology – which had been developed more than 20 years earlier by Marconi – could be used as a mass communication device. An executive from Postal Telegraph famously noted: “we were telegraph men, and we did not think about alternative methods of communication” (Rosenberg 1994).

Innovating

Another Austrian man, Joseph Alois Schumpeter, played a key role in developing the idea of entrepreneurs as innovators (Schumpeter and Backhaus 1912). Schumpeter – especially in his early work – described the entrepreneur as a hero, actively engage in challenging the current equilibrium and leading toward economic progress through newness and destruction.  While Schumpeter describes the process of creative destruction as “the essential fact about capitalism” (Schumpeter 1942), the entrepreneur plays a key role in this process (see our article “Are entrepreneurs the source of economic crises?”).

This Schumpeterian approach to entrepreneurship has been later refined by innovation researchers.  Prof Jim Utterback from MIT Sloan for instance developed a model of industry life-cycles in which entrepreneurs play a key role in the early days of the industry: they come up with all sorts of competing technological designs in order to meet the same market demand. At some point however, the entrepreneurial era of the new industry is over when a “dominant technological design” is established. Industries are hereafter dominated by a few large players who can benefit from economies of scope and scale related to process-level innovations (Abernathy and Utterback 1978; Utterback 1996). More recently, the Schumpeterian approach to entrepreneurship was developed by another MIT Sloan professor: Scott Stern. Building on Rosenberg’s idea of economic experimentation (Rosenberg 1994), Prof Stern proposes a model of the entrepreneur as economic experimenter, trying new technologies, new markets and new organizations forms and therefore driving economic growth in society (Stern 2006).
 

Convincing

A more recent approach on entrepreneurship has focused on the idea that entrepreneurs are constantly trying to legitimize their venture. This work too is believed to be a major determinant of success. Ensuring credibility is crucial in entrepreneurship because partnering organization such as venture capitalist, business angels but also often collaborators, suppliers and customers are typically taking a risk when doing business with a company which might disappear overnight. Researchers have for instance noted that prominent scientists were the first to spin-off firms from their academic research (Stuart and Ding 2006). They have also found that entrepreneurs stemming from more prestigious organizations can raise more VC money and take higher technological risk (Burton, Sørensen, and Beckman).

Put simply, many might have had the idea of “Project Better Place” but few would have been able to get so many governments (Israel, Denmark, California, etc.), manufacturers (Renault-Nissan)  and investors (HSBC, Morgan Stanley) to get on board other than a man previously as successful (in entrepreneurship and in the corporate world) as Shai Agassi. Researchers have distinguished several strategies for entrepreneurs to convince including the use of stories and signals (Santos and Eisenhardt 2006) at the level of the technology, the law, the regulatory institutions and the market (Kaplan and Murray 2008).

Completing successfully these “five labors” seems hardly possible for a sole individual. High-growth start-ups are typically not the result of the work of a sole entrepreneur, but more often the result of a collective effort (Ruef and Lounsbury 2007). In fact, larger entrepreneurial teams are typically more successful in technology-based entrepreneurship (Roberts 1991).  Keeping these five labors in mind might be a smart idea when putting together your next entrepreneurial team.

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References
Abernathy, W. J, and J. M Utterback. 1978. Patterns of industrial innovation. Technology review 80, no. 7: 40–47.

Barreto, H. 1989. The entrepreneur in microeconomic theory: Disappearance and explanation. Routledge Kegan & Paul.

Bhide, A., Graduate School of Business Administration, Division of Research, and Harvard University. 2000. The origin and evolution of new businesses. Oxford University Press New York.

Burt, R. S. 1992. Structural holes. Cambridge, MA.

Burton, M. D., J. B. Sørensen, and C. M. Beckman. Coming from Good Stock: Career Histories and New Venture Formation.

Hayek, F. A. 1948. The Use of Knowledge in Society"(1945). Individualism and Economic Order: 77–91.

Kaplan, S., and F. Murray. 2008. Entrepreneurship and the Construction of Value in Biotechnology.

Kirzner, I. M. 1973. Competition and entrepreneurship. University of Chicago Press.

Kirzner, Israel M. 1997. Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach. Journal of Economic Literature 35, no. 1 (March): 60-85.

Knight, F. H. 1921. Risk, uncertainty and profit. Washington, DC.

Roberts, E. B. 1991. Entrepreneurs in high technology: Lessons from MIT and beyond. Oxford University Press New York.

Rosenberg, Nathan. 1994. Exploring the black box: Technology, economics, and history. Cambridge Univ Pr.

Ruef, M., and M. Lounsbury. 2007. Introduction: The sociology of entrepreneurship.

Santos, F. M., and K. M. Eisenhardt. 2006. Constructing Markets and Shaping Boundaries: A Model of Entrepreneurial Action in Nascent Fields. Working Paper. Google Scholar.

Schumpeter, J., and U. Backhaus. 1912. The theory of economic development. Joseph Alois Schumpeter: 61–116.

Schumpeter, J. A. 1942. Capitalism, Socialism and Democracy.

Shane, S., and S. Venkataraman. 2000. The promise of entrepreneurship as a field of research. Academy of Management Review 25, no. 1: 217-226.

Shane, Scott. 2000. Prior Knowledge and the Discovery of Entrepreneurial Opportunities. Organization Science 11, no. 4 (August): 448-469. doi:10.2307/2640414.

Sorenson, Olav, and Pino G. Audia. 2000. The Social Structure of Entrepreneurial Activity: Geographic Concentration of Footwear Production in the United States, 1940-1989. The American Journal of Sociology 106, no. 2 (September): 424-461. doi:10.2307/3081182.

Stern, S. 2006. Economic experiments: The role of entrepreneurship in economic prosperity. Melbourne Review: A Journal of Business and Public Policy, The 2, no. 2: 53.

Stuart, T. E., and W. W. Ding. 2006. When Do Scientists Become Entrepreneurs? The Social Structural Antecedents of Commercial Activity in the Academic Life Sciences. American Journal of Sociology 112, no. 1 (July): 97-144. doi:10.1086/502691.

Utterback, J. M. 1996. Mastering the dynamics of innovation. Harvard Business School Press.

Von Hippel, E. 1988. The sources of innovation. Oxford University Press New York.

Yoffie, David B., and Michael A. Cusumano. 1999. JUDO STRATEGY. Harvard Business Review 77, no. 1 (January): 70-81. doi:Article.

 

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