“The Drunkard’s Walk” by Leonard Mlodinow has had a significant influence on my understanding of small business and entrepreneurship. That phrase has now become the catchphrase of my current MBA Marketing class as everyone is beginning to internalize what its real meaning is. Here’s a synopsis of what I’m teaching:
At business school the professors all teach that process is everything. One needs to perfect an idea, then from the idea, perfect the plan and finally, go out and do it. I’ve discovered that entrepreneurship is just the opposite. In my class, which is frequently one of the last taken by students on their way to an MBA, I suggest that they forget the concepts that they’ve studied for the past year or two and instead approach small business in a completely different way.
Large businesses like General Electric have potentially hundreds of thousands of employees and millions of customers. Every day their destiny is mostly shaped by the shear momentum of the organization. Of course, a major economic shift, as we’re experiencing now, can influence them, but, for the most part, the winds that blow have little overall influence on their day to day success.
Small companies are quite the opposite. Their momentum is infinitely small in comparison. As a result, the random influences around them that occur each day cause wild fluctuations in their performance. For example, the CEO meets a business opportunity by sitting in a fortuitous seat on an airplane, or a snow storm causes the entire engineering staff of one to miss the deadline for a customer.
Several books have been written about our tendency to see patterns where none exist. In “Outliers” Malcolm Gladwell points out how one’s month of birth in Canada can strongly influence their likelihood of being a successful hockey player though a series of connections that are completely rational but difficult to have foreseen. We often improperly credit an individual with an accomplishment that was driven by external forces. Or, many of my students suggest the use of “mouth to mouth” marketing as their preferred choice and show examples of successful use in the past, but importantly, they can’t demonstrate the critical differences between those that succeeded and those that failed.
All of the successful entrepreneurs that I know (at least those with some modesty) are able to retell the apparently random sequence of events that conspired together to cause their success. They also all shared many important qualities of rationality, perseverance, likability, etc. - too many to list here, that also contributed to their success, but without exception, each also could credit “the Gods” for happenstances that were critical.
The key question is: if random occurrences have a significant influence on our likelihood to succeed in small business, is there anything that we can do about it other than to simply hope for luck?
And, the key answer is yes. I’m reminded of the joke, but truth of the following observation. If you want to live to ninety years of age, there’s one thing that you can do that, from an actuarial perspective will vastly increase the odds of living that long. It is, simply, to live to eighty nine! Look at the actuarial tables on line. As we age, our life expectancy extends.
Thus, the critical ingredient to increasing the likelihood of finding success in small business is simply the act of survival. If one cannot determine with any accuracy when the magic moment will occur or which events will conspire to bring us to success, then the only thing that you can be sure of, is that if you go out business before it occurs, you’re dead.
Survival isn’t simply waking up in the morning with the determination to not die. It requires a plan of action that maximizes your likelihood of not being killed. In small business, survival is equivalent to having a break even or positive cash flow. And, cash flow is contingent upon creating transactions that have value and closing deals with customers that yield profit.
Note that it is not demonstrating a specific minimum rate of growth year over year. It is simply surviving. Any real entrepreneur will tell you that it is a combination of the thousands of meetings with customers, vendors, peers, employees and the like that eventually lead to the eureka moments that seed business ideas with the critical sparks that lead to eventual success.
The next important question that I ask is whether our methods for funding small companies lead to a higher or lower likelihood of success. I think that the answer is at this point self evident. If a venture or angel investor presses a company to show year over year growth in the interest of increasing the stock price for attracting future investors, then the pressure that they are applying is the most destructive force that can be applied. It’s that simple.
Venture capital hasn’t been around for that long a time. It’s quite possible that the methods and concepts that have been used are not optimized and I am suggesting that it is time to consider changing them radically. The skill and resources that investors bring to small companies is invaluable. But, as board members and advisors, the investors must change their focus once the investment is made to one of achieving cash flow neutrality as quickly as possible and then to survive and evaluate new opportunities as they become apparent to the fledgling company.