Entrepreneurship for the 99%

http://steveblank.com/2012/06/04/entrepreneurship-for-the-99/

by ridruejo • 14 years ago

81 54 14 years ago

intellegacy7• 14 years ago

It seems to me that the industries most kinds of 99% businesses enter is zero-sum, which means helping new businesses only hurts the profit of other new businesses or incumbents. Ergo I question what value from an overall economic perspective helping individual entrants to the 99% market holds.

(Here I use as examples the industries defined from the article: construction, retail, health care, lodging, food services)

For instance, if 10 businesses are started, and there is only room in the market for 3, then 7 will inevitably fail. It is possible to improve each's individual odds of success, but to what end? Unless the market these businesses are in grows, any successfully-started new business only increases competition for the others. So lets say that we improve the odds for these new entrepreneurs by educating them. We will also assume incumbents have access to the same knowledge and benefit equally. If the new competitors all enter the market together, all we have done is raise the competitiveness level in the industry, and the odds of failing are still the same.

This is what Peter Thiel discusses in his "perfect competition" argument. (If you haven't read his CS183 notes yet, please do so. They're insightful).

Peter Thiel likens competition to athletes or soldiers beating each other up. They compete to win and that is what they know how to do. But in the end there is only one victor. The rest are losers. And if you improve the competitiveness level of these athletes, all you have done is make the competition fiercer. Now that could be a good thing as it could provide better value for consumers. But the businesses themselves don't benefit from that!

All this program is doing is making more perfect competitors, although what will probably happen is not all will benefit the same amount, as certain businesses will learn and apply these lessons better than others. But from a birds eye perspective, the result is stil the same: the same number of failing businesses. Even if these new businesses you help succeed do in fact "make it", they don't increase the size of the industry (barring technological breakthroughs). They only add more players to a limited pie.

People by nature care more about themselves. Thus they care more about entrepreneurship rather than innovation per se. Entrepreneurship without innovation is about beating up the other guy, simply outcompeting him through energy or maneuvering. Innovation is about doing something better, freeing up time or resources to do other things, which grows the pie for all.

In summary:

Sure a new business may add value by providing a better service than the competitor it beats, but the overall wealth pie of this nation doesn't increase. Encouraging just entrepreneurship without technological innovation is not that useful from a macro perspective. What we need are new entrants who change the game via technological or process breakthroughs. These are precisely the kind of companies that Peter Thiel seems most interested in, according to his CS183 lectures. And I submit that these are the kinds of businesses startups should focus on. Not the other 99% which only increase competition for everyone else.

This is why R&D and innovation are the key to growing the economy. Simply calling for more entrepreneurs, without a corresponding emphasis on innovation, is a flawed long-term strategy.

laglad• 14 years ago

All true. But with a customer development focus, they'll see failure more quickly with less resources.

For example, instead of renovating your restaurant and reopening it with your personal conviction that it is now better, why not test different redesigns before investing.

I'd call it teaching the scientific method.

run4yourlives13• 14 years ago

I'm more than a little confused by your comment. In several areas either you or Thiel (I'm not familiar with his thinking enough to know which) are completely disregarding some very basic economics...

It seems to me that the industries most kinds of 99% businesses enter is zero-sum

Um, no. Nothing in the economy is zero sum. Wealth is constantly being created and transferred. I think you are confusing this with the idea of a mature-market at an industry level, but those markets are almost non-existent because they destroy themselves like anti-matter.

Unless the market these businesses are in grows, any successfully-started new business only increases competition for the others.

Well, for one thing, if the market isn't growing we are in a recession, and recessions simply aren't permanent states. Recessions destroy themselves, because they are simply forced efficiency finders. Secondly, increasing competition increases pressure to become more efficient and/or innovative, which in turn drives market growth. The whole idea of helping and soliciting help in business is an act of innovation.

In short, your initial point - that of a zero sum market - is flawed, and therefore all your other arguments are too.

Increasing the quantity of entrepreneurs by default increases the quality, because it increases the pressure to compete, and therefore leads to the very innovation you feel is the real solution. You are arguing against the very solution you seek.

_delirium5• 14 years ago

I don't have a problem with most of that explanation, but am somewhat skeptical of the last point. I don't think there is necessarily a linear relationship between quantity and quality that holds in all market regimes, across the whole range of possible states. Dynamical systems (such as markets) often have tipping points where things get wonky, so it'd at least require some empirical evidence that that isn't the case.

AznHisoka4• 14 years ago

"Um, no. Nothing in the economy is zero sum. Wealth is constantly being created and transferred."

Created and transferred are 2 completely different things and I think OP is against innovation that simply transfers wealth (popular example is financial industries). A more cynical example is Groupon, which transfers wealth from small businesses to them.

Creating wealth is making something more efficient like creating the airplane or the internet. Or improving the standard of living like creating a cure for a disease.

It's actually very very hard to do it, and less than 5% of tech startups probably succeed in doing it, even the ones that are successful.

intellegacy7• 14 years ago

Um, no. Nothing in the economy is zero sum. Wealth is constantly being created and transferred.

Created and transferred are two different things. Created means new wealth is generated through increased efficiency or innovation. The pie gets bigger. Transferred means one player loses and the other gains (the definition of zero zum). The pie stays the same, only the relative size of each slice changes.

Secondly, increasing competition increases pressure to become more efficient and/or innovative, which in turn drives market growth. The whole idea of helping and soliciting help in business is an act of innovation.

You argue that increased efficiency is a kind of innovation. Your argument is that increased competition leads to increased efficiency, and by increasing efficiency in a market more resources are freed for other markets and the pie gets bigger.

I may agree with you here, but you'll have to provide examples.

* Increasing the quantity of entrepreneurs by default increases the quality, because it increases the pressure to compete, and therefore leads to the very innovation you feel is the real solution*

Can you provide concrete examples?

Several points: I can agree with your argument on a theoretical level but its still a leap to make the connection between increased quantity leading to innovation without evidence or examples.

1) One instance in which your argument could be true: If there are greater efficiencies discovered in one industry (for example, a new gizmo that doesn't require as many restaurant cooks), leading to less labor costs and subsequently lower cost of food, leading to increased money in consumer's pockets with which they could spend in other industries.

But who discovered that efficiency? It could be made by a separate party and have no connection to the increase of competitors. It is a leap to draw the correlation between increased competitors and innovation.

2) One instance where it may not be true: An industry where there are little or no efficiencies to be captured.

Lets say there are 10,000 software design firms competing with one another and they make their profit from software consulting projects. If they all make a profit of $1,000,000 / year and you add another 10,000 competitors, all providing the same service, two things will happen for sure: 1) some of the new competitors will gain entry to the market, leading to lower profit for everyone else. 2) some competitors will fail.

It is possible that the innovations are simply not there to be found by the new entrants, even with their newfound startup wisdom. Innovation is not a matter of strictly effort. For example, I recently came back from a trip to Southeast Asia where I traveled for 3 months across many of the developing countries and witnessed the effects of increased competition there among the street hawkers.

In the street-hawking industry there simply aren't many innovations to be discovered. Adding more entrepreneurs to the mix wouldn't lead to innovation, but rather a race to the bottom. Profits across the board would decrease and consumers would benefit.

Also, a point about quality: increased quality does not necessarily lead to a greater pie. We may lead richer lives from 10% more delicious food but the wealth pie stays the same. (although that is valuable as well).

anigbrowl3• 14 years ago

This is what Peter Thiel discusses in his "perfect competition" argument.

That's not Peter Thiel's argument. That's Peter Thiel delivering a remedial microeconomics lesson. 'Perfect competition', 'monopolistic competition' and 'monopoly' are technical terms which don't necessarily mean what they might appear to. In perfect competition, for example, all goods are fungible. It's a good model for the commodities market, since one barrel of oil is very much like another (there are different grades of oil with different sub-markets, such as 'Brent crude' or 'west Texas intermediate', but you don't care which particular company extracted which particular barrel of oil from the ground within a given market).

Now once you introduce the element of skill, you have something more like monopolistic competition. Pizzerias are in competition, and they're selling a similar product, but they can compete on everything from the quality of the pizza dough to the comfiness of the seating, so different customers may end up strongly preferring one to the other. Maybe I'm price-sensitive and prefer Mario's bargain slice, but you're a gourmet and you prefer Luigi's home-made flavor. Someone else prefers the fancy service at Gino's, and so on. This is why towns can have so many different restaurants and why supermarkets can sell multiple different brands of what are essentially similar products: you can differentiate products and services, and anchor consumers to a particular combination.

Sure a new business may add value by providing a better service than the competitor it beats, but the overall wealth pie of this nation doesn't increase.

Oh yes it does, because now the wealth is being allocated more efficiently. Commodities are one-size-fits-all, but relatively few goods are commodities. Consider, for example, that there are relatively few companies in the business of wheat production (commodity) but a great many different bread companies, in line with the wide variety of different bread products.

Please, pick up a microeconomics textbook. Macroeconomics is so flawed and obtuse that a lot of people dismiss the musings of economists, but microeconomics is a very robust discipline that is almost criminally underappreciated. If I could back to high school and give my teenage self some advice, it would be 'learn microeconomics.'

intellegacy7• 14 years ago

Ok, I'm reading some economics as I type. on Economic efficiency: Efficiency is really about a society making the best or optimal use of our scarce resources to satisfy most wants & needs.

To use your bread example, more bread companies offering more choices, allow us to better satisfy our diverse wants of bread. Basically we receive more value from our money. This is good.

But does adding more bread companies increase the resources we have? We can only eat so much quantity or so many varieties of bread.

To grow the overall wealth pie, we have to either make better use of our existing resources or increase the efficiency of production. Basically, improvements in process or technology leading to greater production.

I'm not against Steve Blank's 99% mainstream entrepreneurship course by any means. Helping entrepreneurs make better decisions raises the level of competition in the industry and in most cases that is good for society. But if the new businesses started don't come with innovation then I see this as fiercer fighting for a stagnant (or shrinking) pie. I value growing the pie over dividing it more optimally, although I suppose each is important.

casca• 14 years ago

Is it just me or does this look like a massive advertisement for Steve Blank's books and program? That's not to say that the books and programs aren't necessarily good, but still.

paulhauggis• 14 years ago

Isn't this most blogs? Even HN is in essence a platform for ycombinator.

larrys3• 14 years ago

Same with Avc.com

People like things to be subtle though.

They can also read into things that aren't there.

I offered to help someone the other day in a comment (which I did - then going back and forth with several emails and advice which took time) and was voted down in the one line offer. I guess they looked at my profile and thought I was angling for paid work? The truth is I've helped many people but never asked for payment (although it's been offered.)

digitalengineer• 14 years ago

Agreed. I kept thinking "well, where are these insight then?" No such luck. Why this scores so high is beyond me. I suppose a lot of people didn't bother to read the entire article which is without ANY insights.

AznHisoka4• 14 years ago

Content marketing is the best marketing.

friendstock• 14 years ago

I agree. I was expecting more insights.

freshnote• 14 years ago

Sheeple mentality for the most part. I will be downvoted into oblivion for saying it, but it's true.

mindcrime• 14 years ago

I voted you (and the parent post) up, FWIW, even though I'm a huge fan of Steve Blank's work. I did also notice that this particular post wasn't as chock-full of useful info and insights as many of his previous posts have been. I don't know that I'd go as far as to call it "just an ad" but it wasn't what I usually expect from Steve's blog.

larrys3• 14 years ago

"massive advertisement for Steve Blank's books and program?"

To which I say "chicken dinner"!

Disclaimer: I worked with Steve. He obviously has a nose for marketing, pr all that stuff. So of course he will always be angling for anything that will raise his profile. Which is, as you said "not to say that the books and programs aren't necessarily good".

_delirium5• 14 years ago

In a certain practical sense, aren't "the 99%", i.e. people without any significant cash cushion, precisely the ones who can't as easily take this non-VC, lifestyle-business route? If you need to pay rent and buy individual health insurance, it's a lot easier to do that if an angel or VC is fronting enough money to pay you at least a modest salary.

run4yourlives13• 14 years ago

I'd venture 90% of all new businesses have nothing to do with VC money.

In fact, my hunch would be that most are started with personal savings and family money.

ams6110• 14 years ago

I agree. The VC-funded startup is for the most part found only in the tech sector. You will never find a VC funded pizzaria, auto-repair shop, carpet-cleaning company, etc.

eli_gottlieb• 14 years ago

Or a bank loan.

larrys3• 14 years ago

While I don't know what the correct number is I can almost assure you that it is nowhere near 90%. Quick and dirty if you were able to determine the amount of state business registrations and compare it to the amount of vc funded companies (even taking into account not every vc funded company is public) I'm sure you would find an extremely small number.

"personal savings and family money" - sba loan, mortgage the house, credit cards, equity line to name a few more.

WettowelReactor• 14 years ago

I believe the article is referring to 99% of small business ventures being outside tech and not referring to the income disparity of the recent referred to in the occupy movements.

wfrick• 14 years ago

I welcome efforts to help small business owners, but we shouldn't pretend that small business in general drives the economy. The huge jobs and productivity growth that we associate with startups comes from a very small % of disruptive companies, mostly in high tech. (I wrote a bit more about this here: http://bostinno.com/2012/02/17/bailouts-for-startups-tough-l...)

rprasad• 14 years ago

Small businesses drive employ almost half of all employees (and more than half during boom cycles).

The technology sector has an overinflated sense of the value it provides to the economy in terms of jobs created or productivity growth. Note that the article you cite does not refer to technology startups, it refers simply to new businesses under the catchall "startups."

isalmon• 14 years ago

He forgot to mention that 90% of all startups produce waste (leveraging VC's money), while 99% of small businesses produce real value simply because they don't have a choice.

guscost• 14 years ago

Great thoughts! But I still want to be an entertainer...

djt• 14 years ago

The Lean Methodology is what small businesses have been doing since companies were created. I assumed that they took it and adapted it to tech business.

Entrepreneurship for the 99%

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