From New Yorker: The apocalyptic vision of entrepreneurship

The New Yorker is an American magazine of reportage, commentary, criticism, essays, fiction, satire, cartoons, and poetry. It is one of best in the world for what it does. It is not a publication about  startup and entrepreneurship.

On May 19, James Surowieki, a seasoned magazine staffer in charge of the financial page  wrote a piece titled EPIC FAILS OF THE STARTUP WORLD where startup entrepreneurs are presented as naive dreamers, a sort of sacrificial lambs of our society in order to have technological advance. The way I word it, the author implies the great majority are doomed to fail, like metaphorical "suicide bombers" who aspire to go to heaven.

The  article  is superbly written, generates controversy and helps the magazine which employs him reach more readers. Nothing sells more than scandal. However the author relies on personal conversations, outdated research,  third parties opinions and misunderstood big data analysis

James says
  • We  live in the age of the startup. It’s never been easier to build a product and start a company. [and] it’s never been easier for startups to raise money 
[MA Note: This is not so true. Getting VC financing it is still a major hurdle]
  • Starting a company may be easier, but making it a success isn’t. Competition is fierce, profits are scarce, and venture capitalists aren’t generous when it comes to later stages of funding.
  • The life of a new company is often brutish and short. as The Economist recently put it, there’s a mass extinction going on, too.
 The author then wonders "So why are so many people gambling on ventures that are likely to end badly?". He makes an insightful observation, before trying to answer.
A traditional answer is that entrepreneurs are just more comfortable taking risks than the rest of us....studies of entrepreneurs find that, in general, they’re as risk-averse as everyone else. Only when it comes to starting a business are they daring. And that’s because the fundamental characteristic of entrepreneurs isn’t risk-seeking; it’s self-confidence. They need the ego to get through it.”
He quotes studies to support this statement from 1997 and 1988, which simple arithmetic shows us are up to 26 years old.

In other words, to "reasonable" people, the entrepreneurs are lunatics with preposterous claims. There is nothing wrong with it.

Crazy is a compliment is the new book -  written by Linda Rotterberg, the charismatic co-founder and CEO of Endeavor - about those delusional, gaga, stubborn,  meshuggah (crazy in Yiddish) which outside world - not California - sees in entrepreneurs. . She had to translate the word entrepreneur in Spanish, because in many countries, Argentina included, there was no need for such a word, in its contemporary usage.

But there is one statement that sends shivers across the entrepreneurial community. Surowieki states:
A later study of more than eight thousand German ventures came to an even grimmer conclusion: founders who had previously failed were more likely to fail than novices.
The blogger Peter O'Kelly titled his entry "James Surowiecki: The Startup Mass Extinction : The New Yorker 

The New Yorker gave no hint on where this German study can be read. Peter and I did some research and we discovered it.

It is a  Big Data analytic paper, that has 45 pages some looking like this:
.
Page 17 of the German Paper

If we read the conclusion it says something different than the 3rd parties quotes:

"Our panel data study of 8,400 solo entrepreneurs uses a wide range of entrepreneurial, financial and venture level characteristics. Using survival duration models, our results showed that venture survival outcomes are unrelated to prior successful entrepreneurial experience and that failed entrepreneurs are more likely to fail again. These findings point to implications for scholars, entrepreneurs and policy makers and highlight the need for further research."
What I extract, is this:

  1. It does not matter if the entrepreneur (1) had before a successful venture or (2) has failed in the past in her venture or (3) never had a venture before. Past can not predict the future performance as an entrepreneur
  2. This lack of correlation needs further research

What is clear is that one cannot predict the future of a venture based on the past of the entrepreneur. However one can not predict the future based on past events, full stop. Benoit Mandelbrot the creator of multi-fractals  said "On even the calmest sea, a gale may be just over the horizon."

This is one of the dangers of Big Data. See Why Big Data is not for everyone .According to the UCSD professor of neuroscience Bradley Voytek - world class expert in big data:
  1. It is foolish to believe that my data have a better understanding of the world than  I do
  2. It is arrogant to believe that the person who best knows what to do with my data is me. 
  3. The more advanced the statistical method used, the fewer critics are available to be properly skeptical 
  4. The more advanced the statistical method used, the more likely the data analysts will be to use math as a shield 
  5. Any sufficiently advanced statistics, can trick people into believing the results reflect truth
The so called German paper has actual names as authors: Gottschalk, Sandra; Greene, Francis J.; Höwer, Daniel; Müller, Bettina (2014)
Dr. Bettina Muller, ZEW
Dr. Sandra Gottschalk ZEW
 They call themselves "entrepreneurship scholars", whatever that may be. No doubt they are solid professionals.They discovered that in Germany ventures that had outside capital (angel, VC) did much better than the opportunity entrepreneur (read desesperados), who try to make a business with their own money. Germany is a very different place than US, because this is obvious in California.

Here is quote from the German Startup Association:
In last decades, Germany has forgotten how to be a startup country. The majority of the wealthiest Germans inherited their wealth, unlike in the US where there is a comparable predominance of “self-made” entrepreneurs. SAP is the only company in the DAX Index whose founders are still alive. 25% of teachers in Germany have a poor image of business, symbolic of society’s perception of it. Almost self-evidently, the terms entrepreneur and manager are used almost interchangeably. 
This is reflected in this picture:

Figure 2: The % of population of the new  entrepreneurs. US is 7.5% vs Germany 2.5%
Also US VC is 0.17% of GDP versus 0.02% for Germany
In many ways, the conclusions of the German papers reflect the challenges that Germany has in creating a similar entrepreneurial climate as US. Germany is one of the most developed countries in the world, but they need not only to show more tolerance for meshuggah, They need to admire and trust them as the main source of newer technological advancement, -  a change in the German mainstream mindset. This started happening in Silicon Allee

Imagine saying that an author who was rejected many times, will never write book which sells. (what about J.K. Rowling?) Or an actor who did not get the part should give up and become a waiter for the rest of her life? Or just watch this video at the bottom of our home page.

The more opinions we listen to, less chances we have to make mistakes. Maybe the entrepreneurs today are descendants from  the gold diggers from Sacramento river, whose unrealistic hopes helped create Sacramento and  San Francisco and ultimately Silicon Valley.

Satirical drawing of a gold digger, 1840
The entire world tries to emulate Silicon Valley.. Twitter IPO alone made 1,600 people millionaire. Is there any single startup in Germany which made 1,600 people millionaires in one day?

1 comment

Popular posts from this blog

Bernard Madoff and I - updated January 1, 2015

Platforms always win

Insurance Industry and the next Industrial revolution