Entrepreneurs are unique people. Much like Benjamin "Bugsy" Siegel's vision of Las Vegas in the Nevada desert, entrepreneurs are solvers of unrecognized societal problems. In a competitive environment, entrepreneurs provide goods and services that consumers have always wanted but never quite knew how to produce or acquire.
Understanding the nature of entrepreneurs - particularly successful entrepreneurs - is not simply an intellectual exercise. For investors in small-to-medium enterprises (SMEs), the ability to distinguish between a skilled entrepreneur, merchant or charlatan is crucial. SMEs are little more than a collection of ideas. The ability to convert these ideas into future profit streams is dependent on the entrepreneurial skills of the founders, whose human capital represent the most valuable asset of the enterprise.
The Small Business Administration (SBA) recently reported that small firms create more than half of new jobs in the U.S. economy. A companion 2003 SBA study also found that SMEs were a major source of technological innovation. This is why every American citizen should care about entrepreneurs and SMEs-job creation and innovation. The identification and cultivation of successful entrepreneurs and SMEs is not only vital for our current economic welfare; it is vital for our future standard of living.
Yet entrepreneurial financing, defined as a percentage of total capital formation, decreased from 16.7 percent to 10.5 percent between 2000 and 2002. Concurrently, going-private filings rose from 197 to 316. Also, going-private deals comprised 17 percent of all public takeovers in 2002. At the same time, the Government's responses to the plague of "Enronitis," which includes tax relief and regulation, are not benefiting SMEs. While tax relief has stimulated the economy, the primary beneficiaries are well-capitalized corporations with established revenue streams. As well, the compliance costs associated with the Sarbannes-Oxley Act and other top-tier regulation are particularly burdensome for SMEs. Since SMEs tend to lack a historical record of earnings, the value of top-tier financial reporting and auditing standards is marginal at best, and potentially misleading.
Given this difficult environment, survival requires the full utilization of entrepreneurial skills. The genetic code for entrepreneurial success can be perceived as "B3", representing "Brains," "Bucks" and "Been-there." Of course, success is never guaranteed; yet without these three, the likelihood of success decreases rapidly. Let's explore the B3 requirements in greater detail.
The brains requirement of the B3 genetic code for entrepreneurial success is a double helix of problem-solving skills and vision. While problem-solving skills are essential for all executives, the stakes are higher for entrepreneurs. Entrepreneurial problem-solving is a unique process of destruction and construction. Entrepreneurs dissemble problems to their basic elements, scale the solution to fit the scope of their operation and creatively reconnect the preexisting parts as an innovative product or service.
Entrepreneurs understand that a clear vision is more valuable than volumes of research. In today's competitive environment, the future is now; SMEs have a narrow window of opportunity to execute their mission and capture market share. While it took radio 38 years and the telephone 13 years to reach critical mass of 50 million users, it took e-commerce retailing only 4 years to reach critical mass. Today's entrepreneur requires the vision necessary to survive in a world that constrains their time horizon to the proverbial elevator pitch.
A significant difficulty that entrepreneurs face is obtaining the necessary capital - "bucks" - for growth. As we argue elsewhere, the core difficulty SMEs face in their pursuit of equity financing is not investor indisposition to SMEs, but a fundamental failure of the U.S. Securities Exchange Commission's (SEC) one-size-fits-all approach when regulating equity securities. Consider Microsoft's $285 billion capitalization, which is approximately twice the capitalization of 7500 micro-cap public companies. To improve SME financing, we have proposed the formation of a micro-cap market that provides scalable sponsorship and proportionate governance specifically tailored for SMEs.
"Been-there" provides the entrepreneur the prudence required to temper the enthusiasm of entrepreneurial vision. The experienced entrepreneur understands that questions and differences signal corporate progress and maturation. Successful entrepreneurs place more value on employees who challenge the precepts of the corporate mission rather than those who cheer on the herd. The key to SME success is the ability to delegate and accept the responsibility for the action of subordinates. This requires an analysis of core competencies and comparative advantages, so as to position employees where they are most likely to experience success. Responsibility should not be conflated with micro-management. A micro-manager is less than ideal in any setting, but in an environment where the probability of failure is imputed in the learning process, dogmatic micro-managers are destructive. Like horse jockeys, there are no "perfect" entrepreneurs, only "good" entrepreneurs who do not fall off their horse to lose the race. The characteristic common to both "good" jockeys and "good" entrepreneurs is their ability to post and ride each day. Bet on persistence
The American Entrepreneur and (Over) Regulation
Entrepreneurs personify the American experience. Parallels can be easily made between the immigrant lineage of most Americans and those characteristics that are embodied in entrepreneurs. Immigrants leaving their indigenous village faced an uncertain future similar to that of an entrepreneur introducing a new product or service. The risks that had to be managed during the journey to, and settlement in, America served as an entrepreneurial laboratory. Immigrants assimilated into their new society, and the assimilation improved society. Entrepreneurs assimilate into existing markets and create new markets. Immigrants had few resources but were nurtured by the dream of success; entrepreneurs are poorly capitalized, but dream of creating wealth. Indeed, it is reasonable to argue that immigrants are the "ultimate entrepreneurs."
What is ironic is that having demonstrated the virtues of the capitalistic system, American policy makers are now trying to recreate the governance regime of European ancestry. Sarbannes-Oxley type regulation is a large operational tax on job creation that gives rise to unintended consequences. The more top-tier regulatory commands strive for predictive capability, the more imprecise the management of micro-cap commercial activity. The more commands add costs to the micro-cap market, the greater the incentive to go underground and/or offshore to conduct business. This, in turn, causes the US micro-cap market to become less transparent, less innovative and less productive.
Napoleonic Code governs Europe, where an activity is prohibited unless expressly permitted. English Common Law reverses the process; unless an activity is expressly prohibited, it is permitted. America took this "openness" and added the concept of "sweat equity" during the Jacksonian Era as an incentive to the settlers of the frontier. Yet disproportionate regulation, such as the Sarbannes-Oxley Act, reverts to Napoleonic Code. Our policymakers are fostering what our ancestors rejected!
Stephen A. Boyko is president of Global Market Thoughtware, an international consulting company. Aron A. Gottesman, Ph.D., is an assistant professor of finance at the Lubin School of Business at Pace University, and is the associate director of the William C. Freund Center for the Study of Securities Market.