The Unsure Thing

William Mitchell joins the Rotman School of Management this fall as a professor of business strategy, having worked extensively with business incubators and entrepreneurs at Duke University in Durham, North Carolina. He spoke recently with U of T Magazine editor Scott Anderson about the profits and perils of being an entrepreneur.

Many people think they have a winning business idea. How do you determine if the idea is worth pursuing?
You never know beforehand whether an idea is worth pursuing. You’re more likely to know that something won’t work than will, but there’s no guarantee either way. The key is to assess whether the person has the drive and the ability to find out whether it will work. Entrepreneurship is by definition an experiment.

So testing an idea involves actually pursuing it?
Yes. Ideally, you go through it in a staged way so that you make low variable-cost commitments rather than high fixed-cost commitments up front. And you assess who might be willing to give up their time and money to use your product or service. If there’s a single thing that entrepreneurs struggle with, it’s switching from being excited about an idea to figuring out what the value is in the idea.

What’s the best process for resolving this struggle?
It involves market research but not massive surveys. You have to talk to the consumers who might buy your product, but also potential suppliers and distributors. Entrepreneurs need to know two types of value: what the consumer will pay for and what companies in the value chain will need in order for them to work with you.

What do you consider to be the biggest challenge, once someone has started a business?
Building an organization of more than one person. Organizations are a pain the ass. They consist of different individuals, with different goals and aspirations and different ways of thinking, in different stages of their careers. This can be a real strength when you make it work but will kill you if you can’t.

In Canada, about half of all new businesses fail in the first five years? Why so many?
In fact, that’s not enough. If Canadians were really experimenting with new businesses, we would have higher failure rates. The challenge is to encourage entry, rather than worrying so much about exit, while also encouraging people to enter in ways so that they can afford to fail if the market for their idea simply does not exist.

Why do businesses commonly fail?
There are two reasons: one is mistakes; the other is you tried out a reasonable hypothesis and it failed. We test hypotheses in science all the time – and most of the hypotheses that we test we reject. A new business is, in many ways, a hypothesis that someone will give you their money to continue selling a product or service. The reality is that, no matter how much market research you do, until you offer something – to either consumers in the end-product market or partners in the value chain – you don’t really know what they will buy. Most of the time, they don’t even know what they will buy – until it is on the market.

Do you think potential entrepreneurs perceive the costs of failing as too high?
In some countries, the penalty for shutting down a business can be jail or worse. In Canada, we have sensible business exit laws. I think part of the problem is that we view the market as consisting of 35 million people. If we were to think globally about our potential role in the value chain and about customers in the U.S., Europe and emerging markets, there would be a lot more opportunity for entrepreneurial entry. In 2013, more than ever, entrepreneurial spirit needs to have a global vision.

If global vision is one characteristic of a successful entrepreneur, what are others?
Entrepreneurs need to take two things seriously, but not obsess about them: money and intellectual property (IP). We tend to think that there are more barriers to both than there actually are. If you have a good, market-oriented value proposition, then it’s possible to raise money.

As for IP, people tend to think of it as a patent, copyright or trademark. But the more important IP is the organization you build around your product or service to develop and sell it. Another company may be able to “copy” your product, but it can’t copy your organization or the value you provide.

Someone has said that a successful entrepreneur, contrary to popular belief, is someone who avoids taking on a great deal of risk. Do you agree?
I don’t know. Is any business risk free – whether it’s big and established or small and new? Does the Toronto Star, which is highly profitable in a rapidly changing media world, face risk and uncertainties right now? Shaw Communications is a hugely profitable company. How much certainty does it have in its business going forward? What does Shaw know about what’s going to happen technologically, or in a regulatory setting, or with its competition? I don’t think it matters whether you’re a one-person entrepreneurial business or a CEO of a 100,000-person business: you face risk and uncertainty every day.

Where does Canada stand in the world in terms of entrepreneurial activity?
Better than many and not as good as we need to be. Let’s look at U of T as an example. The University of Toronto is one of the strongest science and technology-based institutions in the world. We have world-class science coming out of our ears. But we don’t commercialize it well enough. There’s a big gap between the ideas we come up, which are absolutely world-class, and our ability to get something to market – to create customer value from these ideas, as well as scientific value. The world would be a better place if we did.

What can the Canadian government do to make it easier for entrepreneurs to thrive?
In 2012, out of 183 countries, Canada ranked in the top 10 along with Singapore, the U.K., Hong Kong and the U.S. in terms of good business conditions. We have the market infrastructure for entrepreneurship, so I don’t think we need something more from government. We need a mindset that says, “Let’s do something!”

A shorter version of this Q&A appeared in the Summer 2013 print edition of U of T Magazine.