TCS Daily


Cultivating Entrepreneurs

By Chris Charuhas - May 1, 2003 12:00 AM

Entrepreneurship is the key to economic growth, as new companies grow 20 times faster than old ones. Many cities try to foster such growth, most fail. Why?

Virginia provides two models of ways to promote entrepreneurship - a successful one in Northern Virginia, or NoVa, and an unsuccessful one.

A previous column looked at what's needed to be an entrepreneur and how Northern Virginia fostered it. This column looks at how Richmond's efforts at promoting entrepreneurial activity may actually stifle it.

The Old Guard in the New Economy

Richmond has struggled with entrepreneurship mostly because bankers and lawyers - not entrepreneurs - are at the center of its business startups.

Bankers and lawyers are the traditional "gatekeepers" and brokers of startup deals. In the Industrial Age, they helped grow Richmond's tobacco companies, railroads and pharmaceutical firms. Richmond still relies on them to facilitate startups, because it's nothing if not traditional. But in the Information Age, bankers and lawyers don't perform that function nearly as well as entrepreneurs. There are several reasons:

  1. They're steeped in old business models. A Pazzi banker plucked from Renaissance Florence and brought up to date on computers would still find a job at First National. A medieval lawyer from Paris could, after boning up on current law, get a job with a modern-day firm. There's not much mystery in starting a bank or law firm.


  2. They're trained and inclined to avoid risk. Bankers demand collateral to eliminate loan risk. Lawyers settle cases to avert courtroom risk. Such avoidance options aren't available to entrepreneurs, who, since they can't avoid risk, must fight to tame it. That's perhaps why a disproportionate percentage of entrepreneurs in Israel are ex-paratroopers and military pilots -- people who've taken big risks and learned how to manage them.


  3. They look to numbers and precedent. Bankers work by the numbers. Lawyers seek precedent. But the behavior of complex, nonlinear systems such as technology startups can't be explained statistically or by past actions. Today's most important business questions, such as "What's in the customer's mind?" and "Does the CEO have the heart to persevere?" can't be answered through numerical analysis. The most profitable new companies get that way not by seeking precedent, but by breaking it. Big-business bankers and lawyers often ignore this, with disastrous results. Investment fund Long-Term Capital Management employed a platoon of MIT grads and supercomputers to predict the performance of companies, but still lost $200 billion. Prestigious venture capitalists Hummer Winblad helped combine a hot sales medium -- the Internet -- with a can't-miss industry -- pet supplies -- but lost $25 million after they discovered no one wanted to buy dog food at Pets.com.

How about MBAs? Richmond's got plenty of them - could they help? Unfortunately, MBAs aren't much better than bankers and lawyers when it comes to entrepreneurship. An MBA is good preparation for work in a large consulting firm, but not for a startup. Just like young Army lieutenants need a couple of years in the field to learn how real units work, MBAs need real-world entrepreneurial experience to be useful to startups. Before he got a Harvard MBA and started Amazon.com, Jeff Bezos got his first job at a high-tech startup. Most successful entrepreneurs, however, never go to business school. Most find that they can pick up the necessary business skills on their own.

What about the Industrial Age entrepreneurs who built great companies such as Richmond's Reynolds Metals? Perhaps they could contribute their expertise. Unfortunately, most are dead or retired, and the people who inherit their money aren't usually interested in startup firms. Most either invest in established companies or philanthropic projects. The few who deal with startups tend to gravitate toward charismatic narcissists promoting fundamentally unsound schemes, such as Value America founder Craig Winn.

Beware the Government Entrepreneur

If cities like Richmond can't rely on the Old Guard to foster entrepreneurship, can government step in and take up the slack? It depends. If a city government works with private sector organizations, it can help quite a bit. But if it tries to act like them, it'll do more harm than good.

According to Ian MacMillan, director of the Wharton Business School's Entrepreneurial Research Center, "Government agencies have squandered hundreds of millions of dollars on misguided attempts to (encourage) entrepreneurship." That's because most of these attempts involve top-down, large-scale projects. When city leaders start saying things like, "We're going to attract X sorts of companies," or "We're going to become the capital of the Y industry" real entrepreneurship suffers.

The perils of this industrial policy approach can be seen in Richmond. Instead of trying to develop its own high-tech firms, the city spent years trying unsuccessfully to persuade out-of-town chip manufacturers to build plants in the area. It didn't seem to notice that computer chips had become commodities manufactured in the Third World.

To win the favor of chip companies, Richmond had its local community college provide cut-rate technical training to corporate employees. This made it difficult for private training startups to gain a foothold. In NoVa, immigrant-run startup companies provide cheap computer training to corporations, while the community college concentrates on educating individuals. But in Richmond, the community college provides a great deal of corporate computer training, taking business from private firms. And this monster Richmond created is growing: the community college recently sprouted a consulting arm that competes with private companies.

Even when Richmond tries to help entrepreneurs, its top-down efforts don't work. The city spent millions converting a decrepit office building into a technology incubator, but many tenants are moving elsewhere because the rent's too high.

Richmond might say in its defense, "Maybe we're not so good with high-tech startups, but a lot of people here start successful restaurants." That's true. The city has a thriving restaurant scene. But in small retail operations such as restaurants, profit margins are comparatively low and growth is often slow. The skills and knowledge required to make them work are long established, and being proficient with old business models doesn't prepare people to identify and exploit high-growth new ones.

As Jeff Osborn says, "The dumbest money I have ever seen is from people who own chains of pizza stores. ... The other really bad one is dry cleaners." Big money and fast growth comes from new business models. If a city wants lots of tax revenues and employment, it doesn't want another used-car lot, it wants CarMax; it doesn't want another law firm downtown, it wants the headquarters of Nolo.com.

In NoVa, government doesn't try to make industrial policy or act like private companies. Instead, it partners with them. Local government works closely with the Northern Virginia Technology Council, a private organization, to determine how economic development funds should be spent. The Fairfax County Economic Development Authority in NoVa launched its own incubator as a partnership with Milestone Equity Partners, an early-stage investment/startup coaching firm. NoVa's George Mason University set up The Century Club, a partnership between the university and area companies that conducts monthly "Grubstake Breakfasts," where entrepreneurs who need funding can get coaching, consulting help, and introductions to investors.

Thus, developing a public-private partnership that doesn't take business away from entrepeurneurs but encourages their networking is a key to promoting new enterprise. But there is even more.

Oddballs and Outsiders

Richmond needs more entrepreneurs. How can it attract them? The usual method used by cities is to lower taxes. This works for established companies and keeps capital in town, but what's more important to entrepreneurs is a friendly cultural environment for people like them. Basically, if a city wants an entrepreneurial culture, it must accommodate strange folk.

Entrepreneurs are like the pioneers who settled the American West: a mixture of kooks, malcontents, foreigners and mavericks. Your average well-adjusted person doesn't leave what's settled to face known and unknown dangers and work like a dog. Entrepreneurs are people like Erik Buell, who became frustrated with Harley-Davidson management and left his cushy engineering job there to build bikes out of his garage; Bill Gates, who dropped out of Harvard to write operating instructions for crude little machines with no practical value, and Joseph Engelberger, a science-fiction buff who shelved his career in aerospace engineering to build the robotic contraptions he saw in pulp magazines.

Many of these mavericks do well. Buell is now president of a $100 million motorcycle manufacturer. You know where Bill Gates ended up. And Engelberger founded Unimation, the first company to build industrial robots (which sold many thousands of them to the Japanese).

But not all entrepreneurs are as dedicated. Entrepreneurship also attracts crackpots and dreamers. As Nicholas Negroponte puts it, "Innovation is inefficient. More often than not, it is undisciplined, contrarian, and iconoclastic. ... And innovative people are a pain in the ass."

What do you get when you put a bunch of these folks in one place? California. While regarded by many as the nutball capital of America, California has also spawned the most entrepreneurial place on Earth: Silicon Valley. There, the first user-friendly PC was brought to market by Apple Computer, a company founded by the notoriously abrasive Steve Jobs. One of Jobs' biographers said that if he ran for president, "He'd probably tell a number of important senators that they were bozos." If a city wants to foster entrepreneurship, it must welcome people who may be strange or crusty.

Not much is stranger to most Americans than people who swathe themselves in robes from head to toe, or do their dance steps off the beat, or eat fermented-hot-spiced-pickled cabbage. But NoVa does a terrific job of accommodating them. It spends a lot of money on Farsi-speaking schoolteachers and English-Spanish ESL classes. There are more than 100,000 Korean-Americans living in NoVa, and while some NoVa residents have complained about Korean-language road signs and restaurant menus, officials wisely never do anything about it.

NoVa has reaped the rewards of accommodation, because immigrants often become great entrepreneurs. Bob Kang, a Korean-American in NoVa, founded Mortgage Discounters, one of the first mortgage companies to do business online. The NoVa-based Indian CEO High Tech Council has over 800 members. Anna Maria Arias, a NoVa resident of Chilean descent, founded Latina Style, a thriving magazine with over half a million readers nationwide.

Richmond isn't quite as welcoming as NoVa when it comes to outsiders, but it's moving in the right direction. Unlike other cities, it doesn't harass immigrants as a matter of policy. A Hispanic woman in Norcross, Ga., was fined for posting the name "Supermercado" on her store, but Richmond's "Tiendas" are left alone. That's part of why Richmond's Hispanic population has tripled in size the past five years -- an encouraging trend for its entrepreneurial prospects.

Be Kind to Entrepreneurs

To foster an entrepreneurial climate like NoVa's, cities should:
  1. Get entrepreneurs involved. Ask for the advice of entrepreneurs who've "been there and done that" about how to create programs that help startup firms succeed.


  2. Accommodate outsiders. Roll out the red carpet for the pony-tailed hacker, the "skunk at the picnic," the guy in the turban...


  3. Educate the rookies. Send every new company founder a handbook that lists sources of support and warns them away from the most egregious startup errors. Make sure it includes a good reading list of books like The E-Myth Revisited, Under the Radar, and The 22 Immutable Laws of Marketing.


  4. Copy the Netpreneur Exchange. Establish an entrepreneur support organization on the Netpreneur Exchange model. It doesn't matter whether it's funded by public or private money, just that it fulfills the same functions. And make sure it's free or really cheap.


  5. Provide micro loans and grants. Few beginning entrepreneurs have much collateral. They either haven't amassed any yet, or lost it all when their previous startup tanked. Banks won't touch them, investors don't trust them (yet), but a little government help can keep them in the game.

By doing these things, a city can attract and create more entrepreneurs, while reducing their learning curve from around five years to only two or three. It will generate more startups, each with a better chance of success. If it can provide strong entrepreneur support for five or 10 years, a city will find itself with a thriving economy.

Mukesh Chatter, the Indian immigrant who founded Nexabit Networks and sold it for $900 million, explains this very well: "Bring the entrepreneurs in, give them a chance. Bring everybody in who's been told that something can't be done, and that they're nobody. They'll just keep turning into somebodies."
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