Think - AT LONDON BUSINESS SCHOOL

The entrepreneurial advantage

Why startups keep surprising incumbents in the most unlikely ways

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Despite championing entrepreneurship for decades , it still seems a miracle to me that any startup succeeds.

The amateur economist in me says that for any new venture opportunity there must be many other companies that have spotted the opportunity first. Moreover, they probably command the complementary assets needed to propel the product or service to market way before any under-resourced, disconnected and inexperienced startup.

And even if they don’t spot the idea first, then surely, they will hear about it pretty quickly, will have the sector knowledge to know whether it’s viable, and if so, will quickly mobilise to crush the interloper. One of the toughest challenges we set student entrepreneurs is to argue why their nascent venture isn’t simply doing market research for a better equipped competitor.

And yet Schumpeterian startups do succeed – lots of them – many incredible ventures from LBS amongst them. Many start with no technology, sector knowledge, money or startup experience. But they succeed, leaving a trail of surprised incumbents in their wake, wondering why they let someone eat their lunch.

We have a great illustration of this – Richard Downs won our Alumni Accomplished Entrepreneur Award. Richard started Iglu in 1998, growing it from a small beachhead – ski chalet rentals – to become the largest retailer of cruises in the world. In the full gaze of Thomas Cook, which recently rolled over and died. How can this happen?

Well, the lovely thing about working in this place is that you get the chance to find out. Last year I was asked to run an Exec Ed programme to help a major – and still profitable – fintech company to become more innovative. They saw digital disruption happening around them and didn’t want to be a victim.

For me it was a great opportunity to mingle with and to get into the minds of the mass of senior managers they dispatched onto the programme.

As I expected, the managers who they selected for the programme were very smart and well informed. They see opportunities every day, everywhere and are anything but blind to digital disruption in their industry. They are aware of startups nibbling away at their base. They have a pretty good sense of what might work and where their company ought to be investing. They do think strategically.

As part of the programme we asked them all to pitch a ‘horizon 2’ idea that they thought their company should pursue. Forty participants and at least forty ideas, all pitched with entrepreneurial passion.

As individuals they have great ideas. They know their sector and they’re bright. They’re senior enough to make things happen. This firm should be a credible threat to any entrepreneur thinking about eating their lunch.

And yet, as I got to know them, I began to understand why organisations – wonderful blends of technical, political and cultural assets and rigidities – can at once attract incredibly bright, entrepreneurial individuals and so effectively extinguish promising ideas and their salaried progenitors.

How do they do it?

 

First, most managers have never built a business from scratch and don’t know how to. Being innovative wasn’t the reason they were promoted through the ranks – sweating existing assets was. They lack the methodology for managing disruptive ideas. Worse than that, they don’t know how to mentor anyone in their team who has one.

It is this ability to ‘think like an entrepreneur’ that drives all our entrepreneurship programmes and initiatives at London Business School. We believe that entrepreneurship is a management science – maybe not one that’s been fully developed – but nevertheless an emerging set of tried and tested methodologies that you use to shape, test, develop and scale new venture ideas in any context. All our founders have been exposed to this thinking at the School – through a mass of courses and co-curricular programmes.

 

Second, managers have tough targets to meet and generally these boil down to the next-quarter numbers – profit and it various surrogates – that can be measured objectively by those who count. In many financial-driven firms you begin boasting only once you’ve achieved 125% of your target. However, early-stage innovation can’t be counted – it can only be judged by those who know what successful innovation looks like and not many of them make it into middle management.

For the entrepreneur, profit is vanity. Cash is king and must be used to build longer term value into the business – reputation, trust relationships, know-how, sticky users and the rest – from which profit (or exit) eventually emerges. This kind of value is only apparent to those who have built businesses of their own – precisely the kinds of people who we encourage ‘our’ founders to surround themselves with to challenge, poke, prod and encourage them along the way.

 

Third, the informal reward system doesn’t encourage risk-taking. Introduce and implement a great idea and you may get grudging thanks from your managers – but might create resentment for cannibalising or disrupting a status quo. Certainly, no equity. If it goes wrong there’s nothing but blame, sangfroid and the stigma of failure. Firms like to say that they want to celebrate and learn from their heroic failures, but that notion lasts as long as the first scalp.

At London Business School, entrepreneurs are the heroes. We celebrate their successes and share their setbacks. No one seeks anything in return for the vast amount of support we shower on them – not even for a year in the Incubator (valued at around £200k). They keep all the upside too. Maybe we’ll call on them to share their experience or mentor the next generation of entrepreneurs (many do), but that’s it.

 

Fourth, managers think they need to ask permission to do anything and think that most things are impossible. Here, we promote hustle, forgiveness over permission, confidence – hopefully without arrogance – and a general sense that you never say other people’s noes for them.

Get the hell out of the building. Realise that if it’s new then no one else knows what they’re doing either – so you’ve got just as much chance of making it happen as anyone else.

 

Fifth, in so many businesses there is a narrative that disruption isn’t the ‘done thing’. It’s the wrong kind of fun to have. There is strong cultural pressure to keep your head down, grumble (and they do) but not do anything that might lead to change unless you’re instructed to. Just play the game.

In contrast, within this wonderful walled garden we cultivate an entirely different culture. The Entrepreneurship Club is the most active and popular of all the clubs. Hundreds of students enrol in a bewildering plethora of entrepreneurship competitions and challenges. 150 on Launchpad. 120 Impact Investment Challenge. 100 for the Venture Capital Investment Competition. The entrepreneurship courses remain the most in demand. We are in awe of those who start their own business.

 

Sixth, innovation is slow and expensive when it’s part of someone’s job. They want paying and go home at 5pm – or at least I did when I worked in a corporate innovation lab. There is no passion.

The ultimate entrepreneurial advantage is that work is play and play is work. Pass by the Incubator at 10pm (pre-COVID19) and lights were on. They love what they’re doing and don’t count the hours. They will achieve in a day what a hired hand will do in a week.

 

Finally, in a business you’re innovating with someone else’s time and money. You’re spending, not investing. Once a project gets going with a budget there is little incentive to kill it. This encourages the living dead – zombie projects that everyone involved knows should die – to live on way beyond their sell-by date. The smartest thing to do is to move on before the board notices.

At London Business School the mantra is ‘fail fast, fail cheap’. It’s your time. Your energy. Seek out the disquieting evidence. Pivot. Admit you’re wrong. If you can’t make something work, then move on – maybe into a high growth business desperate for people able to lead innovation.

So, my insight is that entrepreneurs can beat behemoth organisations in the short term and the reasons are down to organisational behaviour rather than economics. The longer term is different – eventually the leviathan stirs – so best use the window of opportunity to build real advantage – but that’s another story.

 

Jeff Skinner is Executive Director of the Institute of Innovation and Entrepreneurship.

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This feature is adapted from his plenary talk at the 2019/20 London Business School Founder Awards Ceremony.