Last week, George Gendron was our featured guest in the latest in the Pioneer Entrepreneurs series of "Big Idea" teleconference roundtables.  Gendron recently left Inc. magazine after 20 years as its editor-in-chief in order to pursue his own entrepreneurial ambitions.  In his farewell column, George asserted his belief that this would be the "decade of the entrepreneur."  In our roundtable, George shared his thoughts with an intimate group of our members and responded to their questions about the state of entrepreneurship.

"Inventing" Entrepreneurship

Russ Waddill [2] got things rolling by noting that Gendron, given his tenure at Inc., obviously thought that entrepreneurship could be taught.  Really?  Gendron's answer was that the dynamics of entrepreneurship has been changed fundamentally over the last 20 years by its professionalization.  A body of knowledge and skills have been developed that can enhance one's chances of entrepreneurial success.  Schooling and reading play their roles.  However, "a great deal of knowledge is imbedded in social networks," which, in Gendron's view, have become key.

Gendron framed his elaboration by sharing a story about a conversation he had with Peter Drucker, the oracle of management wisdom, that took place upon the sale of Inc. to Bertlesmann some months ago.  At the time, Drucker told Gendron that his work was through at Inc., because Gendron had finished his role in the "invention of entrepreneurship."  Drucker went on to explain, "just because someone has done something doesn't mean it's been invented...it can be said to have been invented only when it can be replicated."  In the years before the 1980s, successful entrepreneurs spent an enormous amount of time and energy "making all of it up" in addition to running their businesses.  In the last 20 years, on the other hand, entrepreneurs have had increasing access to a "human capital infrastructure" composed of formal and informal networks of professionals who collectively know a lot more about startups than did their predecessors.  In Gendron's view, the opportunity and challenge today is "less about figuring it out by yourself" and more about "how to tap into this entrepreneurial network."  In other words, the new economy adage that "who you know [is] more important than what you know" is probably true.

On the other hand, the tacit knowledge contained within entrepreneurial networks is not mirrored in the curricula of our business schools.  Gendron shared how Inc. polled current and former Inc. 500 CEOs who had MBAs about the value of their business education a couple of years ago.  Roughly 80% to 90% of the CEOs reported that the skills derived from their MBA training started to become valuable once the viability of their businesses was no longer an issue (often around $10 million in sales).  That same proportion routinely said their MBA was "almost valueless in the early stages" of the business.  Specifically, an MBA "does very little, if anything, to prepare them for the psychological challenges" of starting a business.  Nevertheless, the influx of MBA-trained executives into the entrepreneurial ranks has corresponded with what Gendron called the "single biggest change in 20 years at Inc.," the end of the "era of entrepreneurial novelty."

Patrick Pitman reminded Gendron of an interview he had conducted two years ago with entrepreneurship researcher Amar Bhidé titled, "The Origin of the Entrepreneurial Species."  In the article, Bhidé summarized his findings by saying, "most successful entrepreneurs start without a proprietary idea."  Gendron said that Inc.'s research confirms Bhidé's claim -- but indicates that this truth reflects a fairly recent change.

Apparently, Inc. polls each class of incoming Inc. 500 CEOs.  One of the questions the magazine routinely asks is "what is the one thing that contributed the most to your success."  Around 1985, some 75% to 80% of CEOs would respond that their companies' success could be attributed to having a really hot, novel idea around which they could build a company and, indeed, a life.  However, starting around five years ago, the answer to that question had changed dramatically.  In fact, the large majority of CEOs said that they had built their business around "ordinary or mundane" products and services.  Their edge?  Superior execution, or, as Gendron puts it, "the only source of sustainable competitive advantage."  Gendron sees this change most visibly in the retail sector, where "very sophisticated operators" go about niche selection and store design in a fashion that is quite different from their mom and pop predecessors on Main Street.

In short, the shift from from inspiration to execution as the basis for entrepreneurial success has corresponded with the professionalization of the practice of entrepreneurship as manifested in a body of knowledge available via books, articles, and class room case studies as well as the tacit knowledge embodied in emergent networks of people having significant experience with the diverse aspects of the startup process.

Entrepreneurial Inflection Point

Notwithstanding today's "brutal operating conditions" and ravaged capital markets, Gendron firmly believes that the macro conditions that drive entrepreneurial activity in this country are "firing on all cylinders."  As a consequence, he predicts that "entrepreneurship will really flourish" in the coming decade.

First of all, Gendron points out that the "single biggest driver of entrepreneurship" is the behavior of large companies.  Let's start with downsizing.  It's understood that something like 20% of downsized executives will start their own businesses.  Even so, Gendron sees that direct effect as overshadowed by a critical secondary "effect on the executives left behind."  Cynical of the risk-adjusted opportunities within their corporations, the "best and the brightest" executives compose a "second exodus" that leads to even more entrepreneurial activity.

A close cousin of downsizing is outsourcing.  According to Gendron, nearly half of recent Inc. 500 classes performed functions that used to be performed within the organizational boundaries of their client companies.  In other words, a whole generation of growth companies have emerged to fill outsourcing niches.  (Ironically, this is one of the reasons that the current downturn in the economy has so punitively impacted the entrepreneurial sector.)

Again related to the ongoing restructuring of the large corporate world is mergers and acquisitions ("M&A") activity.  In the face of industry consolidation, the management of large corporations become introspective as they "digest" mergers.  Regardless of the talk of synergy, once merged, overhead typically goes up.  As a consequence, M&A activity most often means that valuable niches are ignored by the corporate behemoths.  Gendron points out that there is a surge of niche players in the aftermath of the historic M&A activity of the late 1990s.

A fourth major factor is the emergence of the Internet as a viable business tool.  Gendron pointed out that it typically takes seven years or more before a major technological innovation is effectively adopted.  That suggests that the really valuable applications of Internet technology will become apparent in the next few years.

Gendron concedes that, notwithstanding beneficial trends, there is a natural limit on the formation of new companies.  After all, one "starts to run out of able-bodied people" after a while.  The truth is, the enterprise formation rate (the percentage of people starting businesss relative to the entire labor pool) is fairly stable.  Consequently, one might even expect the number of new enterprises to decline as the baby boom exits the labor pool.  However, Gendron reports that immigrant and ethnic minorities are picking up any slack in the system.  He told us that between 1990 and 2000, the number of firms in this country, overall, increased by 12%.  That said, Asian owned firms increased by 157%; African-American owned firms increased by 27%; and Hispanic owned firms increased by 144%.  For those people having relatively few options, entrepreneurship represents the "last meritocracy." [1]

In the end, it's not that Gendron foresees a dramatic increase in the enterprise rate.  Rather, he envisions the continued influx of ambitious, experienced people into the entrepreneurial ranks who will benefit from both the professionalization of entrepreneurship and the existence of supportive social networks.  As I understand it, Gendron believe that we will see a phase change in the relative number of "substantial startups," that small proportion of businesses that account for the majority of net job creation, economic growth differentials, and innovation.

The Funding Market is Worse Than You Think

Economist John Maynard Keynes said, "In the long run, we're all dead."  Gendron observed that even if he's right about the macro conditions that drive entrepreneurship, that doesn't mean that the current operating and funding climates don't suck.  In fact, while he noted that before 2000, "the funding environment was never as bad as it was made out to be," today's market is "much worse than anybody is writing about."  Since devoting himself full-time to working with startup companies, Gendron has found that "everthing that can go wrong, will go wrong" when it comes to funding.

It's not just that a lot of angels and venture capital funds have retired to the sidelines, the VC sales cycle takes "five times as long" as it did just a couple of years ago.  Raising money has "become a full time job" for entrepreneurs, to the detriment of their businesses.  Furthermore, a "lot of deals are going bad at the last minute."

Not that the credit side of the equation is any better, in Gendron's view.  In fact, he sees it getting worse for emerging growth companies as the banking industry continues to consolidate.  There is a "credit crisis brewing" that policymarkers in Washington are just beginning to acknowledge.

Guy Cook shared that in his experience, even when you can get a term sheet from a VC these days, the terms are so onerous that it's clear that venture capitalists are desperate to recoup the sunk costs of yesterday's investments.  Gendron concurred, and suggested that VCs are "obsessed with salvaging value in their existing portfolios" and are blind to "terrific new companies that are starving for capital."  While acknowledging the cyclicality of risk capital, Gendron speculated that the "depth of the current cycle suggests structural change."  How long might all this take to sort out?  Gendron thinks two years.

Our long run optimist is a short run pessimist.

Management Continuity as a Key to Sustained Advantage

A veteran of three startups, Greg Macpherson asked Gendron whether he thought it "a fact of life" that founders be replaced at a certain point in a company's life.  Gendron answered by admitting that he was "vehement" in his opposition to conventional wisdom (rooted in acadamia and propogated by venture capitalists) that, in almost all cases, the person with the skills to start a company is not the person to grow and manage the company. [2]  In Gendron's view, this is a most damaging manifestation of the entrepreneurial mystique.  In contrast, Gendron believes that substantial founder involvement is essential in shepherding a company from startup to sustainable success.

Prior to leaving Inc., the magazine began research into the relationship between the continuity of founder involvement and long-term company success.  Gendron and his colleagues chose membership in the Fortune 500 as a milestone that suggested the achievement of a certain degree of sustained success.  Because there is significant turnover in the Fortune 500 from year to year, over the last 15 years, there were hundreds of first-time inductees to the list.  Inc. found that in about 80% of the cases, the company founders still had a substantial managerial, strategic, or tactical role in the company.

Sure, some entrepreneurs just aren't cut out for managing a company.  In most cases, they just don't have the interest in developing new skills.  Gendron acknowledged that in these cases, some kind of change is often justified, as bored founders, used to fighting fires, begin to start their own.  Nevertheless, to Gendron, the "real question for individuals" is "How do you pace your personal growth so the company doesn't outgrow you?"  "How should your role evolve over time?"  In other words, how does one "design a company that grows you?"

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[1] One of the most important things pointed out by Bhidé is the relationship between opportunity cost and "promising" startups.  I strongly suspect that places like Bozeman, Montana (which offer a lifestyle that is very attractive to some) benefit from the following equation: Talent + Low Opportunity Cost = Promising Startups.  For more, click here to download a slide (in PDF) I used not long ago in a presentation on the subject.  It's just a new take on the familiar immigrant experience.  Immigrants to Bozeman not only bring fresh ideas, deep experience, and contacts -- there are no jobs here, so immigrants have to become entrepreneurs, if their ambition exceeds a certain threshold.

[2] In Gendron's view, there is a "myth in the venture community about the effectiveness of the transition" between founder and professional management.  If true, maybe we shouldn't wonder.  Venture capitalists, after all, are rewarded for the investments they make over a 3 to 5 year period.  No doubt, they are interested in sustained competitive advantage, but VCs are paid on a return measured as of the date they distribute sales proceeds or marketable securities to their limited partners.  Replacing a founder with a bankable CEO in a hot IPO market may be a lucrative move for a VC (or a board compensated primarily with options), even if the longer run viability of the company suffers as a consequence.  Until the public markets lose their appetite for rock star CEOs, the conventional wisdom regarding the role of the founder may endure.