Monday, January 31, 2011

Which Kind of Entrepreneur are You? - A Visual Exercise

Do you consider yourself an entrepreneur? If you do, are you an analyzer or a doer? Probably both, yes? There are two extremes in the entrepreneur world. There are the people who have great ideas, but research and plan until the idea is rationalized into the “this won’t work” trash bin. These are the “aim, aim, aim,” people. Then there are the extreme doers, who dive into initiatives without proper due diligence. This second group is the “ fire, fire, fire,” group.

Confirmation bias allows an aggressive entrepreneur to rationalize greater expected returns and lower costs of failure. Therefore, they are more likely to pull the trigger sooner in the research process. At the same time, an over-analyzing entrepreneur will rationalize themselves into lower expected returns and greater costs of failure. They will spend much more money on research before going to market.  Let’s look at three graphs showing the decision process of three market actors; the “fire, fire, fire,” the “fire, aim, fire,” and the “aim, aim, aim.” The purple square is the point of indifference.

In large fixed and variable costs industries, the car business for example, somewhere between “Fire! Aim! Fire!” and “Aim. Aim. Aim.” is clearly the way to go. Mistakes are extremely costly. But with the low fixed and variable costs of much of the social technology industry, “fire, aim, fire,” is the way to go. Here are two reasons;
  • Low barriers to entry allow anyone and their dog to put business models to the test. Thus speed to market is critical.
  • The costs of failure are low enough to allow an entrepreneur to quickly recover and try something else.  This means that you have tons of competing initiatives any any given point.

At the end of the day, the power lies in knowing yourself.

Which type of entrepreneur are you? And is that the winning strategy?


Sean said...

Very interesting. I've come across some young entrepreneurs lately who are doing two different things.

One is a bar owner with little business experience but a lot of passion. He just opened his first bar in Dallas with investor's money (about 300k). His knowledge of the Dallas market consist of drinking at bars around town for the last 6 months. It will be interesting to see if the shoot from the hip approach in the most competitive markets in the south will pay off like first one did on 6th street in Austin.

Another is a pair of Romanian brothers who have taken the business model of Tom's shoes and applied it to (Barney's level fashion) rain boots. The pair that gets donated goes to poor children in cold cold Romania. Most of the work done to develop the company has been pro bono by people who are highly skilled and agree with the cause. This extremely low overhead, socially conscious approach is progressive but relatively safe.

I cant wait to see who makes more money. I would put myself in the later category as far as a business approach is concerned but in the end believe the gun slinger will come out on top of the two. Its all about risk. The bar owner could end up broke eating beans or rich sipping Dom. The rain boot brothers will probably be driving Honda's for the rest of their live's. I happen to like my Honda...for now.

Patrick O'Brien said...

Two great examples, Sean. The bar guy obviously sees the world through rose colored glasses. And I love his research methodology...drinking at bars around town. That's more fun than data mining and regression analysis.
Aren't the guys in the second group risking a lot as well? I bet they've tapped a lot of their social capital to get people involved for free. I also don't doubt that they've dedicated tons of time to their effort.
So the first guy risks cash and reputation. The second group risks time (money) and reputation.
But this is even more interesting. The bar guy has risked investor's money (300k) instead of his own time and money. And the second group has risked their own time and money. Moral hazard, anybody?
Thanks for sharing your thoughts, Sean.