Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University. He has also written or edited ten books on business and entrepreneurship.
His book Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) was one of the top ten business books of the year for Amazon.com. His 2005 book Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses won the 2006 Golden Book Award for best business book of the year and has been translated into eight languages.
Mr. Shane has a wealth of knowledge on entrepreneurship, which he has generously shared with TheRisetoWealth.com in this interview below:
TRTW:What would be one of the first, or most fundamental, lessons you would teach your students in one of your classes at Case Western Reserve University? What advice would you like to offer to anyone considering starting a business or becoming an entrepreneur?
SS:Most of the focus in entrepreneurship is on the entrepreneur – what characteristics the person has that make them good at starting and running a business. Often overlooked is the importance of the business idea. In my books Finding Fertile Ground and Illusions of Entrepreneurship I point out that the aspects of the business idea – the industry people enter, the business model they have, the nature of their competitive advantage (if they have one at all) – actually account for more of the variation in performance than the characteristics of the entrepreneur. For instance, a person is several hundred times more likely to have an Inc 500 firm – one of the fastest growing private companies – in the computer industry than in the hotel and motel industry. There is no attribute of a person that has even close to this size of an effect. Moreover, most people make a lot of mistakes in their business ideas – they compete on price when that is a bad strategy for a new business, they fail to put financial controls in place, they have no competitive advantage – the data is about 40 percent of businesses started have no competitive advantage. People start in the wrong industries. The start-up rate and the failure rate are correlated 0.77; more people start in industries in which they are most likely to fail than ones in which they are most likely to succeed. In short, what I focus on with my students is on the business idea and tell them not to worry so much about the characteristics of the person that might make them a good or bad entrepreneur.
TRTW:What aspects of a potential business are most appealing to North Coast Angel Fund? What types of characteristics in the management of a potential business are necessary before North Coast considers investing?
SS:Angel groups are looking for very high potential businesses. Most angel groups also want venture capitalists to follow on their investments to scale the start-up to a point where the business can go public or be acquired. This means that angel groups, like North Coast, are particular. They want businesses that can scale to tens of millions of dollars in sales in five or six years. They want businesses that can be sold to other businesses or taken public. They want businesses in the five or so major tech sectors that VCs like – software/internet, biotech, medical devices, telecommunications, computer hardware/devices/peripherals. This changes a little over time as VCs get interested in things like materials or green energy, but angels look for companies that VCs will like. Angels also want businesses with an observable competitive advantage, something like a patent. You might have the greatest skill as a consultant in the world, but it is very difficult for an outsider to judge that and very risky to invest in an asset that “goes home at night” like a talented person.
Personally, I don’t worry a huge amount about the management of the business. The person needs evidence of experience – both building a company and in the industry – honesty and integrity (they don’t steal other people’s money or get companies in trouble), and that the person is not a complete pain to work with. Some people are very worried about the personality of the entrepreneur, his or her passion, their “coachability.” I don’t worry much about those things because there is little evidence that they are predictive of performance and they are very subjective. I only care whether the person is a complete pain because life is short and it is no fun to interact with difficult people. However, I personally have a high threshold here. Many very successful entrepreneurs are not the easiest people to deal with. So while I don’t want to spend a huge amount of time with a really difficult person, I also don’t have to marry them. There are people I would invest in but wouldn’t want to hang out with.
TRTW:When reviewing someone else’s business plan or presentation, what elements do you notice are most commonly missing?
SS:Most people have a top down approach. If there are X number of customers and I sell my product for Y. I will generate X*Y in revenue. What is more important in my opinion is why a single customer would pay X for something when it costs me X-Y to make and sell it. That is, most business plans don’t tell you how the entrepreneur will make money on a single transaction. If you can make money on one unit, excel will show you that you will make a lot of money if you sell a lot of units. But evidence that you can make money on a single transaction is what is missing.
Read his column on entrepreneurship at BusinessWeek HERE.