Bill Janeway recently said of something I wrote that my focus on uncertainty “seems rather untethered.” Janeway is one of the few people writing about venture capital who have been in the business longer than I have, so this made me sit back and think for a bit. I’ve spent a while now writing primarily about uncertainty in startups even though the numbers show people would rather read about other of my intellectual obsessions. But in my view, uncertainty is still the most important thing I can be thinking about right now.
Edit: Bill Janeway has emailed me to say that his use of ‘untethered’ was poorly considered. This kind of takes the wind out of my oppositional sails. But because he’s a good person and it’s very worth it, you should read his book: Doing Capitalism in the Innovation Economy.
Every person who thinks about entrepreneurship has to ask themselves: what makes high-growth potential startups different from every other company? Some people believe that, in fact, they are not different: startups are just small companies with few resources. In this view, having few resources is the root of every problem they have that is not addressed by standard business strategy. If this is you, this blog will not be interesting to you. But if you have tried the tools of MBA strategy at a startup and realized they just didn’t apply, then you have to ask yourself: what is it that makes startup management so different than traditional strategic management?
I believe it is uncertainty. And, frankly, almost every economist who has seriously considered entrepreneurship has included uncertainty as a prime component of what makes entrepreneurship different, from Cantillon to Schumpeter to Von Mises. And, of course, Frank Knight, who put it at the center of his theory. But having noticed that entrepreneurship and uncertainty always go together, they then neglected to say exactly what we should do about it.
Uncertainty is messy and difficult, and I can see why most people would rather just avoid it. I have been thinking about it now for years and feel like I have made no real progress at all. Perhaps progress can’t be made (though I don’t believe that.) But examining entrepreneurship by only telling stories is like trying to figure out how to beat a slot machine by focusing on the blinking lights and bleeping noises…these are just manifestations; they may be evidence indicating what is really going on—or they may not—but you have to think about the mechanism that produces them to make any sense of it all. If the mechanism of entrepreneurship has uncertainty at its center, then we need to think about uncertainty itself if we are to make any progress.
I teach entrepreneurship at Columbia and have for almost a decade. I ask myself the same questions at the beginning of every semester: is entrepreneurship an area of study? Does it address questions that other fields of study do not? Why is this a course on starting high-growth, technology-driven companies rather than just a course on starting a small business? Wouldn’t it be much cheaper for my students to pick up a mass market book on starting a business and read it rather than taking my course? Am I providing value?
The core question goes like this: what is the difference between starting a company that could be the next Apple or Google and starting a restaurant or yoga studio or one-person law firm? Every startup starts as a small businesses, after all, and has all the problems that small businesses have. They need to pay attention to hiring and managing and accounting and finding customers and making their product. These topics are well-covered by the mass-market paperbacks. Even their scaled up counterparts—the same topics but as implemented at large companies—are well covered, though you may have to pay for an MBA to get the full treatment.
Should my class, then, be a mini-MBA? Should I be teaching accounting and management and the four Ps of marketing and just throw in a bit of information on sparking innovation and raising venture capital? Are these latter the only real difference between a new small business and a high-growth-potential startup?
My primary occupation (teaching doesn’t really pay the bills) for the last several decades has been working at or with technology companies. This has spanned the gamut, from largest to smallest. My personal observation, again and again, is that the central problem at high-growth-potential startups, the specific thing that tends to take up most of management’s strategic attention, is something bigger companies simply don’t have to think about very much: it is uncertainty.
It is not, as I once believed, innovation. The bigger companies, if anything, had more focus on innovation, spent more time trying to innovate and were more willing to spend money on innovation. They had innovation consultants and innovation offsites and chief innovation officers and whiteboards everywhere. They had creative geniuses paid high salaries to do nothing but think of ways to improve the product so that it was better than the competitors’ products—small-i innovation—and think of new, completely different ways of doing things that competitors would not be able to match—big-I Innovation.
High-growth-potential startups when they first begin, on the other hand, see innovation as a constraint: they need an innovation to start, but then they need to buckle down and execute. They may have to continue innovating to get the idea to market, but the last thing they want to have to do is Innovate, because constantly Innovating means they will never get a stable product in front of customers. Their bigger problem is finding an innovation that bigger, better-resourced companies aren’t already trying to do and won’t immediately try to do as soon as they see the startup doing it. That is, the unique problem is not thinking of new things, but thinking of new things that no one else wants to do. And what would cause no one else to want to pursue something that might be a billion dollar idea?
The central problem is also not resource-gathering, though by looking at how founders spend their time you would think it was. Hiring, money raising, partnerships, business development deals…all of these things are done at both big and small companies that are trying to grow. And the processes are really only different because it is usually harder for a new company to get them done. But this is not a knowledge issue, it is just the reality of convincing someone else that your bright idea will work when there is as yet no evidence. This lack of legitimacy is an incredibly important strategic issue, but it is caused by something deeper and more pervasive.
I could argue this for everything that is usually cited as the difference between startups and established companies: innovation and resources, as above, but also risk-taking, agility, leading-edge technology, management personality traits and endowments, etcetera.1 What, then, is the difference?
In Startups and Uncertainty I argued that high-growth-potential startups face uncertainty that more established companies do not. Every company, large and small, faces some uncertainty, it is hardly avoidable in any complex system, and the market is a complex system. But high-growth-potential companies have uncertainty at the very core of what they are doing. This is the tradeoff for having an opportunity to compete with more established companies and it can’t be avoided. This, I believe, is the primary strategic difference between startups and other businesses.
I’m not the first person to think this, by a long shot. The idea pervades the study of entrepreneurship from its beginnings. Cantillon, writing in the 1700s, said that an entrepreneur is “someone who exercises business judgement in the face of uncertainty.”2
Cantillon argued that the origin of entrepreneurship lies in the lack of perfect foresight individuals have about the future. Rather than consider this lack of foresight a defect of the market system, Cantillon accepted it as part of the human condition. Uncertainty is a pervasive fact of everyday life, and those who must deal with it continually in their economic decisions are entrepreneurs.3
The idea that confronting uncertainty was what made entrepreneurs different was obvious to even the earliest thinkers. Why, then, isn’t it at the center of what we teach would-be entrepreneurs? I believe it is because uncertainty is just too hard to work with.
Uncertainty is hard to work with because it is not really something in itself, it is the lack of something: the lack of predictability, the lack of knowledge, the lack of the ability to plan. On the one side of entrepreneurship pedagogy, entrepreneurship theorists ignore it. Some give it lip service then ignore it. On the other side, practitioners teach methods of dealing with uncertainty that have been found to work in the field. But these teachers then shy away from explaining why these techniques are needed. By not acknowledging their roots in uncertainty they limit how these techniques are understood and can be modified to work in specific situations. They produce recipes for startups without acknowledging that recipes are the antithesis of originality and that you can’t be different by being the same.
Why? People love certainty. Business books that promise certainty sell. Teachers who teach recipes for success are considered better teachers. But popularity is not truth. If uncertainty is at the root of what makes it possible for a founder to take an idea and turn it into a successful large company, then entrepreneurship theory and practice should embrace the idea of it and explicitly build it into both theory and practice.
Is this possible? To some extent, no doubt. There are theoretical and practical ways of dealing with uncertainty, and explicitly connecting the two can be illuminating. At worst, it outlines the borders of what we can and can’t know about how to build a high-growth potential business. At best it may help us improve what we teach entrepreneurs in ways that will make them more successful on average. This, I think, is an important task.
How to make progress? The first step is acknowledging that uncertainty must be present and understanding why. The second step is understanding business strategy and what it is, at its core. The third step is tearing down strategy and building a skeleton of business strategy under uncertainty. The fourth step is to try to articulate this new strategy in a startup context and give concrete ideas of how to use it. This is the path I’ve been on [I am going to keep this list updated as I wrote over time]:
- Embracing Uncertainty: an Overview
- Schumpeter on Strategy
- A Taxonomy of Moats
- Startups and Uncertainty
- Strategy under uncertainty
- Productive Uncertainty
- Trial and Error, Part I
- Uncertain Decision-making and the Maximax Criterion
This kind of first principles thinking is probably as frustrating for the old guard to read as it is for me to write. When I explain what I am finding to people who have worked in or with startups for a long time I can sense this. All of my conclusions are already implicit in what they do and how they act. On the other hand, they can generally not articulate why. We are still in the tinkering phase of thinking about entrepreneurship. If we want to make real progress we must think more deeply about the why.
William Gartner once surveyed a group of entrepreneurship experts on what they thought entrepreneurship means. The eight basic themes in the answers were that entrepreneurship involved: individuals with unique characteristics; innovation; resource acquisition and integration; creating value; profit-making; growth-orientation; uniqueness; and/or owner-management. None of these things can be used to sort businesses into what most people would recognize as ‘startups’ versus ‘non-startups.’ Gartner, WB. (1990) What are we talking about when we talk about entrepreneurship? Journal of Business Venturing, 5, 15-28. ↩
Essai sur la Nature du Commerce en Général, published in 1755, quoted in Hébert, R.F. and Link, A.N., A History of Entrepreneurship, Taylor & Francis, 2009, p. 8. ↩
Hébert and Link, p. 12. ↩