Entrepreneurship for the 99%
steveblank.com
steveblank.com
People like things to be subtle though.
They can also read into things that aren't there.
I offered to help someone the other day in a comment (which I did - then going back and forth with several emails and advice which took time) and was voted down in the one line offer. I guess they looked at my profile and thought I was angling for paid work? The truth is I've helped many people but never asked for payment (although it's been offered.)
To which I say "chicken dinner"!
Disclaimer: I worked with Steve. He obviously has a nose for marketing, pr all that stuff. So of course he will always be angling for anything that will raise his profile. Which is, as you said "not to say that the books and programs aren't necessarily good".
(Here I use as examples the industries defined from the article: construction, retail, health care, lodging, food services)
For instance, if 10 businesses are started, and there is only room in the market for 3, then 7 will inevitably fail. It is possible to improve each's individual odds of success, but to what end? Unless the market these businesses are in grows, any successfully-started new business only increases competition for the others. So lets say that we improve the odds for these new entrepreneurs by educating them. We will also assume incumbents have access to the same knowledge and benefit equally. If the new competitors all enter the market together, all we have done is raise the competitiveness level in the industry, and the odds of failing are still the same.
This is what Peter Thiel discusses in his "perfect competition" argument. (If you haven't read his CS183 notes yet, please do so. They're insightful).
Peter Thiel likens competition to athletes or soldiers beating each other up. They compete to win and that is what they know how to do. But in the end there is only one victor. The rest are losers. And if you improve the competitiveness level of these athletes, all you have done is make the competition fiercer. Now that could be a good thing as it could provide better value for consumers. But the businesses themselves don't benefit from that!
All this program is doing is making more perfect competitors, although what will probably happen is not all will benefit the same amount, as certain businesses will learn and apply these lessons better than others. But from a birds eye perspective, the result is stil the same: the same number of failing businesses. Even if these new businesses you help succeed do in fact "make it", they don't increase the size of the industry (barring technological breakthroughs). They only add more players to a limited pie.
People by nature care more about themselves. Thus they care more about entrepreneurship rather than innovation per se. Entrepreneurship without innovation is about beating up the other guy, simply outcompeting him through energy or maneuvering. Innovation is about doing something better, freeing up time or resources to do other things, which grows the pie for all.
In summary:
Sure a new business may add value by providing a better service than the competitor it beats, but the overall wealth pie of this nation doesn't increase. Encouraging just entrepreneurship without technological innovation is not that useful from a macro perspective. What we need are new entrants who change the game via technological or process breakthroughs. These are precisely the kind of companies that Peter Thiel seems most interested in, according to his CS183 lectures. And I submit that these are the kinds of businesses startups should focus on. Not the other 99% which only increase competition for everyone else.
This is why R&D and innovation are the key to growing the economy. Simply calling for more entrepreneurs, without a corresponding emphasis on innovation, is a flawed long-term strategy.
For example, instead of renovating your restaurant and reopening it with your personal conviction that it is now better, why not test different redesigns before investing.
I'd call it teaching the scientific method.
It seems to me that the industries most kinds of 99% businesses enter is zero-sum
Um, no. Nothing in the economy is zero sum. Wealth is constantly being created and transferred. I think you are confusing this with the idea of a mature-market at an industry level, but those markets are almost non-existent because they destroy themselves like anti-matter.
Unless the market these businesses are in grows, any successfully-started new business only increases competition for the others.
Well, for one thing, if the market isn't growing we are in a recession, and recessions simply aren't permanent states. Recessions destroy themselves, because they are simply forced efficiency finders. Secondly, increasing competition increases pressure to become more efficient and/or innovative, which in turn drives market growth. The whole idea of helping and soliciting help in business is an act of innovation.
In short, your initial point - that of a zero sum market - is flawed, and therefore all your other arguments are too.
Increasing the quantity of entrepreneurs by default increases the quality, because it increases the pressure to compete, and therefore leads to the very innovation you feel is the real solution. You are arguing against the very solution you seek.
Let's say you have 5 players selling car tires. There are 1000 cars in the area, and only one brand of tire to buy. For the most part, these 5 players compete on something other than price, since the market is mature. They have 20% of the market each.
Let's introduce 3 new players into this market. They bring nothing new to the market per se, but by default they get some sales (maybe they are closer to the car owner's homes, maybe they have a hot chick at the front desk). Nothing major, let's say they share 10% of the market overall, and the 5 incumbents lose 2.5% of their sales each.
The incumbents panic and look to counter this threat, and one of them happens upon the fact that if you change the formula for the tire a little, you can get a 50% increase in performance and a 20% increase in lifespan with only an extra 5% in manufacturing costs.
Now everyone scrambles: Some into R&D, some into improving customer service, some into death. The overall value of this market increases, because of the 5% increase and corresponding price increase... inflation, if you will.
This innovation happened completely and only because of the dreaded saturation of the market you are complaining about. The quality of the noobies is irrelevant, since the incumbent did the innovation. Point is the innovation happened, and wouldn't have happened without the new entrants creating pressure through competition.
Even a case where an innovation decreased market efficiency (of this does happen - all players would love to have a monopoly), the trend is for the market to work towards increased efficiency.
I'm no hard-core libertarian, but unless you have outside interference in a market - big tire 5 use government to mandate a tire-selling license that presents a barrier to entry - or one of those markets that lead itself to creating natural monopolies, this is the way things work.
I never said it didn't.
I said greater market participation increases innovation by default, regardless of the quality of said participation. You are the only one equating the behaviour of the markets to being either "good" or "bad". The reality is that these are not concepts the market understands or cares about.
Innovation can and does destroy entire markets all the time. But unless you feel innovation itself is horrible and we should be writing these arguments with typewriters and cabling them to each other, you simply have to accept the reality that innovation will occur all the time in every direction.
I don't think its that easy, and the story could have turned out a number of different ways and you chose the one that supported your argument (much like I did in my other reply to you).
Increased competition could lead to a race to the bottom, with each competitor slashing prices, engaging in expensive marketing wars and predatory acquisitions. With so much heated competition, R&D budgets get slashed by short-term thinking managers. There is no innovation for a decade, only decreased profits.
Decreased profits are an innovation. Clearly the market was overpriced. It's the same as buying a new machine and decreasing your costs.
Creating wealth is not "building something" directly. I think this is where you are confused. Creating wealth is "acquiring something". This could be a physical item or something nondescript like time.
False. This happens with or without the 3 new players. Those 5 players are going to be vying for a bigger piece of the pie. They're trying new marketing, new formulas, etc. Over time an increasingly large part of the company will be dedicated to growing it, (especially if they're not growing!). Some of them might invest in or partner with the car companies and secure a contract for new cars. They might work together to increase the size of the market. Markets that are stable are not so because players idle, they are stable because everyone is innovating at a similar pace. When one of these guys makes the mistake of thinking he can take it easy and sit on his 20%, the others will take it as fast as possible.
(I'm not disagreeing that new entrants to a market are a bad thing, just saying that it's not for this reason)
Failing a strong leader that can create monopolistic conditions in a market, oligarchies are the norm. The reason for this is that the status quo is often more desirable than the risk required in advancing your position.
What you are suggesting will only happen if for some reason, competitors view themselves as enemies. The reality is that it is often the opposite, and nobody wants to rock the boat - except for the upstart.
It's for that reason that new competitors are almost a requirement, never mind a benefit.
Created and transferred are 2 completely different things and I think OP is against innovation that simply transfers wealth (popular example is financial industries). A more cynical example is Groupon, which transfers wealth from small businesses to them.
Creating wealth is making something more efficient like creating the airplane or the internet. Or improving the standard of living like creating a cure for a disease.
It's actually very very hard to do it, and less than 5% of tech startups probably succeed in doing it, even the ones that are successful.
There is no "good" wealth creation, nor is there "bad" wealth creation. It just simply is. A tornado is a horrible event, but it creates wealth.
You are conflating simple wealth creation - the idea of providing value that wasn't previously there - with innovation and/or human progress. That's simply a misunderstanding of the term when used in the context of economics.
How is that so?
Yes, creating wealth does involve transferring of wealth, but if it's simple redistribution entirely from A to B, that's not new wealth creation at all. Say I take out a loan of 100K to build a house. Did I create new wealth?
"A tornado is a horrible event, but it creates wealth."
I can see your point, if that's your definition of wealth. Divorces create wealth. Wars create wealth. I guess that shows how useless any economic indicators are: they don't tell you whether the standard of living is improving at all.
What you are looking for though is Quality of Life. This measurement is an attempt to do what you are looking for: harness non-economic indicators together with the empirical data to determine how people are doing.
EDIT: To your first point - If you are giving some of your wealth (often in the form of money) to someone else, you are usually doing so for a reason, in that they are producing something that you value. The very act of producing value is creating wealth.
Say I take out a loan of 100K to build a house. Did I create new wealth?
Yes. You're paying interest to the bank aren't you? Interest that wasn't there before. That's new wealth. You're also paying your realtor. That's new wealth, etc. etc.
The fact that you don't think the bank needs any more wealth is entirely besides the point.
There's a good pg essay on this that explains these concepts well: http://paulgraham.com/wealth.html
People think that what a business does is make money. But money is just the intermediate stage-- just a shorthand-- for whatever people want. What most businesses really do is make wealth. They do something people want.
Besides this one confusing sentence PG gets wealth creation correctly: its about increasing the size of the pie, and that is what's important for the country as a whole.
Your example of the realtor and the bank is not wealth creation, but money transfer. They didn't create new wealth. They made money from you, and your "wealth" is now decreased. The only wealth created in this instance is the wealth you add to the pie when you use that loan to complete your house. The realtor and bank add value in that they enable you to do your wealth-creating thing: build a house. The simple act of lending you 100k is not wealth-creation because if you piss that money away or burn it, all you have done is give money to someone else. The world is not richer as a result.
Money transfer - assuming it isn't charity - is wealth creation, you are always getting something in return in exchange for that money. That something is increased wealth.
The only wealth created in this instance is the wealth you add to the pie when you use that loan to complete your house.
First, that $100K did not exist before I asked for it. It literally was created. Second, these aren't two unrelated events. I bought money after all.
if you piss that money away or burn it, all you have done is give money to someone else. The world is not richer as a result.
Actually, the bartender would be richer in this case. I bought money, that action alone increased my wealth the same way buying a car increases my wealth. I have something now that I didn't have before. What I do with that money is really irrelevant, in the same way that how fast I drive the car is irrelevant.
If I physically burned the money, sure. But the same is true if I physically burn my house down. Of course this too adds to the economy.
Again, conflating wealth to some sort of "good" is a near impossibility, since it devolves into opinions of value and worth.
My wealth is now decreased? Hello? I have a house that I didn't have before! It takes some strange reasoning to assume my wealth is decreased because I'm paying interest on a loan.
the meaning of wealth is context-dependent and there is no universally agreed upon definition. At the most general level, economists may define wealth as "anything of value" which captures both the subjective nature of the idea and the idea that it is not a fixed or static concept.
So it seems a lot of the discussion in this thread revolves around semantics, mainly about what defines wealth.
So what exactly is your definition of wealth? I don't understand the logical basic behind your arguments.
For example: Actually, the bartender would be richer in this case. I bought money, that action alone increased my wealth the same way buying a car increases my wealth. I have something now that I didn't have before. What I do with that money is really irrelevant, in the same way that how fast I drive the car is irrelevant.
You exchanged your money for a car. You could now be wealthier in the sense that the car brings you happiness or functionality that you didn't have before, enabling you to be more productive. But what if you already owned a car and were simply indulging yourself? What if this was your 5th car that you didn't need? So you could keep on buying cars forever, and you'd be continually increasing your wealth? I don't understand why buying the car automatically makes you wealthier. If you give a hobo $10,000 to buy an hour of him walking in circles, you've increased your wealth of entertainment perhaps, but it is a stretch by any definition of wealth to say you've created it.
If I physically burned the money, sure. But the same is true if I physically burn my house down. Of course this too adds to the economy."
Assuming your house was functioning and adequate then the economy is poorer without your house. That is wealth destruction not creation. For now you have to pay for a new house. Someone has to use the materials and labor to build that house. You pay him your money to do so. Now you have less. Wealth was not created here. It was shifted around from your pocket to the construction company's.
You give the example of Christmas. Wealth is hardly ever created when you buy lots of stuff for Christmas - that's wealth distribution from your savings to Macys. Savings is still wealth. If nobody spent anything for Christmas, wealth would not decrease - because our money would remain in our savings accounts.
Technology is a good example of wealth creation. With the invention of the internet, we save time on many things like shopping, buying plane tickets, etc. Time that could be used on other things in our lives.
As such, some of the things you are saying are absurd in that context, and it really makes it difficult to keep the conversation in scope. I can certainly tell you that if everyone stayed home this Christmas, the economy would come close to collapsing.
I don't take issue with what you're saying, but you have moved beyond this being a discussion regrading economics, I'm afraid.
Classic broken window fallacy.
A tornado doesn't create wealth. On net, it leaves the society poorer than before. It may create a windfall for a particular industry, but that's just moving wealth around. The money spent on rebuilding had to get pulled away from something else. It would have necessarily been spent or invested, and now that spending or investment will never happen.
Bastiat called it the seen vs the unseen. We see the builders making money. We don't see the economic activity that would have otherwise occurred if there had been no tornado.
The overall impact on economic activity is a wash, and the only net effect is the original property destruction.
Of course it does. It's a catalyst.
On net, it leaves the society poorer than before.
There's no basis for you to make that assertion. If a trailer park is destroyed and a regional business park is what replaces it, there's no way you can argue that there hasn't been a net growth economically. Natural disasters almost always increase GDP in the recovery phase.
We don't see the economic activity that would have otherwise occurred if there had been no tornado.
This is kind of irrelevant since economic activity can't be measured until it actually happens. It's like suggesting that going to the moon was a net loss for humanity because we could have reinvested those funds in going to Mars instead.
We don't see the economic activity that would have otherwise occurred if there had been no tornado.
Again, because said activity is completely irrelevant. The point is that there is economic activity that is a direct result of the event. Is Christmas a wealth creating event? You are suggesting it's not, after all, all the resources used for Christmas presents would have been used somewhere else, no? Using those terms, nothing is a wealth generator, and the economy is zero sum.
That is completely wrong.
Created and transferred are two different things. Created means new wealth is generated through increased efficiency or innovation. The pie gets bigger. Transferred means one player loses and the other gains (the definition of zero zum). The pie stays the same, only the relative size of each slice changes.
Secondly, increasing competition increases pressure to become more efficient and/or innovative, which in turn drives market growth. The whole idea of helping and soliciting help in business is an act of innovation.
You argue that increased efficiency is a kind of innovation. Your argument is that increased competition leads to increased efficiency, and by increasing efficiency in a market more resources are freed for other markets and the pie gets bigger.
I may agree with you here, but you'll have to provide examples.
* Increasing the quantity of entrepreneurs by default increases the quality, because it increases the pressure to compete, and therefore leads to the very innovation you feel is the real solution*
Can you provide concrete examples?
Several points: I can agree with your argument on a theoretical level but its still a leap to make the connection between increased quantity leading to innovation without evidence or examples.
1) One instance in which your argument could be true: If there are greater efficiencies discovered in one industry (for example, a new gizmo that doesn't require as many restaurant cooks), leading to less labor costs and subsequently lower cost of food, leading to increased money in consumer's pockets with which they could spend in other industries.
But who discovered that efficiency? It could be made by a separate party and have no connection to the increase of competitors. It is a leap to draw the correlation between increased competitors and innovation.
2) One instance where it may not be true: An industry where there are little or no efficiencies to be captured.
Lets say there are 10,000 software design firms competing with one another and they make their profit from software consulting projects. If they all make a profit of $1,000,000 / year and you add another 10,000 competitors, all providing the same service, two things will happen for sure: 1) some of the new competitors will gain entry to the market, leading to lower profit for everyone else. 2) some competitors will fail.
It is possible that the innovations are simply not there to be found by the new entrants, even with their newfound startup wisdom. Innovation is not a matter of strictly effort. For example, I recently came back from a trip to Southeast Asia where I traveled for 3 months across many of the developing countries and witnessed the effects of increased competition there among the street hawkers.
In the street-hawking industry there simply aren't many innovations to be discovered. Adding more entrepreneurs to the mix wouldn't lead to innovation, but rather a race to the bottom. Profits across the board would decrease and consumers would benefit.
Also, a point about quality: increased quality does not necessarily lead to a greater pie. We may lead richer lives from 10% more delicious food but the wealth pie stays the same. (although that is valuable as well).
That's not Peter Thiel's argument. That's Peter Thiel delivering a remedial microeconomics lesson. 'Perfect competition', 'monopolistic competition' and 'monopoly' are technical terms which don't necessarily mean what they might appear to. In perfect competition, for example, all goods are fungible. It's a good model for the commodities market, since one barrel of oil is very much like another (there are different grades of oil with different sub-markets, such as 'Brent crude' or 'west Texas intermediate', but you don't care which particular company extracted which particular barrel of oil from the ground within a given market).
Now once you introduce the element of skill, you have something more like monopolistic competition. Pizzerias are in competition, and they're selling a similar product, but they can compete on everything from the quality of the pizza dough to the comfiness of the seating, so different customers may end up strongly preferring one to the other. Maybe I'm price-sensitive and prefer Mario's bargain slice, but you're a gourmet and you prefer Luigi's home-made flavor. Someone else prefers the fancy service at Gino's, and so on. This is why towns can have so many different restaurants and why supermarkets can sell multiple different brands of what are essentially similar products: you can differentiate products and services, and anchor consumers to a particular combination.
Sure a new business may add value by providing a better service than the competitor it beats, but the overall wealth pie of this nation doesn't increase.
Oh yes it does, because now the wealth is being allocated more efficiently. Commodities are one-size-fits-all, but relatively few goods are commodities. Consider, for example, that there are relatively few companies in the business of wheat production (commodity) but a great many different bread companies, in line with the wide variety of different bread products.
Please, pick up a microeconomics textbook. Macroeconomics is so flawed and obtuse that a lot of people dismiss the musings of economists, but microeconomics is a very robust discipline that is almost criminally underappreciated. If I could back to high school and give my teenage self some advice, it would be 'learn microeconomics.'
To use your bread example, more bread companies offering more choices, allow us to better satisfy our diverse wants of bread. Basically we receive more value from our money. This is good.
But does adding more bread companies increase the resources we have? We can only eat so much quantity or so many varieties of bread.
To grow the overall wealth pie, we have to either make better use of our existing resources or increase the efficiency of production. Basically, improvements in process or technology leading to greater production.
I'm not against Steve Blank's 99% mainstream entrepreneurship course by any means. Helping entrepreneurs make better decisions raises the level of competition in the industry and in most cases that is good for society. But if the new businesses started don't come with innovation then I see this as fiercer fighting for a stagnant (or shrinking) pie. I value growing the pie over dividing it more optimally, although I suppose each is important.
It's kind of beyond the scope of this conversation, but the basic concept is called 'utility maximization'. It's hard to measure utility directly, but we can infer it by examining the opportunity cost - ie, the value of other alternatives foregone in favor of the option I prefer. Where a consumer's preferred product/service is unavailable or unaffordable, other goods are substituted, but these have lower utility. If rising consumer incomes cause people to switch from one good to another, the abandoned good is known as an 'inferior good'.To the extent that resources are dedicated to the production of something that people don't actually want, it's inefficient. It would be better if those resources were dedicated to the production of superior or ideal goods, of the kind that people buy because they already maximize utility.
This general field is called 'price theory.' Please appreciate that I can only sketch the crudest outline within a single paragraph.
If we add more competitors to the pizza arena, how does that grow the overall pie of wealth?
Greater choice leads to more efficient outcomes. You like cheap pizza served fast, so you get a slice for only $3 and don't waste money on linen tablecloths, which you consider a foolish affectation. I like nice service, so I pay $10 to spend a half-hour being seated and served by a waiter. You save money by not paying for services you don't want, I spend it locally instead of driving to the next town for a sit-down meal, which is what I actually want (as opposed to the drive, which costs me $3 in gas and mileage expenses). We both get what we want, pizzeria owners make money money, which they in turn spend on the goods and services they need, and you have a nice virtuous circle.
Now, you could say that there's money wasted on pizza marketing or too many entrants for all pizzerias to survive, so some will go out of business. All true, but those are short run phenomena. Over the long run, the result is greater efficiency. This pattern of short-term fluctuations between equilibria is the business cycle. What you're looking for is optimality, not necessarily growth. Again, all this is drastically oversimplified.
Now, you could say that there's money wasted on pizza marketing or too many entrants for all pizzerias to survive, so some will go out of business. All true, but those are short run phenomena. Over the long run, the result is greater efficiency.
Yes, this is what I'm thinking of. Too many competitors in the short-term. Is there a point where there are no more efficiencies to be found though? Or the efficiencies are so small as to be negligible? Like having 101 pizza shops vs. 100.
On an intuitive level, increasing the efficiency of production feels more important to me than maximizing efficiency of utility. But both affect wealth positively.
For sure. If demand outstrips supply, some competitors will have to exit the market. A good micro textbook will go through all of this, or if you prefer a conceptual approach try Todd Buckholz' New ideas from dead economists.
In fact, my hunch would be that most are started with personal savings and family money.
I think it'd be a much less attractive choice if you were in an area like tech where you do have the option of a well-paying job or funding, though. Lifestyle businesses are still attractive in tech, but only if you're somewhat better off, either coming from a better-off family, having already had one minor success on a previous business, or spending some time in a lucrative job / consulting career that let you save up a cash reserve. That appears to have been Steve Blank's route as well; he became a self-funding entrepreneur only after first having a few successful exits from funded companies.
"personal savings and family money" - sba loan, mortgage the house, credit cards, equity line to name a few more.
The technology sector has an overinflated sense of the value it provides to the economy in terms of jobs created or productivity growth. Note that the article you cite does not refer to technology startups, it refers simply to new businesses under the catchall "startups."