Why Bucking the Trends Often Leads to Success
Entrepreneurs
often wonder whether to stick with their idea, especially when that
idea is unpopular. But sometimes timing is everything.
It's
common for entrepreneurs--especially tech entrepreneurs--to rush to
enter markets that are in the midst of a boom, usually presaged by a
spectacular event such as a billion-dollar IPO. Entrepreneurs
reasonably assume the risk of failure is lower when entering then,
and that's why high-profile successes can trigger an explosion of
interest in a particular area.
Of
course it works both ways. If a market has a large negative
event--like a high-profile bankruptcy--entrepreneurs are far less
likely to enter that market, because it is seen as too risky. Big
splashy events--both negative and positive--can lead to an
exaggerated view of the underlying market and that causes
entrepreneurs, as well as venture capitalists, to flock or flee en
masse.
It
would seem counterintuitive then, to make the case that entrepreneurs
who enter a market at its low point actually stand a better chance at
succeeding than those who enter when a market is hot. Yet that's the
argument Stanford Graduate School of Business Professor William P.
Barnett and University of Chicago Booth School of Business Professor
Elizabeth G. Pontikes make in their new working paper: "When to
Be a Nonconformist Entrepreneur? Organizational Responses to Vital
Events."
"People
and the press tend to magnify the importance of failures and
successes," says Barnett. But entrepreneurs, like everyone else,
make sense of an uncertain world by referring to popular sentiment
and by watching what their peers are doing. That tends to magnify a
particular belief in the market, and then helps it spread.
But
nonconformist entrepreneurs go against popular wisdom. They choose to
enter an unpopular market at a time when consensus is against them,
and face far more rigorous scrutiny by investors and potential
partners because of that, says Barnett. "But they are much more
likely to survive as a result."
Take
Google, he says. In the late-1990s, many of the firms specializing in
search, like Lycos, Alta Vista, and FAST Search, failed, and market
watchers questioned if search was a viable business. Yet a few years
later Google’s success handily reversed that skepticism. Barnett
says Google's founders, like other nonconformist entrepreneurs, were
scrutinized harder than they would have been if the search market had
been booming.
"That
scrutiny makes it more difficult for a company to get into the
market, but we hypothesized that if they do get in, there is a better
chance they will do well and stick around for a while."
To
test that theory, Barnett and Pontikes used data about software
companies they gathered from 268,963 industry press releases written
between 1990 and 2001. Those releases each contained at least three
mentions of the word “software.” The data covered 400 segments
within the software industry. The researchers also used financial
services firm Thomson Financial to plot the timing of events, like
venture capital investment and software company bankruptcies, during
that period. As expected, positive events drew a host of entrants
into a market, including companies that weren’t a great fit.
Looking
at 15 years of this data, Barnett and Pontikes found that, on
average, businesses created in the wake of a start-up frenzy were
unlikely to survive and, even if they did, were unlikely to go
public. "On average, our findings showed that businesses
entering a frenzied market were less likely to succeed," says
Barnett.
On
the flipside, starting a business on the heels of a big failure in
the market--or a spate of them--is extremely difficult. In fact the
scrutiny is so intense, those startups that do make it into the
market "are often great," says Barnett. "The
conventional wisdom today is ‘let’s make it easier to start a
business.’ But what makes Silicon Valley great is not that it’s
easy to start a business. It’s that it’s possible to start
another one after you fail," he says. "That’s why the
ones which succeed are so good."
Entrepreneurs
often face the dilemma of whether or not to stick with their idea,
especially when that idea is unpopular. In his blog, Barnett cites
the example of Irwin Jacobs, the founder of telecom giant Qualcomm,
who believed strongly his CDMA technology--a method for transmitting
digital signals that is widely used today in cell phones--would
become a wireless standard. He and his engineering team claimed to
have made it work, but doubts about that claim mounted, even among
highly regarded experts. Despite that, Jacobs continued to believe it
would work. "The team at Qualcomm might have been wrong, but
they felt they understood it," says Barnett. "And Qualcomm,
of course, was successful, and Jacobs is often described as a genius.
His success was greater because of all those early doubts."
Nonconformist
entrepreneurs--like Irwin Jacobs and the founders of Google--were
willing to buck the trend and that is a risky strategy, says Barnett.
His research has shown that the highest return ideas are often the
least supported. The lower-risk strategy--entering a market that’s
popular--is also a low-payoff strategy, says Barnett.
In
other words, when the market is hot and entrepreneurs are rushing to
enter, they may skimp on the due diligence required to succeed
long-term because it’s easier to get funded and get started.
The
non-conformist entrepreneur, on the other hand, is taking a bigger
risk initially by entering a market that others are staying away
from. Because the likelihood of failure is higher, their plan faces
greater scrutiny and that makes them more likely to succeed in the
long run if they make it through to the market.
"It’s
much riskier to do what's unpopular and very likely fail. But if you
don’t fail," he says, "you’ll probably be considered a
genius and become a big success."
BY
EILENE
ZIMMERMAN http://www.inc.com/eilene-zimmerman/why-bucking-the-trends-can-lead-to-success.html?cid=em01016week45c
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