How do great entrepreneurs think?

Here is one interesting study:

That is not to say entrepreneurs don't have goals, only that those goals are broad and–like luggage–may shift during flight. Rather than meticulously segment customers according to potential return, they itch to get to market as quickly and cheaply as possible, a principle Sarasvathy calls affordable loss. Repeatedly, the entrepreneurs in her study expressed impatience with anything that smacked of extensive planning, particularly traditional market research. (Inc.'s own research backs this up. One survey of Inc. 500 CEOs found that 60 percent had not written business plans before launching their companies. Just 12 percent had done market research.)

…Sarasvathy explains that entrepreneurs' aversion to market research is symptomatic of a larger lesson they have learned: They do not believe in prediction of any kind. "If you give them data that has to do with the future, they just dismiss it," she says. "They don't believe the future is predictable…or they don't want to be in a space that is very predictable."

The article is interesting throughout and hat tip goes to The Browser.

Comments

"Sarasvathy explains that entrepreneurs' aversion to market research is symptomatic of a larger lesson they have learned: They do not believe in prediction of any kind."

As an entrepreneur (my entire living since leaving college has been from businesses I've started) but not a great one ('coz I certainly ain't rich although am comfortable) that doesn't strike me as quite right.

It's not that the future isn't predictable: it's that what market research tells you people might say they'd like/do/want isn't the same as what people are actually willing to pay for.

And I certainly do do market research, talk to a few people, try and get a feel for what might be interesting to people. But the formal stuff, no.

We can put the same point in economic terms: revealed preferences.

There's a very large difference between what people say and what they do. And market research will tell you the first while only actually launching and counting the shekels will tell you the second.

How is this good research? The professor is samplingon the dependent variable. For all we know, all *unsuccessful* entrepreneurs are also effectual reasoners!

"Ignoring market research" doesn't sound like a strategy that improves expected outcomes to me; it just sounds like a strategy that would significantly increase risk, and therefore of course we'd see it in extremely successful entrepreneurs. The test is not "what do successful entrepreneurs do", it's "what don't unsuccessful entrepreneurs do".

Is it possible that ignoring market research is a trait that is common to both the most successful and the most unsuccessful researchers? Similar to what Alex Godofsky writes. Reminds me of the case where small school size was correlated with better schools.

@Chris:

The hero worship might still be justified if the gain to society by the few ventures that do succeed is larger than the bulk that fail. e.g. a single google.com or netflix.com is probably worth more to society than the many other similar startups that might have failed.

As someone who has worked with many entrepreneurs I can tell you that these characteristics aren't some kind of insight into why they're successful. They're the reason most entrepreneurs fail. And even in cases where entrepreneurs who have these characteristics are successful, how often do they have a team of privtae equity/venture capitalists with Harvard MBAs doing this work for them? My advice to a prospective entrepreneur reading this article is to ignore it, and focus on having a good product/service and a plan based on sound business principles. Not very fun at all, sorry.

An interesting article and some interesting critiques here (see chris 10:03:09). My personal experience: there is nothing more annoying than an "eternal optimist." Someone like that is basically a tax on everyone around them--underestimating the difficulty of projects and oversubscribing their own time and that of the people around them as a result. Having said that, it does seem plausible that these types would occasionally achieve massive success. And it is an open question whether the benefits of that personality trait outweighs the costs. The individuals in this study also seem to be very fearless and adaptable and those seem to be obvious assets as personality traits. Survivor bias is a problem but I don't think you can dismiss the whole study because of survivor bias.

Entrepreneurs think creatively.

Possibly the problem is with the quality of market research, or at least of the type entrepreneurs can afford. By "afford" I mean not only pay for, but help design, wait for, etc.

I've been involved in startups for many years. I doubt the flops would have been prevented by market research, and the successes didn't use it either. This is not to say it's a matter of entrepreneurial genius. IMO, given a reasonable idea it's mostly a matter of blocking and tackling, getting good employees, and being alert and flexible enough to adjust your product as the market changes or you see new opportunities.

Having a focus group tell you they like the red one better than the blue one is pretty useless, especially when you notice that the green one is outselling both.

I suspect that many entrepreneurs who don't use market research still have some kind of informal expertise by having worked in the industry before, or lots of anecdotal data. So they do know if there is a demand for their new products even if there is no formal study.

"Well, here's how great economists think. Those who suffer from Krugman Derangement Syndrome should not click the link. All should recognize that, according to many Republican senators, Peter Diamond is unfit to sit on the Board of Governors... unlike Kevin Warsh, who has no training in economics or finance."

Well, we just got a fantastic example of how you think. Thanks for showing us the way not to do it.

Candace Allen Smith has written about how entrepreneurs are like heroes. She gave a talk on this at the Dallas Fed in 1997. Here is the link

http://www.dallasfed.org/research/ei/ei9701.html

I think that got reprinted in the Freeman. She also had a similar, award winning article in the Journal of Private Enterprise in 1996.

Walter Williams also wrote about entrepreneurs as heroes

http://www.hillsdale.edu/news/imprimis/archive/is...

So did Johan Norberg

http://www.cato.org/pubs/catosletter/catosletterv...

I have also written a couple of articles on the subject

http://cyrilmorong.com/ENTREPRENEUR.htm

http://cyrilmorong.com/ENTREPRENEUR.doc

In one of his books, Israel Kirzner said something like "entreprneurs discover opportunities for economic proft by leading a life of purposeful action."

I started a business because I had the insight to see the opportunity where everyone else saw a problem. I didnt need to spend money on traditional market research. The launch is the market research. The first sale is the confirmation of the hypothesis that there is a market fit for your business. This is the lean startup way.

Lawrence Summers explained his vision for an entrepreneurial future last year at the White House blog

http://www.whitehouse.gov/blog/A-Vision-for-Innov...

"An important aspect of any economic expansion is the role innovation plays as an engine of economic growth. In this regard, the most important economist of the twenty-first century might actually turn out to be not Smith or Keynes, but Joseph Schumpeter."

When you have a disruptive technology and you're seeking to create and define a new market space, market research is not all that useful. How would Mark Zuckerberg have researched the potential market for Facebook? What questions would his survey contain? Instead, he created a product and put it out there. His market research was the iterative process of tweaking his product to satisfy customers. That process typifies successful tech entrepreneurs, largely because the cost of putting out an early version is so low, but the opportunity cost of not being in the market is so high.

This is to say nothing of biotech entrepreneurs.

Business success is most decidedly NOT random. I've been involved in startups that succeeded and failed. I've been on teams that made successful products, and those that failed. In every case, success or failure could be determined by looking at the decisions that were made along the way - and often you identify the bad decisions as they were being made.

The notion that business success is random is a comforting belief, because it allows you to think that CEOs don't deserve their pay, that the guy who makes twice as much as you in the same job is undeserving, or that rich people got where they are through luck. It allows you to believe that your own failure at starting a business was just the Fate of the Gods. But all the evidence we have shows that individual productivity varies tremendously from person to person, and that successful businessmen are those who make better decisions than unsuccessful businessmen.

It would be more accurate to say that starting a successful business is very hard, and therefore many fail at it, for many reasons. It would also be fair to say that there can certainly be an element of risk to any business venture, because the businessman is operating with incomplete information. You don't know what your competitors are doing, you don't really know exactly what people are willing to pay for your product, you don't know how stable the supplier you bet your business on really is, etc.

But variance and risk are not the same thing as randomness. If business success were truly random, you could take a world-class entrepreneur, put him up against a random person picked from the phone book, and expect both of them to have the same success starting up a new business. I guarantee you that's not the case.

Market research at the corporate level is often just a tool used by one executive/set of executives to battle another executive/group.

Much like, I would say, a lot of economic research and the products coming out of "think tanks"...

@Dan H
http://en.wikipedia.org/wiki/Illusory_correlation

And look at the contrapositive: It does not make sense for the majority of successful entrepreneurs to have the notion that the future is unpredictable, or that cheap, fast and frequent investments lead to those that come out on top if business success is predictable.

If business success were predictable, entrepreneurs should tend to believe the future is predictable.

Because of survivor bias, the successful strategy will reflect the properties of the challenge.

I also believe you are aware of the performance of stock pickers vs random portfolios.

But I definitely don't think randomness means this money isn't earned! They put it at risk. If you go into a casino and put $1000 on red and you win, you totally earned that money. Salaries, however, are not as risk-based and tend to be highly correlated (predictable!) with how much money your parents made.

@Bernard Yomtov

Ha! Touche.

“It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” - Steve Jobs

Basically, most of the entrepreneurs goes with the things they love to do most or that may captured their interest. They are sensitive about the competition. Just like <a style="color:black;" href="http://www.virtualbusinesslifestyle.com/2011/02/finding-your-niche/">finding a niche market.

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