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A Band of Inertia

May 16th, 2006

I’ve been asked what we do hundreds of times. I’ve personally been called mentor, visionary, or genius (!), and many adjectives equally hyperbolical but far less flattering. When it comes to definition of our work, what the inquisitor finds meaningful depends on their experience.

Ever in search of a single sentence to answer that question for everyone, I have recently arrived at this: what we do is work on the entrepreneurial problem of moving people to action.

Simple occupational titles don’t describe our job—that’s part of the challenge. What we actually do is as varied as the individual entrepreneurs and economic conditions we work for and in. The economy is complex, but often less so than even the most publicity-shy down-home entrepreneur—who as often as not shuns even that word as too erudite.

The critical determinate of an entrepreneur’s success is convincing others that acting on his or her next idea is less risky than business-as-usual. This is part of the fun in a startup firm; it is a source of ongoing frustration in an established one. Fun or frustrating, the economic imperative is the need to change again and again. That is a business certainty.

I think entrepreneurs’ ideas work. How well they work is dependent on economic timing. The idea is still foremost, but–economic timing is to the entrepreneur’s idea as timing is to humor.

Our economic thinking applies to the problem of action–right action–in wrestling with the practical problem of determining whether results come from the idea, the effort, or changing economic conditions. The lines are funny, the timing is right one, nobody laughs. Ordinary economic volatility affects prices, costs, demand and risk. Knowledge of these changing reactions including techniques for selecting jokes fitted to the audience.

Until about 15 years ago these little adjustments, if made at all, were flying in a cloud without instruments. Results were largely a matter of whether you crashed.

My thinking is basic: the entrepreneur is a reasoned optimist. Regarding the economy, most of the time people are right most of the time. They are only wrong it matters most.

A Story

I can illustrate the earliest development of assisting entrepreneurs by a case from the early 1980’s.

At a reception an executive from a client’s largest and most profitable customer took me aside. “I am surprised at Jack’s success, he knows nothing about business”. Today Jack’s business is worth 260 times his original investment. What the executive said about Jack is still true.

Yet the exec shouldn’t have been surprised. Jack’s success made sense. I had worked through the economics of his startup. Jack had deep experience in an old industry. He had an idea. I was sure that even a little idea was enough for liftoff in old industries. Jack’s was classic entrepreneurial calculation about the future: an idea of how things could be done better, (unconventional), and that doing so would be worthwhile (customer response).

The other half of Jack’s success was timing. It was because of econometrics I urged him not to wait. The industry was in trouble. Not only had its heartbeat flat lined, but prime was 20%. These conditions create a low cost startup. Interest rates would surely drop. When rates dropped so did expense. When rates drop asset values increase and volume increases.

The rest is management, or knowing about business, which Jack hired.

None of that raises money. Economic conditions and Jack’s lack of business experience didn’t help. For some time had been considering the question of what gets money to move away from positions of perceived high security and actual low returns. By the time of Jack’s deal, I had concluded that emphasizing the opportunity wasn’t it. Translated, high potential does not prove an idea. Ideas can’t be proven to the skeptical, so to speak, except by doing.

Jack was clearly nervous. With a wife and four children even Jack’s job with its limited future can look better than a promising but unproven future. So documenting his plan and especially the numbers, I decided to watch for signs of Jack’s uneasiness. The object was to document his plan and numbers to fit, think of fitting a suit, with Jack’s feel for things.

Then I did something I hadn’t with others. I sent him to his funding presentation alone, no accountant, no lawyer, no CFO and no me. My thinking was that if the plan and numbers felt comfortable for Jack his answers would be adequate, and even his verbal missteps wouldn’t hurt.

The issue was credibility: Jack’s credibility, not the plan, not mine or anyone else’s. Credibility is personal. Jack would be the proof of the idea.

On Second Thought

Over the course of 30 years, I found myself less than satisfied with mere good results. Sometimes I felt I learned more from the failures. But increasingly it was on a reflection that just because something works doesn’t mean I knew why it worked. If I didn’t know why, then how could I repeat it? It must have been this obsession that brought me to spend the last 3 years reviewing and researching ending in a book of some 300 pages. The working title is Fit to be Tried. Much as I like talking about this stuff and dealing with the wide economic conditions and remarkable people, I’ll not post the whole things here.

The conclusion of the matter, relevant to the story I’ve told is this: I believe entrepreneurs take present action based on their view of the future in order to reduce uncertainty and eliminate risks. I think entrepreneurs are highly risk averse. That they act to change, and change of itself is risky, is because they become convinced by reasoning that failing to change is much riskier.

Put in theoretical terms, entrepreneurs have a narrow band of inertia, originated by the need to address uneasiness about the future. (This phrase is lifted from work done years ago analyzing 2,000 companies to find a prediction of business failure called the Z-score. It gave a band for scores: likely to fail, likely to prosper, and band of ignorance.)

Therefore, the entrepreneur’s problem of getting action depends on demonstrating that action reduces risk.

Band of Inertia

The band of inertia differs between three types of people. The entrepreneur has the narrowest band of inertia–within his/her slice of expertise on the future. Experts have a wider band of inertia, but it is general so that in all but the entrepreneur’s narrow slice the expert’s band of inertia is narrower. The third type—those who are neither expert nor entrepreneur–has a wide band of inertia.

Deciding when to change is difficult only exceeded by the difficulty of enlisting the support of others for change. It does not matter that everyone knows the necessity of changing is absolute; it seems theoretical.

Business inertia does not mean doing nothing. It means working, likely very hard, at doing, approaching and deciding the same way or on the same criteria that have always been used. There is merit to inertia. It results in fewer mistakes and refines results, tending to maximize profits as everyone knows, in the short term.

Because major change is sporadic, it makes the choice between present profits and present action to reduce future risk unsettling.

Praexis

If I fashion or proclaim Praexis as experts and argue for the application of our expertise to:

- Narrow the band of inertia for the entrepreneur in areas outside of his/her narrow slice of the future
- Gain understanding of entrepreneur’s thinking.
- Narrow the band of inertia for others on whose action the entrepreneur depends.

Technology has substantially changed small business. At last small business people can afford to use 150 year old traded markets, 200 year old math, and economic data Coolidge began to capture when he was Secretary of Commerce in the 1920’s. Now we can wrestle with the practical problem of determining whether results come from the idea, the effort or changing economic conditions with precise instruments.

Now small business can catch up with the past.

So What, Who Cares?

All of which leaves the practical questions: So what? Who cares? I admit to harboring a particular optimism about entrepreneurs and that it extends to the others on which he or she is ultimately dependent. Part of the significance of the band of inertia lay in how the entrepreneur sells change. This is especially true in a company that is doing well for the present.

If others think that entrepreneurs are risk takers, then the demand on the entrepreneur will be to prove sufficient reward. The consequence is raising the expectation of reward too high. If the perception of risk is high, then it follows that the reward must be a lot higher. It inclines entrepreneurs to adopt a view that they may think is possible, even likely, but are far less willing to bet on.

It is like the lottery. Nobody believes that they will win but the payoff is so high that odds don’t matter. But it is not like the lottery, for change is not a one dollar bet.

The issue is credibility — the stock-in-trade of the entrepreneur.

The answer then, to “So what”, is reducing risk. The effect of narrowing the band of inertia is reducing resistance by reducing the perception of risk. And increasing the realization that risk in is in not changing. Less resistance, less passivity, less excessiveness – take your pick – reduces risk.

I suppose I’ve already answered “Who cares”. The entrepreneur cares because when the understanding of risk both in changing and not changing is measured, the reward doesn’t have to be stretched beyond his or her own reasoning — when or how much.

There is another reason. Entrepreneurs are highly dependent on those around them for success. When others are fully engaged it minimizes silly mistakes and refines implementation.

I have not answered what triggers an entrepreneur’s sense of a future abyss or what produces their peculiar foresight. I frankly don’t know. My experience, research and writing did not resolve the question. Interviews haven’t closed the gap. In some cases what they saw didn’t seem revolutionary.

That said while I don’t know how they see. It is however clear that what they see comes from the fact their world is not to confined to the world of the company. The narrow slice of the world of employees, customers, vendors does not define all of reality to them. It is perhaps their curse. It is, however, how they hold the keys to a better future. That is why those who work for, sell to, buy from are those who care.

Are entrepreneur right about the future, about the actions required, do they have to be right? I don’t think so; they only have to be more right than others. They are likely to be as most don’t get past the bonds of the present.

Now to finish the story of Jack’s customer: I didn’t think of comeback until I wrote my book. It is: “So what business advice do you buy from Jack?”