How to be a Better Entrepreneur: Pretend You're a Scientist

Recent research shows that experimentation is the key to success for entrepreneurs. What can you learn?

Aug 17, 2014 at 9:00AM


How can you be successful as an entrepreneur? The question hounds the full-time, venture-backed techie and the part-time freelancer alike. Two recent studies look at the success of each group, and they bear a strikingly similar result. 

To be a successful entrepreneur, you should think like a scientist. 

In other words, experiment
Instead of looking at each day of work as an all-or-nothing milestone on the road to success or failure, think of it as a series of experiments. 

"Entrepreneurship is fundamentally about experimentation because the knowledge required to be successful cannot be known in advance."

Looking at venture-backed firms, Professors William R. Kerr, Ramana Nanda, and Matthew Rhodes-Kropf of Harvard Business School find that they tend to invest a little at a time in their portfolio businesses, testing different questions over time. For example, does this technology even work? Is anyone willing to pay for it?  

As the results come in, venture firms make decisions about whether to invest more or to back out.

"Venture capital firms are better thought of as conducting a portfolio of tests across a number of highly uncertain ideas with skewed economics." Most tests fail, in other words, but venture capitalists relish this information. Once they know something has failed, they can redirect and ramp up investments to those experiments that still look promising. 

In the end, only 6% of investments end up returning more than five times their invested capital -- but together, those few big wins account for about 50% of overall portfolio returns. 

In other words, venture capitalists realize that the "wild success" rate will be low, so rather than focusing on identifying the eventual winners at the beginning, they use the experimental process to reveal those winners over time. 

But it matters for the average entrepreneur too
So how does this apply to everyone else? After all, powerful as they might be, venture-backed firms are very much a minority among entrepreneurs. 

An investigation into small businesses in Texas confirms the importance of experimentation by demonstrating the value of experience. Professors Francine Lafontaine and Kathryn Shaw, from the University of Michigan and Stanford, respectively, find that "serial entrepreneurs are considerable more successful" than their first-time counterparts. 

In other words, someone with prior experience opening and running a business is more likely to be successful the next time around. "For owners with one or more past businesses, the probability of exit is 7% lower than those with no prior business record."

Lafontaine and Shaw chalk up the greater probability of success to the importance of experience. Most businesses are started by people with little to none, so the skills learned in previous businesses can make a real difference. They find that having for each previously "closed" businesses, or those that failed or were sold, reduces the exit rate of the current business by almost 4%. 

That means that people who have been through the trenches before are better at keeping their businesses alive later. 

(It should also be noted that the people who sold probably weren't buying mansions and Porsches with the proceeds. The authors note that, even in cases where an entrepreneur sells a business, they generally don't even take home the present value of their future profits.)  

The lesson: Failure isn't failure unless you stop trying

"Success is the ability to go from one failure to another with no loss of enthusiasm." Sir Winston Churchill 

These two papers complement each other because they each drive home the important role of "failure" in finding the path to success. 

Just as in science, every experiment tells you something. So instead of stressing about that one "make or break" sales pitch, treat it like an experiment. Take the results, measure them up, and see what the data tell you. Maybe you need to try a different way of selling, or a different market entirely. 

Extend this to every aspect of your business, and you'll find a veritable playground of possible experiments. Keep at it, and experiment often. 

It might not just make you a better entrepreneur today, the experience might be exactly what you need in the future, when that vague idea you have now is ready for fruition. 

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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