Friday, July 9, 2010

Founder personalities and the “first-class man” theory of management

At any given time, something like four percent of the US population is engaged in some form of new-company-creation. And that narrow definition of entrepreneurship doesn’t count all of the managers inside established companies who are effectively engaged in the same process of building an internal startup (see What is a startup? for my more expansive definition).

What motivates all these entrepreneurs? Typical explanations tend to focus on the well-known anecdotes and larger than life archetypes we have in mind: the twenty-something college dropouts (men, of course) from Stanford inventing some radical new technology. The academic research tells a very different story.

What do entrepreneurs look like? Are they born or made? This is a hard question. I think the root cause of that difficulty is that we tend to conflate two different questions into one. First, what causes someone to attempt entrepreneurship instead of a more traditional career path? And second, what attributes make someone likely to be a successful entrepreneur?

The difficulty lies in this paradox: many of the attributes that increase the likelihood of becoming an entrepreneur actually impede startup success.

Let’s start with the startup personality attributes. The academic research here is extraordinary. Here are the personality traits that are positively correlated with likelihood to pursue entrepreneurship: extraversion, skepticism, need for achievement, risk taking, desire for independence, locus of control, self efficacy, overconfidence, representativeness (the tendency to over-generalize from small samples), and intuition.

I think most of those factors correspond to our shared image of what an entrepreneur is supposed to look like. But many other attributes (especially demographic realities) cut against that stereotype. For example, Vivek Wadhwa and others have shown that most entrepreneurs are much older than we expect. Career experience and industry expertise are both positively correlated with entrepreneurship: contrary to stereotype, most entrepreneurs are not young and inexperienced outsiders. And unlike some psychological factors, these experience-based factors also increase the odds of the subsequent venture being successful.

It is in the psychological factors that we find the most paradox. For example, consider the propensity for risk-taking. Research has demonstrated the obvious: that people who have greater tolerance for risk or ambiguity are more likely to attempt entrepreneurship. That’s not too surprising. But does a risk-taking attitude actually lead to more startup success? The studies that have looked at this question in particular have found a negative correlation between risk-taking behavior and startup success.

That doesn’t strike me as shocking. And, although this hasn’t been subjected to a great deal of study (yet), I believe this same pattern will be found in a variety of other entrepreneurial characteristics: overconfidence, determination to succeed, perseverance, and even the desire to be in control. All of these factors are helpful in getting people to take the plunge, but all of them cause serious impairment of decision-making down the road. Think of the startups you know who are caught in a reality distortion field, heading full-speed off a cliff. Most likely, you will find the above attributes in excess supply.

I believe this is also why breakthrough success stories in entrepreneurship often feature a “classic” zany entrepreneur paired with someone you wouldn’t expect to be taking those kinds of risks. We often talk about this as the “visionary” and “the quant” or the “leader” and the “manager.” But I’m not convinced those labels are right at all. I think it much more likely that we’re seeing the embodiment – in the form of personality - of the “problem team/solution team” organizational structure. One team is in charge of carrying out the vision as currently specified, and one team is constantly asking the skeptical questions: who is the customer? Are we solving the right problem?

Although we have historically viewed this structure in startups by focusing on the personalities of the founders, I think that reflects our current, relatively poor, understanding of how startups work. We can do better by focusing on process instead of personality. We can consciously organize startups to become much more resilient organizations. Otherwise, we risk having them degenerate into cults of personality.

In the early twentieth century, before the advent of scientific management, the overriding management philosophy was that of the first-class man (and they were always men). The idea was, for any job, if you can simply find an individual with just that right combination of virtues, talents, and experience, you could safely delegate all decisions to them. Sound familiar? This kind of reasoning is almost impossible to disprove. If you empower someone to make decisions and then something goes horribly wrong, does that disprove the first-class man theory? Probably not; it’s much easier to blame the particular person who made the mistakes. In fact, making mistakes is seen as “proof” of being second-class.

In management jobs related to operations – that is, the people tasked with actually making and distributing physical products – this kind of thinking is now considered ludicrous, thanks to a century of progress. Our modern philosophy of management has this core belief (taken straight from scientific management) at its heart: that the performance of companies is determined by the systems they create, not just the people they hire. No amount of individual superstardom can overcome a badly organized factory, because the weight of the system eventually overwhelms any well-intentioned but poorly organized resistance.

Yet we tolerate our modern version of the first-class man theory in the management of more “fuzzy” topics, especially innovation and entrepreneurship. When we look back on this period in history, it will seem just as ludicrous to future entrepreneurs as pre-scientific management looks to us.

I am determined to do everything I can to hasten the arrival of that day. If you’re part of the Lean Startup movement, then you’re actually making it happen. Thank you.

All of the academic research alluded to in this essay is drawn from Scott Shane’s General Theory of Entrepreneurship which is a fantastic and wide-ranging overview of the state of the art in academic research on entrepreneurship.
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