“Do you think I have what it takes to succeed as an entrepreneur?” That’s the question I hear over and over from students in my entrepreneurship classes at Princeton and from other aspiring entrepreneurs.
It’s no casual inquiry. They’ve spent many weeks and months developing their ideas and plans for a new business. Many are on the cusp of graduation and face some momentous life choices. They don’t want platitudes about hard work or noble failure. They want a frank assessment of their chances.
Unfortunately, there’s no easy answer. Venture capitalists (VCs), who bet millions of dollars on their ability to pick winners, get it wrong most of the time. They don’t mind because they’re looking for “unicorns”—those rarities like Airbnb or Uber—that achieve multi-billion dollar valuations that more than make up for all the bad bets. But my students aren’t looking to create the next unicorn and they certainly don’t want to fail. So my responsibility in giving them an answer is very different from that of a VC partner answering to the limited partners about the chances of success for a company the firm might back.
VCs aren’t the only ones who have trouble predicting who is likely to succeed. In the now classic book Thinking, Fast and Slow, Nobel Laureate Daniel Kahneman recounts his early days studying the effectiveness of the Israeli army’s officer selection program. He found that the system in place had virtually no correlation with the list of candidates who went on to have stellar careers as officers. Kahneman concluded that what it took to succeed as an army officer was subject to too many variables and external chance events to make any prediction possible.
Nevertheless, the army had to select officers. They largely did so through wide ranging interviews at the conclusion of which selections were made on the basis of intuition—the interviewer’s gut feel. Kahneman designed a new system based on the insights of clinical psychologist Paul Meehl and his “disturbing little book” entitled Clinical Versus Statistical Prediction. Meehl had argued that statistical summaries of separately evaluated attributes like education or mastery of some specific skills would achieve higher validity than intuitive overall evaluations. Kahneman’s system, by way of Meehl, not only turned out to have much greater predictive power but it was still being used decades later when he visited his old army base. Kahneman even found a way to increase the predictive accuracy of intuition—it went up if interviewers first went through the methodical evaluation of particular attributes and only then closed their eyes and visualized how candidates would fare in their careers.
That kind of methodical consideration of specific attributes and the separate criteria for each is how I provide feedback to students on their chances of success. Here are the five questions I ask and the criteria I use for evaluating the answers:
Do you have some strategic advantage in entering this business? Attractive businesses attract swarms of entrepreneurial copycats and corporate competitors. Most of them won’t hesitate to borrow your ideas and those with deep pockets can draw on their immense financial resources to beat you at your own game. You need some important advantage that can prevent that. Being first to market doesn’t count—research shows that it doesn’t improve the chances of long-term success. Patents can be an important advantage, but don’t expect to prevail in a patent fight with a company you suspect of infringement. Even with a strong patent, you can be run out of business by larger, well-financed competitors who drown you in legal costs.
More defensible strategies rely upon proprietary skills and methods in applying a technology or a proprietary relationship with a potentially important early customer. That’s what Bill Gates did in the early days of Microsoft when he sewed up IBM as a customer for his operating system. Perhaps the most common strategic advantage comes from having worked in the industry for an industry leader, understanding their specific weaknesses and then exploiting those weaknesses. This obviously can be a challenging for students.
Do you understand the skills you’ll need to prosper against competitors and copycats? Even if you have a strategic advantage, your business will still need a range of skills to succeed: finance, sales, supply chain, prototype building, recruiting (particularly when you need people with hard to find skills) and more. In my experience, entrepreneurs often undervalue those necessities or naively assume that they will appear when needed. I’ve seen too many entrepreneurs fail because they appreciated—only after the fact—that they lacked an essential skill. Perversely, this is more of a problem today because of ubiquitous media stories about how much easier it is to start a company today because of Amazon Web Services (AWS) and the like. AWS is great, no question, but none of the social media marketing or automated website services actually do the selling—somebody in your company will have to do it. Similarly, LinkedIn can’t do your recruiting for you.
Do you have a solid plan for quickly assembling a team that includes masters in each of those skills? Even when entrepreneurs understand what skills they need, they are often unprepared to actually find and recruit people to their teams who are genuine masters of those skills. Do you have plans on how you will recruit critical skill sets? Have you validated your plan with anyone who has recruiting experience? Some universities and many incubators are happy to introduce first-time entrepreneurs to potential advisors and mentors willing to share their experiences.
Outsourcing skill sets to another firm, like using a subcontractor to design and make prototypes is possible, or hiring a specialist consultant, but only if you have the time, money and relationships to do so. Otherwise, you need to be able to assess those skills in the people you seek to recruit.
Are you motivated to succeed? Entrepreneurs have explicit and implicit motivation for starting their companies. Explicit motivations include frequently heard motives like “wanting to be my own boss” or “doing something good for the world” or “doing work that I enjoy.” But the motives that really count are those deep-seated drives that spring from fundamental emotional needs like needing to overcome feelings of unworthiness, pleasing a demanding parent or avoiding failure at all costs. It is those drives that will sustain you through the inevitable setbacks, punishing hours and financial uncertainty that goes with starting a business. You could go to therapy to discover whether your implicit motives are sufficiently strong, but the simpler and less expensive course is to ask yourself some simple questions.
Do you understand why your product will make customers happy enough to give you plenty of their money in return? This is the fundamental principle of entrepreneurship. No entrepreneur can succeed without fulfilling this criterion. Sure, when an initial idea for a startup runs into trouble many entrepreneurs pivot to a new idea, or at least an altered one. Such a pivot can succeed, but only if it keeps you in the realm where your motivations and skill sets enable you to deliver a product or service that makes lots of people happy enough to gladly give you lots of money in return.
Even though Kahneman ultimately found a place for intuition in his evaluative scheme for the Israeli army, I favor an eyes wide open approach with my students. That’s because my objective is to help them succeed at what best suits them, not at what I want them to succeed at, as with the army. I do, however, try to visualize things that could go wrong. I then make a list of things to watch out for and brainstorm with the student about ways to mitigate those risks.
The system seems to work. Most of my students who started companies have succeeded, making themselves and their customers happy. But just as important, this line of questioning has helped many would-be entrepreneurs realize that they were not adequately prepared or properly motivated, so they appropriately postponed their leap. I’m equally proud of both groups.
