Policy Theory and Entrepreneurial Fact

Presumably, ranking states according to a formulation of a "policy environment for entrepreneurship" is intended to be predictive.  At a minimum, it's not unreasonable to expect that the theories underlying such rankings would help us understand actual entrepreneurial experience.

Hmm...

I received the 2004 edition of the Inc. 500 this afternoon.  The following is a list of the states with the highest number of Inc. 500 companies per capita.  At the very least, such experience-based data is suggestive of a pretty healthy entrepreneurial environment:

1. Utah (28)
2. Virginia (15)
3. Delaware (23)
4. Colorado (9)
5. Massachusetts (41)
6. Montana (38)
7. Tennessee (16)
8. Washington (4)
    Maryland (21)
10. Arizona (17)

The numbers in the parentheses are the 2004 rankings of those states according to the Small Business Survival Index.  At first blush, there doesn't seem to be a correlation.

Costs matter.  Taxes matter.  Regulatory barriers matter.  But, they aren't the only factors that matter.  Furthermore, costs - viewed in isolation - don't tell us much.  If tax revenues are invested in public goods such as education and transportation systems, and if regulations reduce economic externalities and help facilitate effective markets, it's at least possible that taxpayers in Utah, Delaware, and Maryland might actually be getting a pretty good entrepreneurial bang for their tax buck.

I don't think I'll base a prescriptive entrepreneurial ranking on that assumption, though.

Related: Ranking Entrepreneurial Environments

 

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If You Can Survive, You Shall Succeed

In a review (registration required) of His Excellency George Washington , New York Times writer Michiko Kakutani writes:

What remains surprising about the narrative of Washington's life is the supremely ordinary nature of his virtues. He was not a military genius: Mr. Ellis notes that "he lost more battles than he won; indeed, he lost more battles than any victorious general in modern history." He possessed neither the wisdom of Benjamin Franklin, the intellectual sophistication of Thomas Jefferson, the effusive charm of John Adams nor the political instincts of James Madison. What Washington did possess in spades was ambition, stamina and the dogged ability to learn from his mistakes. He realized during the French and Indian War and later at Valley Forge, Mr. Ellis writes, that if you can survive, "you shall succeed." (emphasis added)

Washington was neither a brilliant military strategist nor inspired tactician.  His genius lay in his ability to hold his army together long enough to draw France back into the war and win the battle that ultimately counted.

As with Washington, many a successful entrepreneur has retrospectively been accorded genius.  Genius can help, to be sure.  I suspect, though, that fortitude and adaptiveness are more common ingredients of entrepreneurial success, even in the face of repeated, ultimately temporary, failures.  In the end, I find that inspirational.  I'm not likely to become a genius.  However, I can certainly be stubborn, and the notion of learning how to be a better learner seems within reach.

Related: The Source of Entrepreneurial Genius

 

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Young Entrepreneurs Find Success

From Jeff Cornwall:

Entrepreneur magazine presents their annual Young Millionaires feature. What is particularly inspiring is how these young people worked to build businesses with value with a variety of products and services including manufacturing makeup and body creams, a specialty medical school…

[The Entrepreneurial Mind]

This is another reminder that the application of technology and sound business execution can be as lucrative as the creation of new technologies.

 

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Growth Competitiveness and Taxes

From the October 16th edition of The Economist comes the following blurb on growth competitiveness (registration required):

Finland gain tops the World Economic Forum's league table of global competitiveness, followed by the United States.  Of the ten highest-ranked countries, five are Nordic.  Despite high taxes, these countries receive high marks for the quality of their public services and macroeconomic policy, including budget surpluses, areas in which America mostly scores lower.

1. Finland
2. United States
3. Sweden
4. Taiwan
5. Denmark
6. Norway
7. Singapore
8. Switzerland
9. Japan

Taxes matter, but so does deficit spending.  It also matters how you spend tax dollars: real public goods or special interest pork?

 

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Ranking Entrepreneurial Environments

Beware of policy prescriptions that are generalizations of "most important factor" analyses.

From Business Opportunities Weblog comes a posting titled Small Business Survival Index 2004 Rates the States.  This particular index focuses on tax, workers' compensation, and regulatory cost metrics.  Undoubtedly, these are important, and possibly critical factors, to many small and entrepreneurial businesses.  However, the implication that these factors are, in general, critical to a robust entrepreneurial environment can be misleading.

For example, take my home state of Montana.  According to this index, Montana is ranked #38, making it one of the "most anti-entrepreneurial environments" in the country.  I would be the first to agree that there is plenty of room for improvement here, but there is compelling evidence to suggest that entrepreneurship not only survives here, but is thriving.

Stephan Weiler, an economist at the Federal Reserve Bank in Kansas City, presents data that doesn't seem consistent with Montana's portrayal as being anti-entrepreneurial.  For example, the breadth of entrepreneurship in the state is unusually high.  Studies referenced by Weiler in a recent presentation conclude that Montana ranks #1 in entrepreneurial and small business participation rates, and the micropolitan areas of Missoula and Bozeman rank 9th and 12th, respectively, in terms of business formation rates.  Weiler's map of the breadth of entrepreneurship across the state shows that the ratio of proprietorships to total employment in Montana is consistently higher than the national average:

In terms of depth of entrepreneurship, Montana is still, somewhat more surprisingly, above average.  As measured by the income of its proprietors, Montana ranks just above the middle of the pack at #21.  Weiler's work shows that this is a function of a few counties in the state where proprietor income is significantly above the national average:

From the perspective of value added, the depth of entrepreneurship in Montana looks even more favorable:

So how does higher than average breadth and depth of entrepreneurship measured in these ways square with purportedly having "one of the worst anti-entrepreneurial environments" in the country?  The conclusions I come to are:

• The relative importance of the factors that influence entrepreneurial success are a function of context.
• Given the preceding, be wary of "most important factor" policy prescriptions.

I'm pretty sure that the reason that we in Montana are prone to start our own businesses is that there are few alternatives to self-employment.  The desire to survive here trumps a relatively unfavorable tax and regulatory environment.

Related: Small Business Survival Index 2004 (PDF)

 

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The Sales Learning Curve

Mark Leslie is a technology partner at El Dorado Ventures.  From 1990 to 2000, he was the CEO of Veritas Software.  In a venture capital market that is characterized by the need for capital efficiency, Leslie's thoughtful insights in his recent AlwaysOn Network article regarding the relationships among iterative experiential learning, sales productivity, and net cash flow are spot on:

By learning from the past, startups can build cost-effective, successful sales teams that burn through a minimal amount of cash on the road to breakeven...The time it takes to achieve cash flow breakeven is reasonably independent of sales force staffing.  It is, instead, entirely dependent on how well and how quickly the entire organization learns what it takes to sell the product or service while incorporating customer feedback into the product itself.  Because the entire organization has to come up to speed, hiring large initial sales staff does not speed up the time to breakeven, it simply consumes cash more quickly...Rather than starting with a large sales force, a company using the [sales learning curve] is better served by hiring a small team of sales execs with the analytical skills and patience to lead the company through an iterative learning process that includes the continuous discovery and solution of small but crucial problems.

In other words, initial sales capacity in the context of a new venture is inevitably low because the company has yet to really learn how to sell its innovative service or product.  Throwing expensive, yet unproductive, staff at the problem burns cash and, probably, slows the rate of organizational learning.  Leslie's advice is to first use a small, highly skilled team to climb into the steep part of the classic S-shaped sales learning curve.  At that point, sales techniques can be institutionalized.  It then makes sense to hit the gas by hiring more sales staff.  Greg Gianforte, the founder and CEO of RightNow Technologies, put it a slightly different way.  He advises to find a sales tactic that works, then build a sale strategy around that tactic.

With a little help from Laura Black of Greer Black Company, I've created a simulating model that links cash with sales staffing, iterative learning, the diffusion of learning, and sales capacity (click for larger image):

A model like this allows one to test assumptions regarding the sensitivity of cash flow to initial sales staffing, sales staff growth, initial productivity, learning rates, and the cost of sales staff relative to revenue potential.  As a reflection of Leslie's observations, I've found this little model quite useful.  If you'd like to learn more, please contact me.

Related: It Always Takes Longer and Costs More (PDF), Start with Nothing

 

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Center for the Study of Rural America

Yesterday, I listened to a very interesting presentation (1.2MB PDF) by Stephan Weiler of the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City while attending a conference on entrepreneurship sponsored by the Burton K. Wheeler Center for Public Policy.  Weiler's research focuses on rural and dynamic micropolitan areas along the metrics of the breadth and depth of entrepreneurial economic activity.  It seems to build very nicely on the work done by Erik Pages and his former colleagues at the National Commission on Entrepreneurship, who did a comprehensive survey of relative rates of entrepreneurial growth company formation across the U.S.

 

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Annotate, Share & Comment Upon Web Pages

My Venture Dynamics Group colleague Laura Black defines collaboration as the co-creation of knowledge.  A longstanding interest of mine is how technology might be used to facilitate effective collaboration among entrepreneurs and entrepreneurial support organizations.  Consequently, I constantly experiment with tools such as this weblog.

Although virtual office tools such as Groove can be immensely useful, the learning curve can be too steep for many, which limits the range of situations in which the tools are useful.  Consequently, my toolbox is full of lighter weight, easier to use, specialty tools such as Glance.net.  Over the last few months, I've been using shared Web link services such as del.icio.us and Onfolio, which I've found very useful.  After reading a Kolabora posting this morning, I've started to play around with Gibeo, which incorporates some of the easy-to-publish and RSS syndication features of del.icio.us and adds some more powerful annotation and commenting features.

For example, after highlighting a passage as "important" and publishing the page using my Gibeo account, other viewers can click the passage and add their own comments:

Similarly, passages can be highlighted for inclusion in my personal RSS feed that, in turn, are available for comment by others:

 

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