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TECH TALK: The Company: Amar Bhide

May 5th, 2004 · No Comments

The Origin and Evolution of New Businesses by Amar Bhide is a look at how entrepreneurs start and grow their businesses. From the books description:

What is this mysterious activity we call entrepreneurship? Does success require special traits and skills or just luck? Can large companies follow their example? What role does venture capital play?

In a field dominated by anecdote and folklore, this landmark study integrates more than ten years of intensive research and modern theories of business and economics. The result is a comprehensive framework for understanding entrepreneurship that provides new and penetrating insights. Examining hundreds of successful ventures, the author finds that the typical business has humble, improvised origins. Well-planned start-ups, backed by substantial venture capital, are exceptional. Entrepreneurs like Bill Gates and Sam Walton initially pursue small, uncertain opportunities, without much capital, market research, or breakthrough technologies. Coping with ambiguity and surprises, face-to-face selling, and making do with second-tier employees is more important than foresight, deal-making, or recruiting top-notch teams. Transforming improvised start-ups into noteworthy enterprises requires a radical shift, from “opportunistic adaptation” in niche markets to the pursuit of ambitious strategies. This requires traits such as ambition and risk-taking that are initially unimportant. Mature corporations have to pursue entrepreneurial activity in a much more disciplined way. Companies like Intel and Merck focus their resources on large-scale initiatives that scrappy entrepreneurs cannot undertake. Their success requires carefully chosen bets, meticulous planning, and the smooth coordination of many employees rather than the talents of a driven few.

Amar Bhide looks at the entrepreneur-driven Company and its early stage:

Most promising businesses start-out with meager funds only a very select subset of high potential start-ups can raise funds from professional intermediaries such as venture capitalists. Most founders of promising businesses cannot raise much outside capital because they dont have much verifiable human capital or proprietary technologies they tend to have limited experience and often start their businesses by copying or slightly modifying someone elses idea.

Promising start-ups have low most likely profit potential; but because of the nature of the opportunities they pursue, they have at least a chance of earning significant returns. Promising start-ups cluster in market niches characterized by high uncertainty generated by technological, regulatory or other such exogenous changes or by the amorphous nature of customer wants. High uncertainty and low capital and opportunity costs create a heads I win, tails I dont lose much proposition for entrepreneurs.

The founders of promising ventures find their business ideas in the course of their previous employment or by chance, rather than through a systematic search. They devote little effort to prior market research or planning. Entrepreneurs rely on opportunistic adaptation to unexpected problems and opportunities.

To add value to their free option, entrepreneurs have to get customers and other resource providers to take a chance on their business. The lack of a track record and capital makes resource providers reluctant to do business with a start-up. Entrepreneurs overcome this reluctance by providing special benefits, exploiting others cognitive biases and reflexive tendencies, and by locating resource providers with unusual needs or willing to bear risk.

Unforeseen events play a significant role in promising start-ups because of the high uncertainty and lack of planning. Adapting to unforeseen circumstances requires an unusual tolerance for ambiguity.

Amar Bhides book provides a detailed look into the minds of entrepreneurs. The Company that every entrepreneur seeks to build is the One to change the world. And yet few survive over the long-term. It is this optimism and belief on which our world is built.

Tomorrow: Arie de Geus


TECH TALK The Company+T

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