Most controversies would soon be ended, if those engaged in them would first accurately define their terms, and then adhere to their definitions.
—Tryon Edwards
We use certain words every day. Those words have meanings and implications that affect the way we think about others and ourselves and about the present and the future. The way we define and use words can empower or undermine the way we think and act, especially the way we visualize what is possible or desirable. We must take care to understand what we really mean as we talk to others—and even to ourselves—about our ideas and plans. As Frank Luntz says in the subtitle of his book Words That Work, “It’s not what you say, it’s what people hear.”
This is painfully true when talking to others, but it’s even more so when we talk to ourselves. It’s critical that we hear ourselves correctly. To do this and to make starting out a little smoother, let’s take the time to get into the right mindset and set expectations for a few fundamental definitions.
Whether you are thinking about starting a for-profit commercial venture, starting a nonprofit social enterprise, or just doing something new and innovative within an existing organization, if you are thinking about executing an idea and making something happen, you are thinking about business. If you are not in business now and want an entry into this executor’s world, it’s wise to think a little about its nature. What is it like to be in this world? What are its defining characteristics? Is it like the world you are in now? The last question is particularly important to think about before going anywhere. If you don’t, you might be in for culture shock. The rules of engagement in the public sector or academia, for example, are very different from those in the business world.
What exactly is business? There is no one definition, of course, but Walter Bennis and James O’Toole of Harvard Business School used an interesting phrase in a 2005 article about business school education, of all things. They defined business as “essentially a human activity in which judgments are made with messy, incomplete, and incoherent data.”1 In that short phrase they named three hugely important concepts that are at the heart of what it means to function in business:
1. Judgments. Business is seldom rigidly deterministic. Yes, there are rules, models, analytics, procedures, and data that can help point you in the right direction, but in the end judgment always is needed. This is often the last thing people stop to think about.2 The Oxford English Dictionary defines judgment as “the ability to form an opinion; discernment, discretion, wisdom, discretion, good sense; the action of mentally apprehending the relation between two objects of thought; prediction as an act of the mind.” There are few serious decisions in business that don’t require judgment far more than data and analytics. Judgment requires weighing options, considering the future, making intelligent guesses about probabilities, and, most of all, considering unintended consequences. For every identified consequence, there are also the things that didn’t happen or that aren’t obvious, and those things are often vitally important. Good judgment lets you see what is not seen.3 Whether it’s a dire unintended consequence or a great opportunity that is overlooked, judgment in business often is most valuable when you see what is not seen.
People generally want things to be simple and formulaic: “If x, then do y.” Business doesn’t work this way, especially entrepreneurial business. There isn’t always a process to follow. Gregg remembers from his Samson days the time a new hire from one of the top schools in the country, six months into her job, came into his office in tears. She said she couldn’t function in Samson’s environment. When asked why, she blurted out, “There’s no procedure!” (Gregg couldn’t help responding, “We don’t have procedures here; we just have problems.”)
2. Messy, incomplete, and incoherent data. Few decisions in life are ever black and white. Data is seldom conclusive. And data is not answers. In the world in which businesspeople live, data is often incomplete and never better than the questions used to generate it or the methods used to collect it. Framing the right questions is the most important step in getting meaningful answers. Defined, relevant, researched questions help you gather data that may lead to an answer. But even when the data are clear and conclusive—which isn’t often—simple answers are rare. Sadly, most people seldom pause to ask, “What do we really mean by the terms we’re using?” and “What is it we are really asking here?” As a result, they frame questions poorly and seek the wrong information. In the end, good decisions come from good judgment, and good judgment comes from experience. Asking the right questions and seeking relevant and meaningful data are the essential foundations of informed judgment.
3. Activity. All the best ideas, questions, data, and plans come to nothing without activity. Remember Howard Stevenson’s words from Chapter 1: “There are innovative thinkers who never get anything done”?4 In the end you have to do something. Only activity—execution, doing something—can create value. But how? Most people assume ready, aim, fire—think everything through, figure out a plan, perfect that plan, and then start. Although this may apply in sharpshooting, in building something from nothing you’ll never have enough information to aim. You make the best progress when you ready, fire, and then aim. It’s a matter of trial and error. This means getting out into your market, trying a new idea, iterating, and then trying again. It is sharpshooting by trial and error; you try a shot, see how close you got, adjust, and shoot again.
Nothing gets done if you sit around all day planning until you think you have it right; you’ll find yourself stuck in ready-aim-aim-aim-aim…. The most meaningful information comes from activity and execution, seeing what works and what doesn’t, not doing more research. The best entrepreneurs have a built-in impulse to action: They want to do things, and by doing things they figure out what is important along the way. Even if this is not your inclination, fake it at first. You’ll see that it works. Actually it is often the most efficient way to innovate. After a while it may even grow on you.
There is a whole field of study and an extensive literature on innovation: what it is, how to do it, and why it’s valuable. We can’t do anything here but summarize some of the key points. First, Peter Drucker defined innovation as “an economic or social, rather than a technical term … the means by which [entrepreneurs] exploit change as an opportunity for a different business or a different service.”5 Innovation fundamentally aims to create value—“new and different satisfactions”—rather than simply improve what already exists.6 Although innovation can involve new technology or a new invention, it is a broader idea: doing something better to create value. This can mean new products, new services, new business models. Table 2-1 outlines some of the differences between industry and academia.
You don’t have to be a high-tech scientist or engineer to be an innovator. Joseph Schumpeter (1883–1950), an influential economic theorist, described five different areas of entrepreneurial innovation: a new product or product quality, a new method of production or handling, opening a new market, conquest of a new raw material, and a new kind of organization.7
Table 2-1 Industry and Academia Compared
Second, certain conditions and situations foster innovation better than others do. Periods of rapid change in science and technology, politics, or culture offer many opportunities as new markets develop and new needs arise. Today university and research laboratories produce a great deal of invention and advancement. Although this might seem like a natural place for innovation, complications quickly arise. The academic and business worlds have significant differences in culture that make the transition of an idea from the research lab to business execution on the street very difficult. Researchers and businesspeople often expect different things from the process. They define value differently, and they have contrary assumptions about how the world works. They use different nomenclature and vocabulary to talk about the same concepts, causing problems in communication and understanding. Also, academics and industry people don’t work on the same timeline. People in the university often don’t have the same sense of urgency about a project as people in the industry.
Third, innovation requires application. This means that although innovation often starts with the new knowledge coming out of university research labs, someone must use that knowledge to fill a social need before it can be called innovation. To make this transition from knowledge to innovation, someone must bridge the gap between the creators and the implementers. This means a deliberate sensitivity to the different cultural assumptions and behaviors on the other side. This might seem obvious, but it’s one of the biggest stumbling blocks in turning knowledge into valuable innovation. At most universities, technology transfer offices live in this gap, as do commercialization and entrepreneurship offices such as the Dartmouth Entrepreneurial Network. Getting businesspeople and researchers to communicate and work together effectively is critical to innovation.
Because they hold a limited view of innovation or don’t know where to look for it, many entrepreneurs miss the opportunity to create significant value and impact. By embracing Schumpeter and Drucker’s expansive conception of innovation, you have a much better chance of finding the innovations that will take your idea to the next level.
It’s dangerous to think that you know something on the basis of facts when actually all you are doing is making an assumption that is based on little or nothing concrete. There is nothing more painful than having an investor call you out on something you have claimed to be true when you have nothing but your opinion to substantiate it. Entrepreneurs find themselves in this situation every day when they haven’t thought through and substantiated what they believe they know. First-time entrepreneurs often discuss library research and talk about their impressions of the market or interest in a product. Or they may argue by analogy and compare their idea to a company that was successful with something similar: “We can replicate Facebook’s viral promotion….”
When an investor balks at something—say, your description of what the customer will pay—there is nothing more powerful than to reply with hard data: surveys, focus groups, testimonials, and, best of all, a purchase order or letter of intent to buy. At that point it becomes the investor’s opinion against all those people and all that data, not against your assumptions or library research.8 Substantiation is the difference between knowing and assuming.
Thus, how you think about what you know or believe is critically important, and figuring this out is the discipline of epistemology. Epistemology is what philosophers call the discipline of determining how we know what we know. You can never know something with 100 percent certainty; everything in life is a matter of probabilities. There will always be a chance you are right and a chance you are wrong. Therefore, you should maintain a healthy skepticism about what you think you know. Demand evidence. Relentlessly convince yourself of the important points. Ask questions continuously and get the answers; then ask more questions and get more answers.
Epistemology is valuable in everything you do, from your mundane everyday decisions to the most fundamental issues in your business and even in your life. However, most of the time we are terribly sloppy about the discipline of knowing why we think something is true or valid. We may think in any situation that the reason something is true is obvious to everyone, but this is rarely the case. In fact, often what we think we know is plain wrong. Psychology researcher Thomas Gilovich of Cornell has spent a lifetime studying exactly this issue. In his book How We Know What Isn’t So, he identifies ways our minds work against us as we form conclusions about what we think we know9:
1. Misunderstanding statistical regression to the mean. If given enough time, usually a trend will return to a long-term statistical average. One outlier will tend to be offset by another; an upturn will balance out a downturn. For this reason it’s dangerous to project growth curves too far into the future. You can’t sustain rapid growth forever. As Wall Street says: Trees don’t grow to the sky. Inevitably curves will level or even reverse; outliers will return to the norm. Take care when projecting data that’s too far from known averages.
2. Failing to detect and correct for biases that result from incomplete or unrepresentative data. What is necessary for science may be needless overkill for industry. Decisions in business often suffer from inadequate, unrepresentative, and biased data. The only antidote is to consider your information carefully: where you got it, how reliable it is, and how you think about it. A good first line of defense is to talk the data over with other team members or advisors before making a decision.
3. Interpreting ambiguous and inconsistent data in light of preferences, pet theories, or a priori expectations. It’s easy to see what you want or expect to see, and since most data is messy, incomplete, and incoherent, you will always be at risk of erroneous beliefs rooted in wishful thinking and self-serving distortions of reality. The only effective defense is to be self-aware and maintain a stance of skepticism and inquiry. If it’s important enough, refer to item 2 above: At least talk things over with others less attached to the situation—team members, directors, or advisors.
4. Depending on distorted or secondhand information provided by other people or the media. In business you can’t do primary research on everything you need to know. You have to rely on publications, research, and the news. However, you can’t take everything at face value. You need to avoid relying too much on this kind of information to make important decisions. If you are careful, you often can detect and filter biases. In contrast, distortion and shoddy, secondhand information are harder to spot.
5. Thinking that others believe what we believe, that they are more like us than they really are. This is critically important in market research. You have to listen to what customers are really telling you and not let your own beliefs filter their message. Further, within your team, it’s dangerous to assume casually that others are more like you than they really are. This is a big problem in everyday work with your team, but it’s potentially fatal in forming a team.10
6. Failing to distinguish correlation from cause and effect. The big problem with thinking that one thing causes another is that you stop looking for the real cause. People want to know that when they do something, they’ll get the result they expect. Unfortunately, when they form mental rules for what causes any given what effect, they often rely on the fact that the two things appear to be correlated. Correlation means that two independent variables tend to move together; but they may not have anything to do with each other. For causation, one variable has to be both necessary and sufficient to produce the other variable’s action. Far too much bad science, bad politics, and bad business have come from failure to appreciate this fundamental principle.
The business journalist Niles Howard adds to this list of epistemology errors11:
Giving information more weight than it deserves because it was easy to get.
Confusing source reliability with predictive ability.
Having too much confidence in memory; we remember events better than statistics.
Attributing genius to winners and stupidity to losers.
Make sure you work with solid information. Nothing is more frustrating than discovering that things went wrong because you based your decisions on flawed and confounded information. Every entrepreneur must become a disciplined epistemologist.
A large subset of the entrepreneurial world, even the world of entrepreneurial education, conflates venture capital–funded projects and entrepreneurship. It declares that only start-ups with paradigm-shifting innovations that are seeking high growth rates and dominating positions in billion-dollar markets are worthwhile. Those are great opportunities for entrepreneurs to pursue, but they are hardly the only ones that can be attractive for an entrepreneur. It’s just that they are the only ones potentially worthwhile for venture capitalists. Regardless of what some might say, the fact that you aren’t going for these things doesn’t mean that you are not being entrepreneurial or that you won’t find great success with your idea. Figure 2-1 compares venture capital and entrepreneurship.
Figure 2-1 The relationship between venture capital and entrepreneurship.
Venture capitalists raise funds from outside parties and then invest that money professionally in early-stage companies. They make their return by selling those companies or taking them public within a certain period, at most 7 to 10 years. Their only goal is to distribute attractive returns to their investors. An entrepreneur’s goal is to build his or her company into a stable going concern. Perhaps you will sell it for a great return in 7 to 10 years, but perhaps you won’t. Or maybe the entrepreneur wants to pursue a nonprofit, which by definition can never be sold for a profit, or even a socially focused hybrid.12 The point is that your goals and interests and those of venture capitalists are not necessarily the same. When they are—the shaded area in Figure 2-1 where the circles overlap—that’s great and we hope you all make a lot of money. But if they aren’t, you should maintain your focus on what you find important and not let investors unduly influence your thinking about goals, opportunities, or plans.
Our focus in this book is on you, not on the investor. We do discuss what’s important to different kinds of investors since you’ll probably need money to get started, and in that case it’s really important what your investors think. However, never mistake their interests for your own. At best they coincide for a time. Sometimes they are hardly coincident at all, and when that happens, you are usually the one who loses.
The space above was intentionally left blank. That is all the entrepreneur starts with: nothing, a blank page. There may be a germ of an idea or an invention, but there is no plan, no money, and no team. People normally want to see where the path in front of them is heading. That is safe and comfortable. Entrepreneurs do not have that luxury. No one gives them a plan or a road map, only a blank piece of paper.
Where do you start? What should you do? Yes, entrepreneurs often have an idea or an invention, but as we will see in the coming chapters, there’s not much value in ideas. Entrepreneurs add value through execution, doing things. But which things? For first-time entrepreneurs, knowing what to do next is daunting, but actually this is one of the best parts of starting something new! It’s exciting and unknown. You can go anywhere. You start by putting things on that blank page.
Most people want some sort of specific plan or program preprinted on the page. Well, we can’t help you there because we don’t know your business, your resources, and your needs. Only you know about those things. So where does a plan come from? Fundamentally, people create plans and programs to answer questions. For example, if you are going on vacation, you ask: Where do I want to go? How will I get there? Where will I stay? What do I want to do? What can I pay for it? These questions help you narrow your options and ultimately create an action plan that fits your needs and resources.
With entrepreneurship, often people don’t pause to frame their first questions in a meaningful and orderly way. They believe the questions are self-evident or assume the answers will become apparent over time. Few things work like this, especially in entrepreneurship. You need to be intentional about forming, defining, and asking smart questions. If you are, you’ll have a much better chance of getting significant and valuable answers. Also, you can’t expect to have your whole future mapped out in short order. You can try, but you will be wrong. Entrepreneurs find they always have to rework a plan at least once, usually many times. The launch is a process of discovery and adjustment. Life is easier if you get comfortable with that. Instead of defining the first steps, start by defining the end goal, then work backward to the right questions and some provisional ideas for a few first steps you can test. You’ll have to sort out the rest as you go.
From the time you first think about your idea and every time you think about it and all your planning, partition your mind and think as if you were three different people filling three different roles:
1. Think like an investor. How would an investor react to the thought that is going through your mind right now? If you knew those reactions, how would you address them to convince the investor or change your thoughts so that they would be compelling to an investor? Note: Often entrepreneurs will say, “But I’m not planning to raise money from investors.” It doesn’t matter. Even if you are not planning to raise money, you are the most important investor in your company. You’re investing your time even if you’re not investing money, and time is infinitely more valuable than money. When the end comes, all the money in the world won’t buy you more time. Thus, you should think as critically as any investor about your ideas every minute of every day.
2. Think like your chief operating officer. How will all these ideas be executed? What is going to be needed? When? Done by whom? Where will the money come from? How will you measure results? No idea turns into anything without relentless, effective execution down to every detail.
3. Think like yourself in the future. Imagine looking back from the end of the story. Can you imagine a narrative that leads from the ideas you are thinking about today to an ending that meets your personal goal? This is perhaps the most important thing, because in the press of day-to-day activity it is far too easy to drift off target bit by bit, so gradually that you never notice, until one day you see you are so far off course that you will never meet the goal that got you into this in the first place. Believe it or not, this happens all the time. More often than not entrepreneurs first realize they’ve achieved all kinds of things except their own goals at the end of the story: a sale, a merger, shutting down, or, worst of all, grinding it out day after day with no end in sight in a company totally different from the vision that started it. The best way not to end up there is to think about the goal every day.
Where do you start? What are the right questions to ask? That’s what the rest of this book is about: using smart questions to fill in the blank page.
How do you make decisions in a world where few things seem certain and you’re usually drowning in data and starving for relevant information? Do you have a process, or do you just wing it? How well do you think your decisions work out?
Do you have an idea? Do you know what to do next, or are you still looking at that blank piece of paper?
1. Bennis, Warren G., and James O’Toole, “How Business Schools Lost Their Way,” Harvard Business Review 83, no. 5 (May 2005): 96–104.
2. More on this in Chapter 18.
3. Bastiat, Frédéric, Selected Essays on Political Economy, S. Cain, trans.(Irvington-on-Hudson, NY: Foundation for Economic Education, Inc., 1995). Library of Economics and Liberty, http://www.econlib.org/library/Bastiat/basEss1.html (accessed June 3, 2010).
4. Stevenson, Howard, A Perspective on Entrepreneurship, Harvard Business School Case 9–384–131, April 13, 2006: 5.
5. Drucker, Peter, Innovation and Entrepreneurship (New York: Collins Business, 1993): 19, 33.
6. Ibid.: 34.
7. Schumpeter, Joseph, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle, Trans. Redvers Opie (1911; republished by Harvard University Press, 1955): 66.
8. We discuss validating markets in detail in Chapter 4.
9. Gilovich, Thomas, How We Know What Isn’t So: The Fallibility of Human Reason in Everyday Life (New York: Free Press, 1991).
10. More on the defenses against this problem in choosing cofounders in Chapter 8.
11. Howard, Niles, “Decisions, Decisions, Decisions,” Dun’s Review 117–118, no. 2 (May 1981): 98–101.
12. More on social entrepreneurship and alternative structures in Chapter 14.