The Reflective Entrepreneur

Front matter

O te

TRETRECUECTIVE ENTREPRENEUR

Dimo Dimov

Conclusion

Bibliography Index

66 70

75 79

Figures

Elements of opportunity

Interplay between idea and opportunity

A view ahead of the entrepreneurial journey A view backward of the entrepreneurial journey A long-tail distribution

Blindspots in entrepreneurial judgment Consideration sets before and after action Two places for exercising judgment Entrepreneurial design problem

Frames and solutions

Survival slide and expected value climb

Tables

4.1 Interplay between sanction and attrition 5.1 Action principles for contingent future 8.1 Resource balance sheet 8.2 Property rights balance sheet

10.1 Supporting entrepreneurial efforts

Preface

There is a lot of excitement about entrepreneurship. We associate it with the significant changes it brings — the new products, services, business models, organizational methods that change the way we live and open up yet new opportunities. Many of us see it as a platform for autonomy and personal expression, as a means for solving problems related to the long-term sustainability of our planet and societies, and as a source of recognition and financial success. Policy makers see it is an engine of economic development and job creation. The media loves it because it offers great stories of going from humble beginnings to amazing ends, of venturing ahead against all odds.

One consequence of this excitement is that demand for learning entrepreneurship has shot up. Countless books are published on how to become a successful entrepreneur. Enrolment in entrepreneurship courses at universities has soared. Entrepreneurship is now making its headway into the secondary-school curriculum. At the core of these endeavours lies a fundamental question of how to teach entrepreneurship. And as soon as this question is posed, many people — indeed, many successful entrepreneurs — would argue that 1t cannot be taught; it is something one is born with.

The difficulty of tackling this question lies in the fact that entrepreneurship can be seen at several levels. At a broadest level, in terms of ultimate achievement or end point, it involves organization of resources and the creation of a new venture — whether an independent firm or a separate initiative within an existing organization — and thus can be described in terms of what needs to be put in place for this to happen. We need people, marketing, operations, etc. This is epitomized in the notion of a business plan as precisely what it implies, a plan for building the business. The challenge here is that we have a form, but no substance. When we answer the question of how to become an entrepreneur in these terms, we simply describe what a successful venture looks like and the elements 1t needs to have. A reader would be nonplussed as to what to do or how to proceed.

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At a middle level, in terms of how we get to the end point, entrepreneurship involves a series of actions, that is, what entrepreneurs do in the process of creating their ventures. They make decisions, meet and negotiate with people, manage and lead people, solve problems. Every entrepreneurial story is a long stream of actions, of things done, challenges faced and overcome. The challenge here is with the lessons that we can extract from this sequence of actions. We are unlikely to repeat it, to have to do the same actions and in the same sequence, for our own situations will be different, indeed unique. Thus, we can get a detailed description of a process, but no logic that can recreate it. Again, a reader or a student would be nonplussed as to how to apply the experiences and stories of others to his or her own situations.

At a micro level, in terms of what explains each action and its relationship to those that precede it or succeed it, entrepreneurship involves facing and dealing with specific situations, of overcoming problems. We have a purpose, that is, what we aim to do or achieve, a set of circumstances and available information — from these we have to construct a course of action. Dealing with the interplay of purpose, circumstances, and information becomes a question of mindset, of a way of thinking, of procedural logic that can be applied to different situations regardless of their content. It is a mindset that has to be applied repeatedly, for the results of our actions in one situation become part of the circumstances of the next. This repeated logic becomes the building block of the broader journey and its outcomes.

The problem of approaching this micro level is that it requires displacement or modification of the ways of thinking that are already there, developed through socialization, education, and work experience, as well as by current narratives in the media. In teaching entrepreneurship, I have always faced the challenge of dealing with current preconceptions about it, of putting people on the same page before letting them experience it. When people face entrepreneurial situations, they resort to seeing them in preconceived ways, which suggest how these situations should be approached or what should be done. When there are no obvious solutions, the easiest answer might be that their ideas are not worthwhile or that they themselves are not suited for this sort of thing.

I have found that entrepreneurship puts people out of their comfort zone, as the expectations that their preconceptions bring and the certainty they demand clash with the uncertainty and ambiguity of the situations they face. People are often lulled by the clarity, smoothness, and inevitability of the entrepreneurial stories they hear, and they may expect to get the same feeling when they have an idea of their own and seek to take it forward. Needless to say, no obvious path reveals itself. In this case, we need to question and dislodge the preconceptions rather than the person or idea.

Preface xv

I see this book as applying a new coat of paint, a new way of viewing and approaching entrepreneurial situations. The biggest enemy of new paint is . . . the old paint, particularly where it is flaky or peeling off. To put a coat of new paint, one first has to prepare the wall — scrape off the loose bits of old paint until we have a smooth, solid foundation. Without doing this, the new paint will not stand — it will start peeling off in no time, unfastened by the unstable foundation underneath. The old paint in this case consists of preconceptions about what it means to be an entrepreneur.

The purpose of this book is to start a conversation with you, the reader, about entrepreneurship and its journey. I presume that opening this book is driven by your interest in entrepreneurship and perhaps your bubbling entrepreneurial energy: desire to solve problems, to become an agent of social or economic change, or to leave your own creative mark on the world through your ideas or visions. This inspiration and energy can quickly turn into dejection as the lack of clear signal or a sense of direction can be paralyzing. Against the clarity and seeming inevitability of entrepreneurial success stories, you might easily conclude that (1) your idea is not good enough or (2) you do not have what it takes.

The main premise of the book is that this perceived difficulty is self-imposed. It reflects a mindset that makes entrepreneurship a matter of superior judgment, thereby pressing one to search for the right decision — a decision that can be somehow justified. But the concept of ‘right’ requires a bounded context within which something can be determined as correct or optimal. And because the boundaries are set by what we already know, only an extension of the past can be justified. Entrepreneurship therefore requires stepping out of the judgment system as we know it.

In the words of George Bernard Shaw, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man”. If we have to be reasonable, entrepreneurship would not be done. To do it, we have to step into the realm of unreasonableness. But how to do this without descending into chaos?

Most living systems operate at the ‘edge of chaos’, the fertile region between order and disorder (Kauffman, 2008). Too far a step in either direction can take them to the stifling force of too much order or to the destructive force of too much disorder. How can we walk this fine yet invisible line?

There are no ready or clear answers, but I hope that the conversation this book initiates will engage your reflective side and thus help you develop your own sense and find your own balance in your actions ahead. The book’s title mirrors Schon’s (1983) classic work that places reflection at the core of effective practice.

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The book is organized in three parts. The first part looks to identify the flakes in the old paint: those implicit preconceptions about entrepreneurship and the entrepreneurial journey that, upon further scrutiny, reveal three irreconcilable tensions. I have synthesized these tensions from my own extensive research on the topic as well as from countless discussions and conversations that can be inevitably traced to one of these tensions. These tensions cannot be resolved; they have to be endured. But what makes them hard to endure is that they are underpinned by a need to exercise judgment. Thus, the final chapter of the first part seeks to prepare the ground for how this need can be contained.

The second part identifies and discusses the elements of the new paint. It focuses on the areas in which current implicit assumptions or preconceptions about the entrepreneurial journey need to be supplanted. One relates to the nature of the future and how to approach it. Rather than being inevitable or necessary, the future is contingent, unfolding through an interplay between purpose and constraints. In this regard, approaching it is a matter of dealing with immediate problems and setting proximate milestones. As we do that, we have to deal with both internal and external pressures and considerations.

The third part prepares the new mindset for action by raising awareness of the broader playing field. It first brings in the analogy of sport with its positive interplay between participation and achievement. By this token, entrepreneurship operates as an ecosystem, in which participation is individual (i.e. driven by individual effort), but outcomes are ultimately collective (i.e. determined by social processes). The second chapter discusses success as a result of natural attrition rather than artificial selection. This poses the question of resourcing entrepreneurship as emergent development, operating in stages and based on milestones.

Kauffman, S.A. (2008). Reinventing the sacred. New York: Basic Books. Schon, D.A. (1983). The reflective practitioner. New York: Basic Books.

Acknowledgements

My academic work has placed me at the intersection of two vibrant communities, entrepreneurship scholars and aspiring and practicing entrepreneurs. In its own spirt, this book is effectively a collective outcome: the ideas presented here would not have arisen without innumerable productive encounters over the past 5 years. Although my purpose of understanding the entrepreneurial process has remained unchanged all along, each encounter has offered a new thread to follow — an idea, paper, book, video, a question, or feedback — and each such pursuit has opened up new intellectual vistas. What they all have in common is that it is easy to Imagine that, without any one of them, history would have taken a different path, not leading up to this book.

I would like to thank all who have helped shape my thinking — fellow scholars, colleagues, collaborators, editors, reviewers, students, entrepreneurs, friends, and family. | am particularly grateful to Terry Clague for proactively supporting the idea of the book, to Mike Sotirakos and Jake Ronay for providing feedback and encouragement to earlier drafts, and to my family for giving me the space and support for thinking and writing, and for putting up with my obliviousness.

Taylor & Francis Taylor & Francis Group http://taylorandfrancis.com

Part I

The evolution of business and indeed of life is a story of branching out, of pushing outward. We are fascinated by the next big thing, the branch that opens up new value, the new venture that brings great returns or changes the way we live. Whereas in life this is a natural process, driven by random mutations and an inherent instinct to survive and procreate, in business this is not a natural process, but one fed by decisions of what to do and where to invest resources. Thus, ultimate outcomes can be traced to specific, forward-looking prior decisions. And, naturally, there is a tendency to explain these decisions as somehow prescient or optimal, in order to derive some rules for such decisions to be made again in the future, in other circumstances.

The very notion of optimality, however, requires an outward boundary within which to exercise judgment of what the best course of action is for what we want. The present represents such a boundary in that it can vindicate or discredit prior actions and choices. At the same, for present actions and choices such boundary is to be sought — but not found — in the future.

There is an asymmetry between what we do and what happens. This is because in reasoning what to do, we have to set boundaries within which to exercise reason. Without them, reasoning is impossible — indeed thinking about everything is not possible because the question ‘what else?’ never ends. We have to stop somewhere and acknowledge leaving other things unspecified. What actually happens, however, arises from events outside of our control, at least some of which would fall outside of the boundaries set for reasoning. It is these surprises, whether positive or negative, that mark and define the entrepreneurial journey.

Branching-out structures are very interesting. If you trace them backwards, no matter from which end point you start, you will always run back to the beginning. If you trace them forwards, however, you start from the beginning, but cannot really know which end point you will reach — it is down to deciding which fork to take at each junction.

The knowledge asymmetry between present and future represents a tension that cannot be resolved. This is the case because without acting now the future outcome — whatever it might be — will not come about or will come about differently. But if one seeks to justify action by reference to future outcomes, such justification is possible only for outcomes that fall squarely within the current boundaries of reason.

This fundamental tension reveals itself in three different ways, depending on the viewpoint into the entrepreneurial journey, that is, its content, its person, and its process. One viewpoint is that of the prospective entrepreneur, of you and me looking ahead inspired by an idea. The tension there is between idea and opportunity. Another viewpoint is that of an external observer — whether a friend, a potential investor, or potential partner — looking at us as prospective entrepreneurs, to make sense of our optimism and aspirations. The tension there is between genius and lunatic. Yet another viewpoint is to make sense of the journey as a whole and to draw lessons from the way it has unfolded. This is captured by the tension between skill and luck.

The following three chapters focus on each of these tensions. In the fourth chapter, I draw implications from these tensions by returning to the question of judgment, highlighting its limitations and tensions as a guide for entrepreneurial action.

1 Idea vs. opportunity

People come up with ideas but, as entrepreneurs, they pursue opportunities. They pitch ideas to others, and these can be shot down as not being good opportunities; or they can generate excitement as great opportunities. Ideas and opportunities thus seem to be the same thing — images of a future — yet they feel different. Every opportunity originates or can be described as an idea, but not every idea can be deemed an opportunity. If we come up with an idea, we immediately start wondering if it is an opportunity.

At a first glance, the dividing line between the two is some positive judgment, a sense that the imagined future is desirable and attainable. But in the likely face of divided opinions, whose judgment matters here? We may be filled with optimism, with a sense of confidence, yet others may be more sceptical or outright dismissive. When one judgment is pinned against another, which one is right cannot be determined by . . . yet another judgment. Each judgment is underpinned by a set of beliefs about the future and none of these can be ruled out as wrong. Frustratingly, both may be right.

With the fallibility of opinion as a dividing line between idea and opportunity, the line can be drawn by the undertaking of some action in the name of the idea, that is, stepping forward towards the imagined future. The best marker of our positive judgment is whether we are ready to do something about our idea. Simply talking about it does not change it; it remains an idea, its possibility remains intact. But doing something about the idea does: it affirms our confidence in it and puts its possibility to the test. Thus, the very action in the name of the idea turns the idea into opportunity at least momentarily. This action brings in new information that can be used to update the idea and, in turn, if new action is undertaken, the pursuit of opportunity continues. An opportunity is thus kept alive through the repeated cycle of ideas and actions. An idea is static, an opportunity dynamic.

This poses an interesting puzzle. On the one hand, opportunities are ideas that are acted upon. Indeed, if an idea is not acted upon, whether it is to be considered an opportunity or not can be the subject of infinite speculation and debate. On the other hand, to act upon an idea seems to require a judgment that the idea is an opportunity in the first place. Hence the chickenand-egg question: which comes first, the opportunity or the action?

This is a fundamental tension of the entrepreneurial journey, one that keeps the journey going towards revealing whether an idea is an opportunity. The tension can be resolved in one of two ways. One either abandons the pursuit of the idea, in which case the idea ceases to be an opportunity contender. Or one can reach a state in which the idea can be considered realized, in which case it is clearly an opportunity. Because this process hinges upon an evolving judgment that is often made quickly, it is helpful to unpack its elements.

The content of an idea and the nature of an opportunity

Idea and opportunity both refer to some form of business venture, whether undertaken as an independent start-up, as a separate initiative within an established firm, or in the name of pursuing a wider social goal. For something to be a business venture, it needs to have three elements: (1) a product or a service; (2) customers, users, or consumers of that product; and (3) an infrastructure that sources, creates, and distributes the product or service. In this sense, the business venture is a system — a social structure — of interconnected elements, namely people and some productive assets, as shown in Figure 1.1.

The individual elements alone are not sufficient to define the structure; it is the relationships among them that do so. Indeed, the very terms we use to describe the structure are relational in nature, that is, defined only in reference to something else. Thus, a particular individual becomes a customer only when related to a particular product or service; or an employee only when contracted within the infrastructure that produces the product or service. Similarly, something becomes a product or service only when related to a particular customer or a production infrastructure.

The notion of structure is essential here as it highlights the fact that it needs to be put together, meaning its elements gathered and weaved into the particular relationships. Consider the analogy of a building: it is a physical

Infrastructure Product Users

Stakeholders Service Customers

Figure 1.1 Elements of opportunity.

Idea vs. opportunity 5 structure in which its individual elements (bricks, concrete, glass, etc.) are put together as to form functional relationships that comprise the entire structure: foundation, walls, windows, roof. In the same manner, the entrepreneur creates the venture by establishing the functional relationships that comprise production and consumption.

The analogy stretches further. Before it is built, a building exists only as a blueprint — an idea in the mind of the architect or formally drawn. This blueprint takes materials that are taken for granted and imagines or draws the functional relationships that can be created among them. Similarly, before a venture is put together, it exists only as an idea in the mind of the entrepreneur that imagines relationships among people and productive assets.

Therefore, idea and opportunity represent two different viewpoints of the venture in question: (1) from the present, as an imagined future, and (2) from the future, as a realized future. The actions undertaken by the entrepreneur intend to move the venture along a continuum from 100 per cent blueprint to 100 per cent actualized, with all the gradations in between. Initiating or continuing the movement rests on two judgments. The first is a question of possibility, that is whether the future can be transformed from imagined to realized. Is the product/service even possible to make or deliver? And, if yes, will someone buy it? The second is a question of profitability, that is whether the realized future will be financially viable. Indeed, the expectation of profit is the essence of entrepreneurship. Will the basic economic transaction of the venture be profitable? In other words, will the price paid for the product/service be higher than the costs associated with producing it? And (how fast) will the money to be invested into the production infrastructure be recuperated?

To move from the imagination to the realization of an idea requires resources. At the very least, these resources include the time and effort of the entrepreneur, but can also include the time and effort of others, in-kind contributions of services or equipment, and financial resource that can be used to acquire equipment or services. Because the deployment of resources means foregoing all of their alternative uses (and associated benefits), the decision to deploy them involves making a sacrifice of sorts. Without this sacrifice, there is no realization of the idea. But with the sacrifice, the realization is not certain nevertheless, as evident in the looming questions of possibility and profitability. There is thus inherent tension in trading the certainty of current value for the uncertainty of higher future value. This tension cannot be resolved, but only accepted and endured until the effort is abandoned or realized. It is in this sense that entrepreneurs bear uncertainty (Knight, 1921).

Accepting the tension is a sort of plunge, of diving into the unknown with the hope and expectation of surfacing in a better state. Poised at the edge and staring at the abyss of an unknown future, we summon the power of judgment to determine whether what lies ahead is an opportunity or folly. Opportunity means jump, folly means stay; but neither answer is definite. In fact, it draws a line under a complex array of elements and considerations.

Possibility and profitability

The question of possibility

Take the question of possibility. It can be unpacked at several levels. At the start, there is the distinction of third- and first-person perspectives (McMullen and Shepherd, 2006). The former is the question of general possibility, that is, is this sort of product/service possible to produce by anyone and are there any people or companies out there who — as potential customers — would find it appealing? The latter is a question of more specific possibility, as faced by us, the particular entrepreneur. Will we be able to make this product/service and will we be able to find those who would consume it? If our answer is affirmative to the former and negative to the latter, the next question that arises is whether we can bring in others who can make things possible and, if yes, at what cost and effort. The answers to these questions are speculative at best and thus a yes/no argument cannot be resolved but for the one side to prove the other wrong. The proof has to be done not by argument, but by deeds. The best way to convince someone that we can do something is to do it. Anything else leaves hanging the possibility of being Wrong.

In the first instance, we have to convince ourselves that the possibility is real. This can be done on the basis of a mixture of confidence and hope, which can reveal themselves as a hunch or gut feeling. The former rests on experience and its relevance to the situation at hand. The latter represents a feeling that things will turn out well or that we will make productive use of whatever happens.

The matter of deeds brings in a third question that focuses on the most specific possibility of how it will all be done. This is assessed against what has already been achieved, generating a sense of what needs yet to be done. The more there is still to be done, and the more far-fetched it seems, the lower one’s confidence. For instance, we are facing a blank sheet of paper and have a picture in our head that we aim to transfer on the paper. We mentally project the picture on the paper and see it there, a structure of connected elements. But actually putting it on the paper requires moving the pencil around the paper. As we begin to do so, the picture starts coming alive. As this happens, there is less and less of it to finish and thus increased confidence that we will get there. Of course, this presumes that the lines are coming out exactly as imagined. If they do not, we can abandon the effort in frustration or keep trying on new sheets of paper.

Idea vs. opportunity 7

The same logic applies when the picture in our head is of a business venture, a set of interconnected elements. Except that, instead of drawing it on a blank sheet of paper, we have to construct it in real life, of live elements, that is real people and commitments, and this brings a host of complications. The product or service needs to become real. To produce it requires real infrastructure. And those who will consume it will be real people. Thus, this is not entirely down to our efforts — whether or not we keep practicing — but involves identifying, engaging, and committing other people, whether as customers, partners, or employees.

To add to this complexity, our efforts will take place in real time. This means that all those other actors to be weaved into the social structure go about their daily lives pursuing their own aspirations and being enticed by other social structures. Perhaps some will find our product much to their liking. But if they happen to commit elsewhere before we make contact with them, it becomes a problem of bad timing. In addition, unlike the drawing example in which each blank sheet represents the same starting point, as we keep practicing, everything else around us keeps moving and changing, which means that we always have a different starting point and face new circumstances.

It is clear that producing evidence is the best way to facilitate the judgment of whether our idea is possible to realize. In other words, to convince ourselves or someone else that we can realize our idea, we have to start realizing it. And this of course means deploying resources and thus making the very sacrifices that were to be informed by whether our idea is deemed possible. This suggests that, at the very first steps, the sacrifice is largely underpinned by hope. As Henry Bergson (1913) observes, hope brings an intense pleasure, whereby we shape the future to our liking. In this regard, the idea of the future is more appealing than the future itself, because there is certainty about the future when contained within the idea itself, and uncertainty about whether it will look like that outside of the idea. The first step, therefore, represents trading the purity of the idea for the messiness of the outside world. It is thus not surprising that hanging on to the pure idea is often very appealing.

Figure 1.2 summarizes the interplay that occurs over time — as an idea moves towards opportunity — between hope and intuition on the one hand and tangible evidence on the other, exemplified by new information and commitments by others.

The question of profitability

Now, let’s turn to the question of profitability. Again, it can be unpacked at several levels. One is the level of individual economic exchange at which the price paid for a product/service is compared to the costs of producing

100%

Evidence

0% Idea > Time > Opportunity

Figure 1.2 Interplay between idea and opportunity.

it. It is of course difficult to anticipate prices, but we can nevertheless use current levels for similar products to get a general sense. The matter of assessing costs is more complex. Without delving into the intricacies of accounting, it is helpful to distinguish direct and indirect costs (overheads). Put very simply, direct costs are those that can be attributed to the particular product and would not be otherwise incurred if the product were not made or sold. Overheads are costs that cannot be attributed to a particular product and are incurred regardless of whether the product is made or sold (e.g. rent or accounting office). They can be spread proportionally over each product sold; with more products, the overhead costs per product become lower.

With this in mind, profitability can be considered in terms of whether the price covers the direct costs (gross margin) and whether it covers the indirect costs (operating margin). The latter is dependent upon the scale of the business in the sense of over how many units the indirect costs can be spread. This leads to the second level of the profitability question, namely the scale of the business. As difficult as it might be to judge if any people would choose the product or service, it is more difficult to judge how many of them there would be. Indeed, history is full of examples where the scale potential is greatly underestimated: the first computer, Xerox’s first photocopier, the first Star Wars toys, to name just a few.