Are Entrepreneurs Smarter, or just Gutsier?

The vagaries of my reading habits had me reading two “How I did it” books last week; Ed Whitacre’s “American Turnaround” and Dave Ramsey’s “EntreLeadership.” Both men are justifiably proud of their achievements, but their differing paths to success are striking.

Whitacre  spent 44 years with the same corporation, rising to the Chairmanship of AT&T by climbing the ranks through management. Ramsey, like so many entrepreneurs, first experienced massive failure before building an organization around his own skills and creativity. Is one road to success inherently more admirable, or more challenging, than the other?

As a lifelong small business owner (not counting “side businesses” when I was young and employed), I’ve signed my own paychecks for over 32 years, I tend to be strongly biased in favor of the achievements of other owners. I frequently point out that taking risks is easier when it isn’t your own paycheck on the line. Yet the successful executives I meet seem to suffer no embarrassment about compensation packages that dwarf those of most business owners. I’ve never heard one say “I only do this because I’m just not smart enough to own a small company.”

Just before the last Presidential election, I attended a speech by David Axelrod, President Obama’s political strategist. His message was plain (even though he was speaking to an audience of conservative Texas business people). He said, or at least intimated that the problems in our country were largely due to the fact that the really smart people, the ones who had chosen politics as a profession, didn’t have enough control over the economy.

He had a point. If I look at his job as getting a secure paycheck while controlling vast sums, having corporations and millionaire entrepreneurs curry his favor, and being able to pass laws to enforce what he thinks should be done, perhaps that is where all of the brightest folks would go if given the choice.

Certainly the three obvious types of financially successful people, business owners, business executives, and elected officials; along with professional athletes, artists, and leading scientists, all have to survive a competitive gauntlet in their chosen fields. Reaching the pinnacle of what you do, whether measured by income or accolades, is pretty Darwinian.

Is there really a difference, then? Are we somehow suited for a specific career path, or are we like the Tutsi and Hutu tribes in Rwanda? There is essentially no ethnic difference between the two. Their tribal identity was determined by British colonists, who issued identity cards based on what they saw as differences in facial features. Yet the fact that there was no real racial distinction didn’t stop the two groups from discriminating, and eventually slaughtering some 800,000 of each other in the Rwandan Genocide of 1994.

Like any other human beings, we first become part of a group and then start focusing on why that group is better. Let’s face it. Small business owners are no smarter than anyone else. Most became entrepreneurs by happenstance. The most frequent reasons I hear for starting a business are 1) Wanted to make more money than my employer paid, and 2) Lost my job and needed to eat.

I also talk to lifelong employees who say “I have always had a burning passion to own my own business.” That’s a crock. No one goes through an entire working career with a unfulfilled burning desire. Those people had a choice between the known and the unknown, and they made it.

Risk-Taker-on-Tightrope-285x280That is the single characteristic that defines anyone who has started up a company; a high level of risk tolerance. It may be because the entrepreneur is self-confident, or truthfully because he or she simply doesn’t comprehend the potential downside of leaping into business. Whether it is generated by ignorance, arrogance or merely ebullient optimism, that risk tolerance is the first attribute required of any entrepreneur.Without it, no start-up would ever start up.

Posted in Entrepreneurship, Leadership, Thoughts and Opinions | Tagged , , , | 3 Comments

3 Responses to Are Entrepreneurs Smarter, or just Gutsier?

  1. Joe Zlotkowski says:

    I think you are on track. I know I have toyed with the idea of owning my own business, but realized years ago that I do not have the risk tolerance or the burning need (i.e. I just lost my job and need to eat). Entrepreneurs fulfill a key role, but they often get to a point where they need the skills of “corporate” people. They need each other.

  2. Clint Moar says:

    Thanks John, another good topic…
    Guts, balls, chutzpah, however you say it entrepreneurs and business owners have immensely more than employees…Like you say in the “crock” paragraph, they choose the known “job” because they feel like it’s the easier way…My reason for quitting my job and starting a business was mainly your 1. Wanted to make more money than my employer paid, but it was more about compensation…example, one company I worked for only about 2 years, told me, (after I left, finding a better paying career), “Clint, you were way better at this than the Journeyman, Bill”…Fine time telling me now!..shoulda compensated me and maybe I’d have stayed…I digress…
    Successful entrepreneurs and business owners know how to use risk to their advantage and master it by using it with plenty of practice…Employees go home to watch TV, entrepreneurs go home to work, but fun work.
    Clint.

  3. I think self-employed people realise the world is their oyster, they are no longer sheep…they feel they can achieve whatever they desire…but yes and a big yes, they need to foresight to pick up the pieces when things go wrong or be quick enough to STOP and change what they are doing to make it work.
    Im from a working class background so the only thing we have is our tenacity and will to resolve.

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Giving Referrals: Fire and Forget?

We all appreciate getting referrals. There is a feeling of gratification in knowing that someone thinks enough of your work to send a friend or associate your way. Referrals are usually the life’s blood of most small businesses. When I interview prospective owner clients, one of my standard questions is “How do you get new business?” The answer is almost always “By word of mouth.”

NetworkingSome people hand out referrals like candy. They are the super-networkers, the folks that attend tons of business events. Mixers, luncheons, and seminars attract them like moths to a light. They swap business cards like baseball cards; it sometimes seems that their ambition is to collect the whole set – one of every business in town. They can provide a source for almost any product or service.

This leads to an issue. If you ask someone for a referral, is he or she responding in an attempt to fill your need with the best recommendation possible, or is the motive to curry favor with the business who is on the receiving end of the recommendation?

If it’s the former, you can move forward with some level of confidence that the prospective vendor has been at least minimally vetted. Of course, the assumption that the referrer is trying to help you isn’t a guaranty that the transaction will be successful. Everyone has problems from time to time. But it should be an implied promise that the reason behind the referral is based on experience, or at least on hearing about another’s experience.

If the response is based solely on a chance meeting, and is only intended to curry favor with the business receiving the recommendation, then it is a “fire and forget” referral. The person making the recommendation is not concerned that it will circle back negatively. He is  just throwing bread on the water, hoping something will eventually rise up to benefit him.

The difference is critical. Embarking on a business transaction under the belief that the other party has been pre-qualified in some way, when the reality is that it is merely “caveat emptor,” is foolhardy.

There’s a simple solution, but it’s one that is too seldom used. Ask the person making the referral “Why?” It isn’t hard or insulting. “Gee, thanks. Why do you recommend him?” is a logical and inoffensive follow-on to the original request. It’s not problematic if the answer implies a casual or social relationship; it just lets you proceed with the appropriate caution.

As a trusted advisor to hundreds of business owners, I assiduously avoid making referrals that can reflect on me unfavorably. I feel that I’m being asked to refer people based on my knowledge of what makes a good vendor. Even for the most casual referrals I’ll ask a few exploratory questions. “What is most important to you?” (e.g. price, high quality or responsiveness). “Who have you used before? What type of issues have you had?”

Sometimes the answers tell me that the person making the request isn’t a good prospective customer. Let’s say they are asking for a new IT provider. A follow on question reveals that their current provider was satisfactory until he raised his on-site rate to $100 an hour. If all the IT providers I know charge between $140 and $170 an hour, I won’t make any referral. Neither the prospective customer nor the prospective vendor would be happy with the result.

If you make a referral, you should be willing to put your name on it. I always email both parties with each other’s information. If I’ve gone through the trouble to qualify a good referral, I want everyone to remember where it came from.

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Healthcare Reform: Managing What You Measure

The Affordable Care Act (Obamacare) expanded health coverage to millions of people. It did little or nothing to control costs, and is just the tip of the iceberg in improving the quality of care.

Think about how you select your health care providers. Who recommended them? If it was a friend, what does he or she know about the practice of medicine? I did a statistical study when I was managing medical groups. It proved that patients rated their physician by his staff’s attitude.

Think about it. You see the doctor for about 5 minutes. He looks at the information an assistant took down, asks a few questions, and delivers his verdict. Was your visit pleasant? If so, it probably didn’t have much to do with the doctor. So it’s likely that your friend gave you a recommendation heavily influenced by his or her impression of a nurse or receptionist.

Was the doctor you are thinking of recommended by another doctor? I have some more surprising news. Unless they are collaborating on a treatment plan, physicians rarely know much about a colleague’s practice patterns. I used to recruit docs to sit on M&M panels. M&M stands for Morbidity and Mortality; in other words, the process that (sometimes) occurs when a treatment goes wrong.

There were many times when our participating reviewers were aghast at the standard of care delivered by someone they knew well. I’d hear things like “He recommended WHAT? That treatment was discredited 15 years ago. My God, I’ve been sending my patients to him all this time!”

How do docs decide who is the best doctor? Often, it is by the same trappings of wealth that you might use. If he has a big house, expensive car and custom made suits, he is successful. Success=ability=quality, right?

Not at all. I knew of a surgeon who officed in the most expensive medical office building in Beverly Hills. His waiting room was literally packed with the rich and famous. Too bad his outcome rate was worse than most first-year residents. Paying a premium price in health care frequently has more to do with someone’s marketing than their proficiency.

How can you find out if a physician is really good at what he or she does? Unfortunately, you probably can’t. The necessary information often isn’t collected. If it is collected, it may not be accurate. If it is accurate, it likely won’t be reported.

Outcomes are hard to measure. In New York City a few years ago a magazine collected the results of all heart surgeries and reported them. They ranked the surgeons by the success of their operations. Great, right? Not so fast.

It turned out that the success rate was highly sensitive to the patient demographics of the practice. In other words. surgeons who operated on wealthier patients, people who had better educations, more dietary awareness, and greater financial resources for follow up treatment and support, had better outcomes. Not surprising.

In fact, the surgeon rated as the worst in the city was one who specialized in taking all the high risk patients that his colleagues were afraid to operate on. They referred to him because he was the most skilled among them, but the measurements said he was a disaster because of his adverse patient selection.

So if we do collect data, we don’t report it because simple yardsticks are too misleading to be of general use. If it is reported without explaining the many subtle variances that affect the data, and it could destroy a career without justification or even due process.

President Obama ran for his first term on a platform that included a national outcomes and best practices database. That, like a few of his good ideas, is proving to be a bigger challenge than anticipated. Measuring medical outcomes is complicated, sensitive, fraught with pitfalls and difficult to communicate. It is something only the government can do, but unfortunately it isn’t the kind of thing the government does well.

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Could We Stamp Out Entrepreneurship in America?

In a recent Special Report on the Nordic Countries, The Economist notes that some Californian citizens pay taxes equivalent to those of Sweden. The Swedes,  however, at least receive an excellent educational system and free health care in return.

The American Institute of Certified Public Accountants sponsors a site where you can see how much you pay in taxes. The Total Tax Calculator includes income, payroll, property, excise and capital gains levies. I highly recommend the tool. It’s easy, and a bit shocking.

I tried it with some simple numbers; $250,000 adjusted net income, a $500,000 house, and about $2,000 a month in discretionary spending aside from fuel and phone, with no capital gains or dividends (which took the largest hit in the recent tax bill). In San Antonio, that would incur about $78,000 in total taxes. In Sacramento, the ding would be over $91,000, and in New York City it is just below $97,000. It seems that the Big Apple takes a pretty big bite.

outnumbered-againIn California, less than 150,000 people in a state of 36,000,000 pay half of the total income taxes. Citizens passed a recent referendum to raise the top income tax rate to 13.3% and the sales tax to 11.25%. Let’s think about that for a moment. If I put 400 people on one side of a room, and 1 person on the other side, and let the 400 vote on whether the one should cough up more money to support them, how do you think that might go?

Last week we discussed the drop in US productivity. Follow this train of thought one step further. What would happen to the American economy if entrepreneurs decided that the rewards associated with working hard weren’t worth the effort?

This week I had discussion with one of my TAB Boards about the cost impact of the Affordable Care Act (wow! Another Soviet-style misnaming, just like the Taxpayer Relief Act) on our profits. Not surprisingly, business owners are discussing strategies for maintaining profits by reducing headcount or outsourcing more work.

On Thursday I also appeared on Jim Blasingame’s “Small Business Advocate” radio show, as I do from time to time. During a commercial break, Jim was talking about how many business owners whom he knows claim to be losing their desire to grow. Whether increased taxation and national health care are really going to crimp the average entrepreneur’s lifestyle remains to be seen. The problem is, they think it will.

We know the economy experiences massive swings with changes in consumer attitudes. How is it impacted by the enthusiasm of small business owners? The NFIB Optimism Index is at miserable levels, with negativity unseen since 1980; the Carter years of stagflation. With small businesses currently creating a massive 75% of all new jobs, how can that not impact the economy’s growth rate?

Regular readers know that I often write about the impact of Baby Boomers, the 2/3 of small business owners approaching retirement. As anyone over 60 can tell you, you start to slow down at that age whether you like it or not. The over-60’s are now 40% of the Boomers. That extrapolates to about 2,500,000 small business owners, or about a quarter of all small employers in the country.

Most of these business owners know that they won’t make a whole lot more money from their businesses. In fact, many believe that they will be making less than they did before. Are they likely to push harder and grow faster, can they coast into retirement, or could they just take their chips and go home?

Besides naming laws in ways that contradicted their true purpose, the Soviets were known for something else: lousy productivity. Their ubiquitous workplace saying from the 60’s through the 80’s was “We pretend to work, and they pretend to pay us.” If American entrepreneurs start deciding to mail it in, we are in serious trouble.

Posted in Exit Planning, Thoughts and Opinions | 3 Comments

3 Responses to Could We Stamp Out Entrepreneurship in America?

  1. Mike Kawula says:

    Thanks for sharing this on Linkedin. Great points and unfortunately to true. I know several SMB owners who are at 45+ employees (but less than 50) from businesses started within the last 5-10 years. Thats on average 4-10 new employees a year and many of them are extremely concerned about future growth. Several have pulled back advertising short-term until they better understand what the cost will be on their businesses at the 50+ level.

  2. George Benson says:

    It would be interesting to know what the average Scandinavian earns compared to the average American. It would also be interesing to know the level of income and wealth inequality in Scandinavian countries compared to the US. It might just show that the average Scandinavian can afford to pay more taxes after being able to pay living expenses. I doubt that the average American is in that situation. However, I believe that most Americans would not shy away from paying their fair share as long as they could maintain a standard of living enjoyed by the majority of Scandinavians. Please try not to compare apples with lutefisk.

    • John F. Dini says:

      Thanks George, but I don’t customarily accept research assignments. As to the assumed (meaning- without checking) erroneousness of the comment, your ripost is better sent to The Economist, whom I was quoting.

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Productivity Declines: Does it matter?

According to the U.S. Department of Labor, as reported by Bloomberg, employee productivity dropped last quarter at a 2% annual rate. The common wisdom is that we have pushed an overstretched workforce as far as we can, but there could be other reasons.

One is that sales are declining, but not sharply enough to warrant layoffs just yet. Small business generates about two-thirds of the new jobs in America. Those owners who survived the Great Recession by reducing staff are reluctant to do so again without a clear indication of what is coming.

Large corporations  can reduce head count to meet short-term profitability objectives. As long as hiring and training costs are treated as immediate expenses, rather than the long-term investments they should be considered, layoffs create an immediate improvement to their bottom line.

Small business owners can’t afford to ignore the cost of bringing a new employee up to speed. Throwing away the training investment in any new hire is wasteful, regardless of the accounting treatment it engenders. In a small business, waste is simply waste. Making the bottom line look better in this quarter at the expense of future profits is nonsensical to an owner. He or she has to take a longer term view.

computer usersAn alternative explanation for the productivity drop, and one that isn’t even mentioned in the media, is that employees are simply being less productive. As one owner said to me earlier in the week; “I look into every office, and the person inside is staring at a computer. How am I supposed to know if they are accomplishing anything?”

It’s a good question. He might more accurately ask “How do I know if they are accomplishing what they are being paid for?”

Back in the dark ages before portable cellular phones, most workplaces had a prohibition against using company telephones for personal business. It was easy enough to track. If an employee was engaged in  a personal conversation you could tell, and calls were billed individually with documentation of the number dialed. Unfortunately, that billing methodology led us to unwittingly term the forbidden behavior as using the company telephones (theft of equipment capability), rather than using company-paid time (theft of personnel capability). With personal communications devices, the rationale quickly became “I’m not using the company’s phone.”

Most employers stuck with this hardware-based policy logic as computers, and then Internet connections became ubiquitous. The logic fails, however, when the time wasters are built-in, or promoted by the company. Operating systems come with pre-installed games. Supervisors forward jokes or cute videos to subordinates, who then redistribute them to coworkers.

Policies against using the Internet for personal reasons are difficult to enforce, and have been shown to be most violated by management. Disciplining an employee becomes impossible if he or she can produce one non-business email from someone higher up on the organizational chart. Forbidding personal cell phone use in the office is tougher to justify if you use that same phone to contact an employee when he is in the field.

One of the biggest challenges is defining misuse. We can start with using company resources for illegitimate activity, like online gambling or illegal downloading. From there, however, things get murkier. If employees can have a radio at their desk, can they therefore stream an Internet music station? If someone communicates via email with a staffer in another location, can they use that same email account to invite them to a party?

Productivity measurements may be important to economists, but on an individual level they become meaningless. Business owners must rely on what an employee accomplishes to judge performance. The melding of work and personal communications means that we have to trust employees to act as adults, and guide them with clear objectives rather than rules for behavior.

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