Conservative entrepreneurs

I want to hate Malcolm Gladwell, but then he writes something interesting enough that I have to grudgingly like  his work again. As with all of his work, though, the good and important stuff needs to be parsed out of his articles, which share with his books the tendency to over-inflate a point, or keep making it with the wrong examples.

In this case, I’m talking about his piece in the January 18 edition of the New Yorker (not yet online, but there’s an abstract available) called “The Sure Thing.” His thesis is that entrepreneurs are not the swashbuckling risk-takers that they’re believed to be in the popular culture. They’re actually quite conservative, minimizing risk wherever possible and carefully exploiting their greater expertise or knowledge in deal-making. Gladwell’s point, I believe, is that it’s important to understand these behaviors from a public-policy perspective because if policy makers (and boards of directors, managers and educators) want to increase entrepreneurialism, they shouldn’t incentivize risk-taking per se to get it.

Where Gladwell goes wrong in his article is using John Paulson, the hedge-fund manager who famously bet on the housing price collapse in 2007 and 2008, as a prime example of his thesis. Paulson is no entrepreneur: he’s a trader who made a very successful bet with a strategy that had better downside protection than most short, negative-carry bets. He didn’t build a business, create new value or new job or add to the sum of wealth in the economy–he transferred money from losers on the trade to his investors and himself.

But he’s dead on with the story of Ted Turner, and how he built his media empire not through high-stakes gambles, but by having a vision of how to build his business, picking the battles to fight and going into those battles with as much certainty of the outcome as he could create.

Gladwell’s article would have been much stronger and more prescriptive if he had defined what he meant by “entrepreneur” and extended his observations to the less visible entrepreneurs in the economy. That would have helped with his diagnosis of what went wrong with Wall Street and banks, how CEOs should be compensated, and would have let him make even better recommendations for encouraging true, productive entrepreneurship in the economy.

So what is an entrepreneur? I like Wikipedia’s definition with one important caveat:

a person who has possession of a new enterprise, venture or idea and assumes significant accountability for the inherent risks and the outcome.

The key terms are “possession,” “new” and “significant accountability,” with the stipulation that the last point should explicitly include the risk of significant financial and/or reputational losses. The entrepreneur needs real skin in the game! I also believe that the new “enterprise, venture or idea” should be one that creates new wealth and value in the economy, including adding new jobs.

This definition excludes John Paulson (who was already wealthy, didn’t have his personal wealth on the line in the trade, and didn’t create new wealth in the economy) but includes everyone from Ted Turner to those who build a new chain of restaurants. It also excludes sole proprietor and small family businesses, which I’d count as “self-employment” rather than true entrepreneurship. I also don’t count most of Silicon Valley startups and their leaders as entrepreneurs for reasons I’ll elaborate on in another post.

So what does this mean for people setting public and managerial policies? Entrepreneurs create new jobs; presumably so does entrepreneurial management within larger companies. How do you get more of that? Here’s my first cut as some prescriptions.

  1. Get out of the way: Neither government, boards of directors or even distant managers should try to overdetermine outcomes. Entrepreneurs need latitude to find advantage and opportunities in a marketplace where commercial value can be found and exploited. Goal-setting works; “industrial policy” rewards game-playing.
  2. Give them something to work with…: As Gladwell observes, undercapitalized businesses, startups (vs. acquiring and improving an existing business) and poor planning result in failure–in unsuccessful entrepreneurs. Policy makers should make sure entrepreneurs have what they need without being too prescriptive (see point 1). Education is important, for sure. But what about making it easier to pass on a family business to an ambitious member of the next generation? In lieu of estate taxes that might be paid on a business being passed down to heirs, the Federal government (via the SBA) could provide personal loans to children who have worked in the business for at least five years and want to continue to operate it. The interest on the loan would balance out the loss from the estate tax and the company stays with a knowledgeable, ambitious operator.
  3. …but make sure there’s skin in the game: As I said, entrepreneurs must have something to lose–that makes them conservative about the downside and work hard for the upside. The advantage of the personal loan in lieu of estate tax scheme in point 2 is that the child is making a personal commitment and is on the hook for the loan. This also applies to corporate managers. Rather than issue stock options to CEOs (all upside reward, no downside risk) or restricted stock (which is still a grant of value, even if it declines), CEOs should be required to invest a significant portion of their personal wealth into any company they run. The board can juice the upside with matching options or warrants, but the CEO should have a lot to lose.
  4. Don’t throw money at the problem. Trying to make another Silicon Valley doesn’t work. Frankly, Silicon Valley doesn’t work as well as it used to, or as well as people think it does now as an engine of transformative wealth and value creation. Yes, amazing companies come out of the Valley and it’s the envy of the world. But I’d argue (and will, like I said) that the venture-backed startup culture is very different from an entrepreneurial one, so investing in that model is doomed to fail.
  5. Mitigate the catastrophic personal consequences of failure: Entrepreneurs (and CEOs, companies and entire industries) should be allowed to fail and go bankrupt, fortunes can be lost. Our culture in the US does a very good job of supporting this failure and these consequences keep the entrepreneurs focused on good risk assessment. But public and managerial policy can reduce some of the worst outcomes so entrepreneurs can focus on the business. Failed entrepreneurs shouldn’t lose their kids’ access to health care, so whether that means portable, affordable non-employer based insurance, a buy-in to Medicare or some comparable policy, there needs to be some way to minimize that kind of personal collateral damage.

That’s my first whack at entrepreneurial public policy. In the future, I’ll elaborate and extend on some of these points, particularly around creating incentives for good performance.

What is a rock star hire?

I write all of readMedia’s job postings, and I read a lot of others to see how other people describe jobs and the people they want to hire. I’m more than happy to steal good ideas and crib from people who write better than I do. I stole the “smart and gets things done” formula from Joel Spolsky, a guy whose writing about business and technology I have followed for years, and whose hiring advice I really admire.

A good job listing should do a few things well:

  • Describe the job and the requirements for it as clearly and explicitly as possible;
  • Be specific about what we want the person to do;
  • Be honest about the real “need to haves” and “nice to haves” in a candidate;
  • Talk about the company, why it’s a good place to work, and why someone should want to work with us;
  • Convey some of the personality of the company in the way you communicate all of this;
  • …MOST IMPORTANT, do all of this well enough to make the best candidates excited about working for you.

There are basically two types of job descriptions: corporate and everything else. It’s not even worth talking about the standard corporate job post. Written by some HR drone, approved by a legal department charged with minimizing risk, dictated by hiring managers who believe buzzwords and acronyms are the same as qualifications, these postings are all different versions of the same bad formula. They’re written by companies looking to fill a position, and attract applicants who are looking to get a job.

The “everything else” runs the gamut from the sublime to the ridiculous. I think that the “everything else” writers at least share my last bullet point in common. They’re writing a non-standard job posting because they believe it’s the way to attract non-standard (and presumably better) applicants. But in all of the job postings I read there is still a surprising amount of conformity in the tropes and formulas they use to describe what they want.

The most annoying of these cliches is the “rock star” qualification. Leave aside whether any CEO or manager really wants to hire rock stars. (I’d rather hire awesome session musicians.) The problem with the rock star description is that no one bothers to define what it means to be a rock star OVER AND ABOVE the job requirements. Without that definition–without both the candidate and the hiring manager knowing what the “rock star” qualification means–it doesn’t advance the goals of the job description and it’s useless as a requirement for hiring.

Let’s look at this from the perspective of the applicant. Undefined, asking someone if they’re a “rock star” is like asking them if they’re “good looking,” “in shape” or “funny” in a personal ad. Who’s going to say no? Everybody thinks they’re above average. So unlike a job listing that says, “A record of carrying—and beating—a quota” (which can be proven or disproven objectively), asking for a rock star  asks people to misidentify their qualifications.

It’s worse for the hiring manager who is looking for the “rock star” in a pile of applicants. Why? Because an applicant who is a dream come true is pretty obvious to everyone. You know a rock star when he or she walks in the door and then your job switches from finding a great hire to convincing that person to come on board.

Usually the challenge for hiring managers and CEOs is picking among a few applicants who are good–they’ve got everything the job description asked for–but are great in different ways. (Or someone is good but not great, and you need the discipline not to hire someone simply adequate.) How do you decide?

At readMedia, we finally sat down and defined what a rock star is. The first thing we did was throw out the term “rock star,” because it’s a stupid way to describe a hire. We prefer “superstar” 😉

What is a superstar? It’s someone who meets all of our needs for a position while delivering at least some of our wants.

Needs are determined by the requirements in the job description. That’s why it’s so important to write clear and specific requirements at the front end–you want to attract people who fit the real requirements of the job and then screen and interview for those qualifications during the hiring process.  Any potential superstar must fit all of the needs or you’ve either 1) written a bad job description or 2) decided you don’t care about hiring adequate people, much less superstars.

Wants are more generic and should reflect your own company philosophies and culture. True superstars aren’t simply qualified to do a job–or even super-qualified. For readMedia, they’re people who make the whole company better than someone who meets the same needs. What we want is:

  • Knowledge, experience or perspective we lack: Given the choice between two equally qualified software developers, we would choose one who worked in a very different company or organization, a different part of the country, or in a different industry (though on similar problems to ones we face).
  • Different friends, contacts, former colleagues or other outside connections that we don’t have: We don’t want to live in an echo chamber, and we want to continually expand our network for future hires, business contacts, and ideas.
  • “Interestingly” and valuably brilliant: We don’t want Mensa members, but it’s great to work with people who are really smart in a way that makes all the work they do–and the way they think about our business–better than we can do ourselves.

Defining what a superstar is has helped us because we can screen and interview for those qualities, and then we can all talk together about whether the candidates possess them. What used to be a gut feeling is now a rigorous process. It lets us find the superstars who don’t necessarily interview like rock stars or who catch an interviewer on a bad day. And so far it has allowed us to bring on some great team members who I wouldn’t want to do without.