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Entrepreneurs and Uncertainty - June 2008
There were times in the 1970’s when Britain had three million unemployed, was viewed as the sick man of Europe and trade union relations were at an all time low, with a three day week because of coal and electricity shortages.
It was obvious that large companies were going to go through a restructuring that would require them to lay off people. There was a threat that American large companies would overtake European ones and that Europe would be dominated by America.
When we look back today on those days it is a completely different world that we live in. Big American companies do not dominate the world and the big challenge of the last 35 years has really been with entrepreneurial companies and with innovation, where America has come out on top.
In 1972 in Britain there were precious few entrepreneurs. It was thought that entrepreneurship was an American phenomenon and that Europeans were very ill suited to entrepreneurial activity. It was tough to explain what an entrepreneur was.
Governments have come to the realisation that, as large smokestack industries went through restructurings and the companies that led these industries scaled down their activities and laid off people, so enterprise was necessary if we were going to create jobs and to get the economy to grow.
Enterprise could thrive only in an environment where there were substantial incentives for hard work, and for taking risks. It’s hard to believe, but in the early 1970’s the marginal rate of taxation in Britain was 98 per cent. Why should anybody take risks, or work hard, in order to earn 2 per cent after tax?
Entrepreneurship needs an environment around it that supports it. You need low rates of taxation particularly capital gains tax but also income tax, and governments have to be prepared to support risk-taking, the liberalisation of industry and the creation of new firms.
So what is entrepreneurship? It is about risk taking but the word ”risk” has a negative connotation. It comes, in fact, from an Italian word that means “running into danger”, and perhaps it’s not surprising that people feel unwilling to take risks. But risk masks the value of uncertainty, and uncertainty is the stuff of entrepreneurship, because you cannot make great gains out of situations that are certain. You can make great gains only out of situations where you have a particular insight that is not shared by the rest of the market.
So the first essential aspect of entrepreneurship is an ability to seek uncertainty and to take advantage of it.
Uncertainty is very much in the eye of the beholder. Some people come from backgrounds where dealing with uncertainty was extremely difficult.
These backgrounds favoured security – safe jobs in big companies that appeared to have the prospect of a very long future. Others come from homes where risk taking was always considered to be the thing to do, and where the fear of failure was not a particular hurdle. Entrepreneurs come in all shapes and sizes.
Some are more risk seeking and others are more protective of the downside. But at the end of day, it is very difficult to be an entrepreneur if you do not have an appetite for taking something that seems impossible for others, but that you believe to be possible. You might say that entrepreneurship is the art of the seemingly impossible.
The second aspect of entrepreneurship is the ability to create a team that can make decisions with surrounding uncertainty, and the ability to collect a group of individuals whose collective judgement ends up being proved correct in a marketplace that is often evolving very quickly. The essence of the entrepreneurial leader’s role is to create an effective organisation that can make the right decisions.
As the firm grows from a start up to a substantial entrepreneurial firm, the role of the leader needs to change, and the most successful entrepreneurs have tended to be those who adapt their role to the needs for the firm, rather than those who attempt to fit the firm to their own personal needs.
So you find entrepreneurs who place themselves at the centre of their firms, at the hub of the wheel, where every decision needs to be made by them and where the firm can grow only to the extent of their own personal reach. And you find other firms where the entrepreneur begins to realise that, beyond a certain size, it’s impossible to continue managing the firm without the entrepreneur placing himself or herself at the front of the firm with colleagues behind, to whom decisions are delegated and who can use their own entrepreneurial skills to make decisions and to implement them. This also reflects itself in the style of decision making in the firm. If there is a dominant personality who makes every decision, it creates a certain culture. If you have open consensus that emerges a decision is made that generally turns out to be correct.
That does not mean that managing an entrepreneurial firm is a democratic process. The role of the entrepreneur is not to measure the weight on each side, but to assess the weight on both sides of an issue and to throw his or her weight behind the correct decision.
The third aspect of entrepreneurship takes us to the building of a major company and the exit of the entrepreneur. Succession is a separate challenge from building up a successful business. When you have built a business that it is closely associated with you as the leading entrepreneur, the founder, it doesn’t necessarily become obvious to all entrepreneurs that the firm has to be put in a position to continue beyond the departure of its founder.
Organising that departure requires a lot of careful thought, organisation and self discipline. You need to examine the issues, separating yourself from the emotion of leaving a business that you have built. You have to leave at the right time for the business and the leadership of the firm. And the leader has to be chosen by the firm if he or she is going to prove effective.
So, an appetite for uncertainty, a knowledge of how to lead a winning team and the realisation that succession is a process that needs to be organised and not just an event are three of the key characteristics of entrepreneurship. There are many other approaches that combine with these three to create an entrepreneurial strategy. They have to do with picking the right opportunity, finding the right time to launch a venture, financing the venture and so on. But those three are the defining characteristics which every entrepreneur should bear in mind.
Entrepreneurship has made a tremendous contribution to the development of economics across the world. We have created an entrepreneurial mind set in Britain and the Government should work to encourage risk taking, not seek to raise levels of taxation on successful businesses and their owners to unreasonable levels.