Friday, July 31, 2015

Hard truths about entrepreneurship !

A careful reader of my books will realise that I get very self-conscious when writing about entrepreneurship and starting businesses. The reason is obvious - since I do not have start-up experience, I feel unqualified to advice business people.

My confidence has grown of late. I dare say that if I every publish a fourth book, I should be able to speak quite authoritatively about running businesses.  Law school has made be used to the idea of reading research journals and my previous engineering and finance studies has always allowed me to be very comfortable dealing with statistics. 

I want to follow up with my previous article on entrepreneurship to dispel a lot of folk wisdom which was thrown my way when the last article on entrepreneurship was published. My materials are drawn from a working paper from the National Bureau of Economic Research by Ross Levine and Yona Rubinstein entitled Smart and Illicit : Who becomes an Entrepreneur and do they earn more ?

Here are some bitter truths :

a) Before we even start, what kind of entrepreneurship are we really talking about ?

There are actually two kinds of entrepreneurs. Entrepreneurs who incorporate private limited companies and limited liability partnerships (LLPs)  are very different from entrepreneurs who run sole proprietorships and partnerships. Let's call the former type A and the latter, type B entrepreneurs.

Type A and type B entrepreneurs have very different income characteristics and tap into different skills when conducting every day businesses so they should not be discussed the same way. 

The government is clearly trying to get more young  people to become type A entrepreneurs because only type A's were found to be Schumpeterian in character - they can disrupt and overturn economies, make millions for investors and can potentially create thousands of jobs in the future.

b) Type A entrepreneurs have strong analytical and knowledge-based skills.

The kind of entrepreneurs behind the Facebooks and Googles are generally geeks who also can lead. They are streetwise intellectuals, not the Boh Tak Cheks that the obsolete baby boomer uncles admire. 

Type A entrepreneur's primary skill set involved non-routine analytical skills and non-routine direction, control and planning skills. While these skills are non-routine, they require a certain amount of book smarts and can be cultivated in a strong liberal arts program - being street-wise is important but no longer enough. A higher-order intelligence is required such that a person who drops of of secondary school is unlikely to have (but a Harvard dropout would).  

Type B entrepreneurs mainly employ non-routine manual work in their daily lives. The ability to hack and rig equipment, make minor repairs and drive trucks is more important for Type B businesses.

c) Type A entrepreneurs are way ahead of Type B when it comes to financial remuneration.

Do not read further if you have a weak heart.

Type As make a lot more money per hour than Type Bs. 

Type A's typically will be paid more when they return to employee status. Type B's typically take a pay-cut to jump into business and generally earn more by working longer hours. 

I see this finding as particularly important for policy makers, if Type As can get a higher pay when they exit from running businesses, more undergrads can be encouraged to build start-ups as there exists a viable exit strategy when they get older and wish to start a family. 

Type A entrepreneurs even make more than their life-long employed peers when they go back to salaried sector !

( Which is great news for the wonderful folks of Block 71 ! )

d) Type As are predominantly white males who have privileged backgrounds.

While this does not directly apply to Singapore. I have said before that only privileged families can sustain this form of risk taking from their children.  

Particularly interesting is that this idea is what you readers resist the most. 

Singaporeans have a romantic notion that the scoundrel who drops out and starts a businesses is the ultimate winner in life, that might work in the 80s but not anymore. Baby boomers talk about the lack of hunger in generation Y when brow beating them even though they know that Gen Y is more highly educated and tech-savvy. 

Some scoundrels do win, but most scoundrels don't.

Innovation and creativity requires a few more years of schooling. In the future, advanced statistics will be employed in basic marketing and citizens are getting more educated and skeptical. A smooth tongue and confident swagger will no longer be enough to start a business empire. People will google to compare prices. 

There is also less arbitrage opportunities in real estate so don't expect to the next Li Kashing by buying property.

e) Successful Type As entrepreneurs are 'illicit' !

It is not "hunger" but "naughtiness" that makes a good entrepreneur.

Not only should Type A's be smart and come from privileged backgrounds, they need to have this attitude that rules simply do not apply to them. Many successful businessmen used marijuana when they were younger. Facebook was first written as an app to rate women on campus. 

Thus, a good entrepreneur will know that he is suited to run a business. He has fairly good results in school but should be naughty and be quite a handful in class. Sometimes this can even lead to criminal behaviour.  

In summary, research clearly shows that the folk wisdom from our well-meaning Boomer generation uncles on successful businessmen is wrong. There is no evidence that hunger drives innovation, otherwise Silicon Valley would be in Africa.

The government needs to target that special category of Singaporeans who come from wealthy families who are smart but have demonstrated a history of illicit behaviour to build the Facebooks and Googles of tomorrow. 

This reinforces my proposal of locating an Entrepreneurship centre at Barker Road. 







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