Wednesday, May 18, 2016

How Entrepreneurs Pick their Projects

Do entrepreneurs pick their projects with forethought?


As I outlined in Entrepreneurial Leverage the return to entrepreneurship is contingent on the success of the project, but, also, the leverage inherent or created in the project.

However, we don't train our young in small business management, managing an innovation firm, analyzing and picking opportunities and, even today, there is little understanding of Entrepreneurial Leverage and how it affects returns to invested time.

It should be of no surprise, to anyone, then that entrepreneurs pick their projects with little real forethought.  Of course, the entrepreneur, upon seeing an opportunity, thinks, 'can I make a go of this?'  Any business person would. 

The result? Entrepreneurs face a sequential stream of random exposures over time based upon the business areas and relationships that they develop during their non-entrepreneurial career phase.  Then they jump.

So, instead of considering a selection from a portfolio of potential projects with differing, well analyzed, prospects for successful implementation and differing leverage and risk profiles, our would be entrepreneur considers and disposes of projects until she finds one that looks like it'll work, then works like mad to make it so.  Darwinian, but not very efficient.  And if high leverage projects create more societal wealth (see Guzman 2016) then not very good for society either.

Can whole industries or categories of industry be better places to create wealth.  Yes.

Can we train people to pick projects better?  Yes.

Can we train people so that their likelihood of success is higher when implementing a project?  Yes.

Can we create more well being accross society if we do?  Yes.

We don't.

Some get lucky.  They worked in a start up.  They know people who have learned by dint of hard learned on the job knowledge to think this way. They network a lot.  They attend the training conducted in incubators and at technically oriented universities to prepare entrepreneurs.  Or they work in Silicon Valley or Boston where 'the knowledge' is more wide spread.

Then they are a little more likely to end up with a good project.  With leverage, non-rival inputs that are at least partially excludable.  They execute.  We get a winner.

Research shows that a business that has certain markers of likely ambition or potential has as much as a 65,000 times higher probability of exponential growth than one with markers for low ambition or potential.

We know how to create growth.  We've got a lot of institutional work to do it.

Accurate Reality:  We continue to do a poor job of training people to work on the most innovative wealth and job creating firms.  This leads to an under performing economy and low middle class growth.  We need to change the way we train in Universities.  We need to bring the hard won knowledge of Silicon Valley and Rt 128 into B school classes.  We need to continue to evolve our financing laws and practices to enable funding of more of these firms.  We need the legal environment and the crony capitalist state to remove barriers to these firms.  There is much work to do.  The payoffs are potentially enormous.

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