Author’s Note: This article is derived from a chapter of my recent graduate paper titled “On Startups: Patterns and Practices of Contemporary Software Entrepreneurs”. This paper was submitted to MIT in June 2006 as part of a master’s degree program. I will be making the full paper available online on or before August 15, 2006.
I have often wondered why entrepreneur’s take the “leap of faith” that is required to start a company – particularly a software company. Many outside the entrepreneurial community tend to believe that people start companies because they have the “big idea” that is keeping them up at night. The idea is so big that they are forced to take the leap of faith because pursuit of the “big idea” is driving them. Though I’m sure there are startups that begin this way, many don’t. Many startup founders I talk to never had the “big idea” – at least it wasn’t a big idea that compelled them to take the leap. Instead, their motivation is more of what I would call “The Big Escape”. They were seeking to escape the constraints and limitations of working for a large established company. Over half (56%) of all Americans dream of starting their own business. This is not surprising given that in a 2003 Conference Board poll on job satisfaction,
Software vs. Other Types Of Startups
One of the factors that has made software startups (vs. other types of startups) so attractive for aspiring entrepreneurs is the potential rewards. In 1998, during the economic boom years, 22 of the world’s 40 richest people came from the software firms of Microsoft, SAP and Oracle.[2] This type of financial reward can be a strong driver for attracting some of the best entrepreneurial talent.
Software entrepreneurs have a certain set of “patterns” that make them different from other types of entrepreneurs. Many of the software entrepreneurs I have encountered and advised have a software development background. They have worked as programmers in larger, more established organizations and then decided to take the leap and start companies of their own.
Further, there continues to be rapid and significant change in the software industry creating ongoing opportunities for software entrepreneurs. Large shifts such as that from mainframe to mini-computers, mini-computers to PCs and PCs to browser-based software have created a continuous stream of business needs from the software marketplace. This type of significant change generally does not occur in other industries with the same degree of frequency.
The Big Idea or The Big Escape
It is not uncommon for aspiring entrepreneurs to believe that in order to get started, they need to have “the big idea”. However, most startups, especially the successful ones, end up pursuing businesses that are often significantly different from the initial idea. Paul Graham, a software entrepreneur and angel investor states, “The fact is, most startups end up nothing like the initial idea. It would be closer to the truth to say the main value of your initial idea is that, in the process of discovering it’s broken, you’ll come up with your real idea.”[3] This theme is common across the software entrepreneurs interviewed for this thesis. In most cases, the ultimate idea that the business pursued was different from what was originally conceived. The business was launched with one idea, but ended up pursuing another.
Further, there is evidence from the research of Professor Ed Roberts from MIT to indicate that many startup entrepreneurs don’t start businesses because they are motivated by some big idea, but because they are looking to escape from the instability or frustrations of their current job.[4] These views are echoed by Mukti Khaire, in assistant professor at the
Understanding Startup Risks
It is common wisdom that most startups are likely to fail. Taking the entrepreneurial leap has considerable risks. Despite the fact that most startups fail and that this is widely known by most entrepreneurs, it is interesting that just about all entrepreneurs believe that they will magically defy the odds and succeed with their own ventures. It seems that this “suspension of disbelief” is a necessary ingredient for the entrepreneurial process.
In a paper titled “Entrepreneurial Risk and Market Entry”, Brian Wu and Anne Marie Knott make a number of significant observations:[6]
- To date, the empirical literature has consistently found that entrepreneurs’ risk profiles seem to be indistinguishable from regular wage earners.
- There are actually two forms of uncertainty in entrepreneurial ventures: market demand uncertainty and entrepreneurial ability uncertainty.
- Entrepreneurs display risk aversion when it comes to market demand uncertainty but exhibit over confidence or “risk-seeking” tendencies with regards to ability uncertainty.
- The above means that entrepreneurs are willing to bear economic risk when overconfidence compensates for their risk-aversion regarding the market.
So, the above report may partly explain why so many entrepreneurs take the leap of faith when in fact it may not be in their best financial interests to do so. The primary driver may simply be that their confidence in their abilities may more than compensate for their lack of clarity on market demands and opportunity.
Which Is Better: Big Idea or Big Escape?
So, what kind of startup is more likely to succeed? The one where the entrepreneur had “the big idea” or the one where the entrepreneur was making “the big escape” from the confines of big business? Candidly, I don’t know for sure, but I have some theories. I’ve known successes and failures of both types. One statement I can make is that those entrepreneurs that start companies for “the big escape” seem generally more likely to be satisfied with the outcomes of their startups. Since they weren’t pursuing “the big idea” in the first place, they will at some level have succeeded simply by getting the freedom and lifestyle they sought. Entrepreneurs that pursue the big idea can often become disenchanted when their big idea turns out not to be so big, and not so easy. A further observation is that entrepreneurs making “the big escape” tend to be more opportunistic and are more ready to tweak their businesses based on what they learn after they get started. Those that are married to a single “big idea” find it more difficult to accept reality when it is necessary to do so. Of course, the fact that there is significant entrepreneurial literature that describes the heroes and legends that stuck to their original idea through thick and thin to eventually emerge victorious fuels this thinking as well. It’s easy for entrepreneurs to forget that for every founder that stubbornly refused to give up on their idea – and succeeded, there are likely tens or hundreds that stuck to their idea too long, and failed. I would argue that many of those that did not succeed could have increased their chances significantly if they were willing to “adjust” their game plan based on what they learned from the market.
Summary Of My Point: It is not necessary to wait for “the big idea” to get a startup kicked off. Often, the “big escape” is just as good a motivation. If you do have “the big idea”, the trick is understanding that there is a fine line between persistence and stubbornness. I’d argue that there are many more founders that give up on “the big idea” too late, having burned through all of their resources and energy, than too early.