It’s Not About the Framework

Imagine that you’re an entrepreneur at a crossroads. You’ve worked hard to develop a new platform, and you feel that it’s time to take it to market. But the VC on your board says that your product needs at least three more months of development and that he will recommend further investment only if you define a clear go-to-market strategy and present a plan for implementing it. Should you follow his advice? Without empirical data on the track record of ventures similar to yours, it’s impossible to know which course of action would be better for your start-up. In his book The Lean Startup, drawn from his experience birthing a software company, Eric Ries tells readers that codesigning products with customers is a better path to success than writing a business plan. That complements a thesis proposed by Steve Blank and Bob Dorf in The Startup Owner’s Manual : that every start-up’s principal task is to search for a scalable opportunity—an entirely experiential learning process that is not amenable to a prearticulated strategy. Both books advise entrepreneurs to develop a “minimally viable product” in order to obtain customer feedback as early as possible. Joshua Gans, Erin Scott, and Scott Stern argue that following the advice of Ries, Blank, and Dorf would usually be wrong, because the absence of a strategic framework for evaluating options leads to uninformed strategic choices. I disagree. To explain why, I’ll start by reflecting on how the study of entrepreneurship began. The Entrepreneurship Industry Until the 1980s no one really taught entrepreneurship, and business academics had no apparent interest in how companies actually came into existence. They focused on preparing students for careers in giant banking, manufacturing, transportation, and consumer products enterprises. Then came Bill Gates and Steve Jobs. Eager to emulate their success, a growing number of MBA students insisted on getting instruction in what was soon called entrepreneurship. (The word “entrepreneur” was just coming into common usage.) The resulting curriculum, drawn from the disciplines of strategy and finance (venture capital was a new investment class), crystallized around a novel pedagogical exercise—namely, writing a business plan for an imagined start-up. Soon a format with common elements, reflecting the criteria applied by potential investors, emerged. Universities had found a new and popular area of instruction and one that allowed intercollegiate competitions of a sort. Today Rice University is home to the annual Super Bowl of business plans, which offers a purse of more than $3 million. It’s easy to understand the appeal of this approach. All of us, by nature, seek to reduce the risk of future events—an impulse that grows with the complexity of a project and the potential cost of failure. Developing a strategy and an action plan makes starting a business look more predictable and certain. What’s more, it’s not hard to argue that experimenting your way to success isn’t applicable to most new ventures: Although the software and technology companies that inspired the lean start-up movement get a lot of attention, they account for no more than 3% of all start-ups. Launching a retail outfit to sell skateboards requires a store (or the digital infrastructure to support online sales), fixtures, inventory, a sales force, and advertising. It seems obvious that a venture like that requires a strategy and a plan. If only it were that simple. The Problem with Plans A deeply flawed assumption underlies the discipline of entrepreneurship as taught in many business schools. It is that a uniform logic can be applied to the process of starting a business—a logic that can be described and, if followed, will increase the likelihood of success for the start-up. But that assumption has never been properly tested: Although business historians have described the early years of a number of today’s large companies, business academics never developed longitudinal data regarding how new ones come into being, detailed the common characteristics of start-ups, or described entrepreneurial behavior that could be replicated. Only recently have economists started to build such records. Instead entrepreneurship scholars rely on case studies of successful start-ups. But those accounts are often highly suspect. Entrepreneurs don’t commonly keep diaries and orderly documentary trails in real time, which means we must rely on ex post facto recitals that are riddled with confirmation and other biases. Furthermore, failed start-ups leave few records, and despite lore to the contrary, failed entrepreneurs are less likely to succeed with subsequent attempts. Thus we cannot establish in any credibly empirical way what some experts refer to as a “science of start-ups.” The evidence we do have suggests that business school orthodoxy is at best questionable. None of the companies for which MBAs traditionally trained, including Alcoa, Disney, GE, IBM, PepsiCo, P&G, Macy’s, United Airlines, and Walmart, started with plans. Nor did iconic younger companies—Apple, Cisco, Facebook, Google, Nike, Uber, and Yahoo—to which today’s entrepreneurs look. Research by Anthony K. Tjan and by Julian Lange and colleagues suggests that plans make no statistical difference in start-ups’ success. That may explain why only a few winners of business-plan competitions ever actually start companies. A student who had won $125,000 in three contests, along with a tuition-free MBA, once told me that the only business he would probably ever start was writing business plans. Nor do I buy the argument that a “real” venture (as opposed to a digital one) can significantly reduce risk by simply having a business plan. Gans, Scott, and Stern suggest that Elon Musk’s Tesla was a more successful launch than Shai Agassi’s Better Place because the former involved more “deliberative, stepwise” planning. But the Tesla project was really a very risky “fat start-up,” requiring enormous amounts of capital. The product couldn’t be tested incrementally. Apart from a huge investment in engineering, Musk had to build a complex supply chain, an assembly facility, a dealership network, and a public-private partnership to ensure that the necessary charging stations existed. To do all that, he needed a plan of action. But the plan’s existence would not have made a material difference to the basic gamble. It might have made his launch smoother but would not have made it much likelier to succeed. The Non-Plan Plan The traditional business plan familiar to students in the 1990s and 2000s has ceded ground to other approaches. But these newer alternatives don’t, it seems to me, represent much of an advance. Efforts by Alan Gleeson and Steve Blank to rebaptize business plans as “models” rest on a very fine distinction. And in Business Model Generation, Alexander Osterwalder and Yves Pigneur propose a process that has would-be founders creating a visual canvas of their imagined enterprise. They compare the process to composing a successful painting, in which a set of specified and necessary components are in balance—in this case, infrastructure, customer needs, channels, and finances. Another framework, Bill Aulet’s “disciplined entrepreneurship,” prescribes a path composed of 24 discrete steps that, if carefully followed, will increase the likelihood of a successful start. In the end, none of these efforts escape the linearity of the planning process; one or more steps serve as required precedents of others. The entrepreneurial strategy compass advocated by Gans, Scott, and Stern is more of the same. The authors argue that newly forming businesses will benefit from a systematic evaluation of four competing go-to-market strategies: protecting the start-up’s intellectual property, disrupting competitors, working within the existing value chain, or creating an entirely new value chain. It is sad that 30 years into a period we might consider “the entrepreneurial revolution,” the advice academics hand out has progressed no further than this. Learning by Doing In the absence of data permitting prescriptive advice, the entrepreneur really has no alternative but to learn by doing—a practice rooted in phenomenology, the school of philosophical thought that claims as proponents the likes of Hegel, Heidegger, and Derrida. Phenomenology is a reaction to the Cartesian assumptions that underlie conventional strategic analysis—and the linear way we think about business. According to phenomenology, people learn about the world through their experiences of it. Rather than analyze past data, they create new data of their own, and on the basis of what they discover they engage in new experiences, building up an understanding of their world as they proceed. It’s an approach taken by one of the world’s most successful businesses, Apple, which uses a learning-by-doing process called challenge-based learning in its Classrooms of Tomorrow project. This trial-and-error format has been particularly effective in starting app-based businesses. It is also the only practical way for an entrepreneur to proceed. Predicting consumer reaction, a key determinant of success, is nearly impossible without trial and error, because expert opinion on what is likely to catch on consistently fails. How else to explain the 1:7 ratio of successful investments in venture capital funds, many of which have four or five decades’ worth of experience on which to draw? When the Segway was unveiled on national television, in 2001, experts hailed it as a revolution in personal transportation that would change cities by, among other things, making parking garages obsolete. Venture investors showered the idea with money. Today the innovation they declared would be “bigger than the Internet” is used mostly by security guards in shopping malls. Ultimately, entrepreneurs know that starting a business is fraught with risk only they can manage. Their task is to make decision after decision in unforeseeable circumstances. As events (often determined by earlier decisions) unfold, they present opportunities or dangers that cannot be evaluated before making a choice. Launching and managing a start-up will never be reducible to a strategic framework, let alone run smoothly according to a preestablished plan. Ted Farnsworth, a serial entrepreneur who is now the chairman of Helios and Matheson, which owns the discount theater-subscription service MoviePass, told me, “For any new company there is only one thing to do: devise a new product and just put it out there. Then you can answer the only two questions that count: Are there customers? How much will they pay? As an entrepreneur, I’m constantly relearning the answers to these questions.” Recall your dilemma as a hypothetical entrepreneur at the beginning of this essay. In 1998 Michael Levin, who had built Titan Steel into a global leader in the buying and selling of metals, launched a digital B2B trading platform. Before the launch he was forced by top-shelf venture investors to write a business plan for his start-up. But at a certain point the business began to struggle, and Levin decided he needed to pivot from the plan. He met such stiff resistance that he decided to buy out the investors to rescue his company. He wryly concluded, “Making a successful company requires an intimate tango with customers, not a tight grip on a business plan.”

It’s Not About the Framework

Partner Center