The Origins and Evolution of New Businesses [Hardcover]

The author gives us a new perspective on new business formation. He discusses five types:

1. marginal businesses. These are hair salons, lawn care services, and other businesses that are simple and small-scale.

2. promising businesses. These businesses also start out at a small scale, but they are much more complicated because they are launched in turbulent markets with high levels of uncertainty. You are going into a market before most people even realize that there is such a market.

3. VC funded firms. These firms require more capital and a more solid business plan than promising new businesses.

4. Revolutionary ventures. These are VC funded firms on steroids (the venture funding may have to come from large enterprises), who take large risks while aiming for large profits.

5. Large enterprise innovation. Here, established companies launch new projects, which require large investments but have a high probability of success (think of Intel maintaining its lead in microprocessors).

This is an excellent theoretical scaffolding, to which Bhide is able to attach many interesting insights. Some are statistical. For example, in a large sample of successful small businesses, only 12 percent thought that the originality of their idea was what produced success. The rest attributed their success to "exceptional execution of an ordinary idea." p.32

Other insights are anecdotal, such as the descriptions of how companies adapted to customer demands.

If I were the type who used a highlighter to mark interesting passages, my copy of the book would be mostly yellow.

With its solid theory, statistical support, and anecdotal color, this book sets a new standard for books about entrepeneurship. No professor of business can afford to ignore this work.

General readers may find some faults with this book. If an academic tone puts you off, too bad for you. Go read "Seven Habits in Search of Chicken Soup" or something.

Another shortcoming is that the Internet receives no real mention. Email me for references to some essays on Internet entrepreneurship that I think are fairly consistent with the thrust of this book.

Overall, I give the book my strongest favorable recommendation.

Bhide committed a fundamental methodological error: he selected only successful firms and then tried to infer what differentiated them from the (non-selected) unsuccessful ones. He surveyed 100 founders of companies that appeared on the Inc. 500 list in 1989 and drew upon on several hundred case studies by his students at Harvard, plus cases of successful firms drawn from business periodicals and his own research. Although he shows some awareness of the methodological problem thus created, he nonetheless injudiciously draws strong inferences from empirical regularities among the successful firms.

Why is such selection bias problematic? Consider a hypothetical study, showing that 20 percent of the successful firms in the financial services industry were currently run by Harvard MBAs, compared to only 10 percent by Stanford MBAs. Would we be entitled to conclude Harvard MBAs were twice as successful as those from Stanford? What if we learned that Harvard MBAs started 80 percent of the firms in the financial services industry, compared to only 1 percent for Stanford? And, that most of the firms started by Harvard MBAs had failed? Now we see that Stanford MBAs are highly over-represented among the successful firms, compared to the initial population of startups, and that Harvard MBAs are substantially under-represented. Without information on the initial cohorts of firms starting out in an industry, we are in great danger of engaging in superstitious learning of the kind that Bhide actually reviews in his book (research conducted by Camerer, Kahneman, Tversky, and others).

By relying on information from firms that made it onto the Inc. 500 list or into the cases written up by his students, as well as on case histories of FedEx, Walmart, Microsoft, and other successful firms, Bhide cannot tell us why or how those firms got there. Only a research design that allowed him to follow startups and growing firms over time would give him the dynamic data he needs to answer the questions posed by his extremely interesting model.