The Origin and Evolution of New Businesses

Rating:
Summary: Rich examples, interesting ideas, but inappropriate data
Review: Amar Bhide has written a richly illustrated book about new and growing firms, drawing eclectically on many social science disciplines. Although he makes frequent references to economics, he often invokes explanatory factors from cognitive psychology and organization theory. His resulting model thus has a strong ring of behavioral plausibility. Unfortunately, he draws on a database that is simply inappropriate for answering his central question: why do a small fraction of startups turn into promising firms, whereas the great majority do not?

Bhide committed a fundamental methodological error: he selected only successful firms and then tried to infer what differentiated them from the (non-selected) unsuccessful ones. He surveyed 100 founders of companies that appeared on the Inc. 500 list in 1989 and drew upon on several hundred case studies by his students at Harvard, plus cases of successful firms drawn from business periodicals and his own research. Although he shows some awareness of the methodological problem thus created, he nonetheless injudiciously draws strong inferences from empirical regularities among the successful firms.

Why is such selection bias problematic? Consider a hypothetical study, showing that 20 percent of the successful firms in the financial services industry were currently run by Harvard MBAs, compared to only 10 percent by Stanford MBAs. Would we be entitled to conclude Harvard MBAs were twice as successful as those from Stanford? What if we learned that Harvard MBAs started 80 percent of the firms in the financial services industry, compared to only 1 percent for Stanford? And, that most of the firms started by Harvard MBAs had failed? Now we see that Stanford MBAs are highly over-represented among the successful firms, compared to the initial population of startups, and that Harvard MBAs are substantially under-represented. Without information on the initial cohorts of firms starting out in an industry, we are in great danger of engaging in superstitious learning of the kind that Bhide actually reviews in his book (research conducted by Camerer, Kahneman, Tversky, and others).

By relying on information from firms that made it onto the Inc. 500 list or into the cases written up by his students, as well as on case histories of FedEx, Walmart, Microsoft, and other successful firms, Bhide cannot tell us why or how those firms got there. Only a research design that allowed him to follow startups and growing firms over time would give him the dynamic data he needs to answer the questions posed by his extremely interesting model.

Rating:
Summary: Rich examples, interesting ideas, but inappropriate data
Review: Amar Bhide has written a richly illustrated book about new and growing firms, drawing eclectically on many social science disciplines. Although he makes frequent references to economics, he often invokes explanatory factors from cognitive psychology and organization theory. His resulting model thus has a strong ring of behavioral plausibility. Unfortunately, he draws on a database that is simply inappropriate for answering his central question: why do a small fraction of startups turn into promising firms, whereas the great majority do not?

Bhide committed a fundamental methodological error: he selected only successful firms and then tried to infer what differentiated them from the (non-selected) unsuccessful ones. He surveyed 100 founders of companies that appeared on the Inc. 500 list in 1989 and drew upon on several hundred case studies by his students at Harvard, plus cases of successful firms drawn from business periodicals and his own research. Although he shows some awareness of the methodological problem thus created, he nonetheless injudiciously draws strong inferences from empirical regularities among the successful firms.

Why is such selection bias problematic? Consider a hypothetical study, showing that 20 percent of the successful firms in the financial services industry were currently run by Harvard MBAs, compared to only 10 percent by Stanford MBAs. Would we be entitled to conclude Harvard MBAs were twice as successful as those from Stanford? What if we learned that Harvard MBAs started 80 percent of the firms in the financial services industry, compared to only 1 percent for Stanford? And, that most of the firms started by Harvard MBAs had failed? Now we see that Stanford MBAs are highly over-represented among the successful firms, compared to the initial population of startups, and that Harvard MBAs are substantially under-represented. Without information on the initial cohorts of firms starting out in an industry, we are in great danger of engaging in superstitious learning of the kind that Bhide actually reviews in his book (research conducted by Camerer, Kahneman, Tversky, and others).

By relying on information from firms that made it onto the Inc. 500 list or into the cases written up by his students, as well as on case histories of FedEx, Walmart, Microsoft, and other successful firms, Bhide cannot tell us why or how those firms got there. Only a research design that allowed him to follow startups and growing firms over time would give him the dynamic data he needs to answer the questions posed by his extremely interesting model.

Rating:
Summary: Additional insights
Review: Arnold Kling has an oustanding review of this book, but I wanted to add my two cents on the subject.

Basically, Bhide provides interesting insights into the entrepreneurs themselves as well. Entrepreneurs can generally be divided into two types: 1) those that plan a venture very carefully, and 2) everyone else. The former group gets most of the press because they tend to be associated with VC funding, corporate partnerships, and eventually IPOs. Careful planning can be a prerequisite to funding, but as the book notes, VC funding, especially with the amount of capital available today, does not automatically mean things have been well thought out.

In many ways, I am more intrigued by the latter group of entrepreneurs focused on the marginal businesses. They lack the pedigree (i.e. MBA education and experience) and resources, but create many more businesses. The real key is that these investments make sense. Unlike the current state of Internet investing, these entrepreneurs look to make low-risk bets (say $50,000 of money from family and friends), which can be turned into a big hit but also have limited downside risk.

Rating:
Summary: Easy to Read, Enlightening
Review: I'm glad to see this book has made it to Amazon's top 10,000. I particularly liked how Bhide makes good use of examples to illustrate his points. In the present-day hoopla of venture capital financing, it's refreshing to see a writer of stature [from a business school, no less ;-) ] take a look at the realities of entrepreneurship.

Rating:
Summary: Better suited to academics?
Review: Perhaps this analysis of entreprenuership is better suited to academics who study the small business sector. Note that most of the reviews on the back cover were from academia. I am a consultant to the private business sector and I found this book to be totally useless. After wading through almost 400 pages, I hoped that perhaps the Conclusion chapter might enlighten me as to what I missed. Unfortunately, even it lacked a grain of usefulness.

Rating:
Summary: Insightful!
Review: The Origin and Evolution of New Businesses When Jann Wenner launched Rolling Stone magazine, he did no market research and considered himself merely an "amateur journalist." When Bill Gates and Paul Allen started Microsoft, they had no business plan, only a brainstorm that they should write a program in the BASIC computer language. Such seat-of-the pants planning is typical among entrepreneurs, says author Amar Bhide. Successful entrepreneurs don't need unique ideas and long resumes, Bhide writes. Rather, they must be able to adapt quickly to changing business conditions, and they must enter industries in a state of upheaval, where established players are lacking. Bhide offers a revealing look at the characteristics that make for successful start-ups. In spite of his often-dense prose, Bhide gives plenty of real-world examples to illustrate his concepts. We [...] recommend this book to entrepreneurs and to those thinking of starting their own companies.


Rating:
Summary: important step forward
Review: There are two books here. The first book, on the origin of new businesses, is a tour de force. The second book, on the evolution of businesses from fledgling businesses to large enterprises, is not as satisfying. I will confine my review to the first book.

The author gives us a new perspective on new business formation. He discusses five types:

1. marginal businesses. These are hair salons, lawn care services, and other businesses that are simple and small-scale.

2. promising businesses. These businesses also start out at a small scale, but they are much more complicated because they are launched in turbulent markets with high levels of uncertainty. You are going into a market before most people even realize that there is such a market.

3. VC funded firms. These firms require more capital and a more solid business plan than promising new businesses.

4. Revolutionary ventures. These are VC funded firms on steroids (the venture funding may have to come from large enterprises), who take large risks while aiming for large profits.

5. Large enterprise innovation. Here, established companies launch new projects, which require large investments but have a high probability of success (think of Intel maintaining its lead in microprocessors).

This is an excellent theoretical scaffolding, to which Bhide is able to attach many interesting insights. Some are statistical. For example, in a large sample of successful small businesses, only 12 percent thought that the originality of their idea was what produced success. The rest attributed their success to "exceptional execution of an ordinary idea." p.32

Other insights are anecdotal, such as the descriptions of how companies adapted to customer demands.

If I were the type who used a highlighter to mark interesting passages, my copy of the book would be mostly yellow.

With its solid theory, statistical support, and anecdotal color, this book sets a new standard for books about entrepeneurship. No professor of business can afford to ignore this work.

General readers may find some faults with this book. If an academic tone puts you off, too bad for you. Go read "Seven Habits in Search of Chicken Soup" or something.

Another shortcoming is that the Internet receives no real mention. Email me for references to some essays on Internet entrepreneurship that I think are fairly consistent with the thrust of this book.

Overall, I give the book my strongest favorable recommendation.

Rating:
Summary: Rigor for the Entrepreneurs and Concepts for Intellectuals
Review: This book provides both valuable practical insights for someone considering a new business and concise conceptual frameworks for those with an academic bent on the subject. Bhide makes excellent use of data to support his assertions, and this gives the book its academic flavor. But he also brings the subject alive with real world evidence and anecdotes. For example, he points to data that shows many entrepreneurs lack credentials one might expect to begin a successful business. He then explains a rational basis for the low credential (not to be confused with low skill) level of many entrepreneurs: that their opportunity cost is low because they "don't have the credentials and experience that could secure them highly paid employment." Hence they have less to lose. "[I]ndividuals who face high opportunity costs...usually do not start small, boot-strapped ventures." Entrepreneurs often even avoid the emotional costs of quitting satisfactory jobs. He then provides the entertaining quote of John Mineck who started Practice Management Systems in 1982 while still employed by the Personal Care Division of Gillete, Inc.: "You could do something on the side very easily; they seemed to discourage hard work."

But the book is by no means all humorous anecdote. It has heavy data, with charts and graphs that are not simply conceptual in nature, but quite empirical. Overall an excellent text for both the intellectually curious and the entrepreneurially inspired.

Rating:
Summary: Rigor for the Entrepreneurs and Concepts for Intellectuals
Review: This book provides both valuable practical insights for someone considering a new business and concise conceptual frameworks for those with an academic bent on the subject. Bhide makes excellent use of data to support his assertions, and this gives the book its academic flavor. But he also brings the subject alive with real world evidence and anecdotes. For example, he points to data that shows many entrepreneurs lack credentials one might expect to begin a successful business. He then explains a rational basis for the low credential (not to be confused with low skill) level of many entrepreneurs: that their opportunity cost is low because they "don't have the credentials and experience that could secure them highly paid employment." Hence they have less to lose. "[I]ndividuals who face high opportunity costs...usually do not start small, boot-strapped ventures." Entrepreneurs often even avoid the emotional costs of quitting satisfactory jobs. He then provides the entertaining quote of John Mineck who started Practice Management Systems in 1982 while still employed by the Personal Care Division of Gillete, Inc.: "You could do something on the side very easily; they seemed to discourage hard work."

But the book is by no means all humorous anecdote. It has heavy data, with charts and graphs that are not simply conceptual in nature, but quite empirical. Overall an excellent text for both the intellectually curious and the entrepreneurially inspired.

Rating:
Summary: A scholarly look at the reality of growing businesses
Review: This is not a breezy get-rich-quick look at how to start and grow a business. And don't expect a list of truisms like: plan your work, work your plan. No, this is an exhaustive exploration of the secret lives of successful small businesses.

If you can wade through its sometimes text book-like prose, you will come away with some tremendous insightful nuggets. Bhide does a great job of blowing away some generally held myths about business creation and the men and women behind growing companies. Bottom line: don't stereotype them.