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We live in an entrepreneurial society in an entrepreneurial age. Surveys consistently rank the United States as one of the most entrepreneurial countries in the world. Moreover, the rate of new firm creation in the United States has grown dramatically since the mid-1970s. The number of organizations created each year has reached levels that have not been seen since records have been kept (the past 150 years). As a result of this entrepreneurial orientation, approximately 4 percent of the U.S. labor force is involved in starting a new company every year—more than the number of people getting married or having children each year![1]—bringing the total of business owners to about 13 percent of the nonagricultural labor force.[2]

In addition, our economy operates through a process of creative destruction. Every year large, established corporations are toppled from their positions of dominance by start-up companies whose new ways of doing business render the competitive advantages of established firms obsolete. A glance at the pages of the Fortune 500 over the past several decades indicates incredible fluidity among the listed companies. Very few Fortune 500 companies remain Fortune 500 companies for more than a decade or two. Every year new companies go public and use the capital that they raise to challenge established industry leaders. The tendency for our economy to create new firms that topple giants in their industries has made successful entrepreneurs such as Jeff Bezos, Bill Gates, Michael Dell, Steve Jobs, Sam Walton, and Meg Whitman, who have founded these giant-killers, heroes and household names.

Despite the entrepreneurial orientation of our economy, and the iconlike status of successful entrepreneurs, most of the entrepreneurial activity that takes place in our economy is actually a dismal failure. Much like the typical lottery ticket buyer who dreams of being the jackpot winner, but ends up holding a handful of losing tickets, the typical entrepreneurial effort ends in a business closure that was not financially beneficial to its founder. Forty percent of all new businesses started in the United States do not live one year, more than two-thirds of new business created in this country die before their fifth birthday, and only 25 percent of new businesses survive eight years. Moreover, most entrepreneurs make very little money. On average, an entrepreneur who continues a business for 10 years—the elite few who manage to survive that long—make only 65 percent of the value of the real earnings that they made in their previous employment, including their return on stock ownership in their new company.[3]

The Purpose of This Book

Obviously, something separates successful entrepreneurs from the masses who try their hand at this activity every year. This book identifies the key difference between the successes and the masses—the selection of the right business concept to exploit a valuable opportunity. The central goal of this book is to provide you, as a potential or actual technology entrepreneur, with the tools necessary to identify the right business concept to exploit a valuable opportunity when you establish your business.

Of course, the information provided in this book will not guarantee you success in a high-technology entrepreneurship. Much in the same way as having the right form for a jump shot will not guarantee that a basketball player will earn $20 million per year in the NBA, understanding what makes a business a good one for an entrepreneur to start will not guarantee that you, as an entrepreneur, will take a start-up public, replace the leading companies in an industry, or even be profitable. However, understanding the information in this book, and following the rules that it outlines, will dramatically increase the probability of a successful outcome.

You probably noticed that the title of this book implies that it focuses on technology entrepreneurship, and I have not said anything about technology businesses yet. The title of the book is not wrong—the book is indeed about technology entrepreneurship—and this is the first lesson of being a successful entrepreneur. On average, entrepreneurs are more successful if they create high-technology start-ups than if they initiate low-technology start-ups. This is not to say that you cannot be successful if you start a low technology business. You only have to look to Sam Walton and Walmart to know that is not true.

However, being a successful entrepreneur involves playing the odds, not looking at extreme examples. Much like most professional gamblers know that they cannot guarantee they will win any given game they play at a casino in Las Vegas or Atlantic City, but play the games that have the best odds, most professional entrepreneurs play the opportunities that have the highest probability of generating profitable private companies or create new public companies. Professional entrepreneurs—serial entrepreneurs such as Jim Clark, who founded Netscape and Healtheon—and their professional investors, the venture capitalists who finance many of these firms, almost always focus on high technology businesses because they know that the odds of success are best with these kinds of companies. These professionals know, for example, that, over the past 25 years, the number one factor predicting the proportion of start-up firms in an industry that become one of the Inc 500 fastest growing companies or have gone public is the proportion of technical employees in the industry. They also know that the number one predictor of new business failure is the industry in which the firm is founded, with retail businesses and restaurants having extremely high failure rates.

Despite the clear effect of industry on the probability of new venture success, the typical entrepreneur starts a business in low-technology industry such as retail or restaurants, where the failure rate of new businesses is highest and the average profits are lowest. Unlike the successful entrepreneurs, typical entrepreneurs choose to start businesses in the wrong industries, making them very unlikely to be successful.

While this observation is disheartening because it illustrates how the majority of entrepreneurs set themselves up for failure, it is also instructive. It demonstrates that you can maximize your chances of success by following the example of professional entrepreneurs and their investors by choosing the right industries to enter, and ignoring the example of the mass of uninformed and unsuccessful entrepreneurs who select the wrong ones.

What I Mean by Technology

One thing that is important to clarify right at the outset of this book is what I mean by technology. In recent years, there has been a tendency for the media to use the word technology to mean information technology (IT). These days, when you turn on CNBC or read the Wall Street Journal, and you hear or see the word “technology” to describe something, it is usually in reference to IT companies. This book uses the word technology in a broader, more traditional sense. Technology is the embodiment of knowledge in ways that make it possible to create new products, exploit new markets, use new ways of organizing, incorporate new raw materials, or use new processes to meet customer needs. Certainly, information technology—the use of zeros and ones in digital form on computers—is an important technology, but there are many other important technologies as well. Biologically based technologies, such as those used to create new drugs or to clean up pollution, are also important. Similarly, mechanically based technologies, such as those that make pumps or valves, matter. New materials, such as those in new ceramic composites, are valuable.

When I refer to technology in this book, I do not just mean simply information technology, though that is certainly one form of technology; I also mean new microorganisms, new mechanical devices, new materials, and a host of other things. So when you see the phrase technology start-up in this book, do not just think of the Internet and computer software companies, think of new businesses producing fuel cells, ceramic composites, new drugs, heart valves, and a variety of other things that are the embodiment of knowledge as a way to meet customer needs. Therefore, this is not just a book about how to create successful Internet or software companies; it is also a book about how to create successful companies in biotechnology, medical devices, materials, manufacturing components, and other industries that are reliant on new technology.

How This Book is Different from Other Books

This book is different from most books on entrepreneurship in three important ways. First, the book focuses on what matters the most for successful entrepreneurship—picking a good opportunity for starting a new business—rather than what most people write about—the attributes of successful entrepreneurs. Why is this latter approach a problem? Because of what academic research has shown about entrepreneurship. Despite decades of effort to identify the special features of successful entrepreneurs, there really are none. Anyone can become a successful entrepreneur. You do not need special psychological characteristics or attitudes. Take the example of Bill Gates. He is not a billion times more successful than the average entrepreneur who founds a restaurant because he has a billion times larger endowment of special psychological traits and attitudes than the average entrepreneur. Instead, Bill Gates is more successful because the creation of the DOS operating system—the technology on which he built Microsoft—created a superb opportunity for the creation of a new business. It was much more valuable than the opportunity for any of the retail or restaurant businesses that the average entrepreneur starts.

I do not mean to imply that entrepreneurial attitudes and talent do not help entrepreneurs. Certainly having better entrepreneurial talent and attitudes than other people helps entrepreneurs to perform better, all other things being equal. However, we live in a world where all other things are not equal, and what accounts for the vast majority of entrepreneurial success is the business opportunity that a person chooses to pursue. Academic research on entrepreneurship has shown that the effect of business opportunities on the performance of new ventures is so large that it swamps the effect of entrepreneurs’ characteristics. While it wouldn’t hurt to be a good entrepreneur no matter what business you start, what really matters is picking the right business for a start-up.

To put this in plain English, even at the risk of putting too fine a point on it, if you start a biotechnology firm, your chances of success are much greater than if you start a restaurant. The difference between a biotechnology firm and a restaurant is so great that the differences between individual entrepreneurs exert little more than a rounding error on the performance of the ventures.

If what separates successful entrepreneurs from everyone else is an understanding of how to pick the right opportunities for starting new companies, then what a good book on entrepreneurship should do is tell readers how to pick the right opportunities. Unfortunately, that isn’t what most books do. This book differs from almost all other entrepreneurship books because it sets aside the discussion of the things that make some people better entrepreneurs than others and focuses attention on the characteristics of great opportunities for new businesses.

This book also is also different from most books on entrepreneurship, which focus on how to get a new company started rather than on what kind of business is a good one to start. While books on “how to start a business” are fine for answering questions like “how to incorporate a company” or “how to fill out tax form,” they do nothing to help entrepreneurs to start successful companies. Unfortunately for entrepreneurs, there is no answer to the “how-to” question that is a secret to success. So there is no way to follow the recommendations of any of these how-to books to increase the chances of being a successful technology entrepreneur.

The “how-to-get-started books” miss the point of what would-be entrepreneurs need. As I said when I began this introduction, most people do not have a problem getting started in business; they have a harder time figuring out the right business to start. So what you need is a book that tells you how to pick a business opportunity that will make you successful, not how to get started in business. This book will help you to identify an opportunity for your new business and define your business concept.

Moreover, the book takes the idea of explaining how to pick the right business opportunity seriously by developing a framework of rules for success that are based on academic research which shows the things that make new companies successful. The book uses this framework to identify specific tools for identifying your business opportunity and developing your business concept that you can use to enhance the performance of your new company—such things as tools for the evaluation of customer needs for new products, tools for measuring adoption and diffusion patterns, tools for financing new companies, and tools for protecting a new venture’s intellectual property. By bringing these tools together in one place and translating them from academic-speak into plain English, this book provides you with an understanding of how to create a successful new technology company.

This book additionally focuses on explaining how to identify a business concept that can support the development of a successful technology-based business. This is important because the performance of technology-based businesses—businesses such as the Internet, pollution abatement chemicals, high-temperature ceramics, fuel cells, and so on—depend on a variety of factors that are not present or are of relatively little importance in businesses not based on technology. The important factors in technology-based businesses, which are discussed in later chapters, include such things as intellectual property, increasing returns, dominant designs, diffusion, and S-curves. By explaining how to harness the factors that influence the performance of businesses in high-technology industries, this book provides you with the tools to create successful companies in these industries. Understanding and applying these tools helps you, as a high-technology entrepreneur, because the application of many concepts from low-technology business settings to high technology industries fails to help most entrepreneurs to be successful and, in some cases, even hinders their performance.

Why is this book’s focus on the factors that matter to high-technology entrepreneurship unique? Given the fact that technology-based businesses are, on average, the most successful new businesses, you would think that many authors would focus their attention on these kinds of businesses. However, almost all existing books in the market discuss entrepreneurship in general, without considering the special nature of high technology. As a result, there really are no good guides available to explain to people the keys to success with high-technology enterprises. This book fills this void. It explains how the special characteristics of high technology influence what needs to be done to be successful with new technology-based businesses.

What This Book Does Not Do

Having said what this book does, it is only fair to tell you what it doesn’t do. This book doesn’t deal with the process of starting a company once you have identified your valuable opportunity. It doesn’t deal with things like how to write a business plan or how to raise money or how to create a venture team or how to hire employees. There are many books out there that can explain these things to you. While it certainly wouldn’t hurt to read these other books, the information contained in them is not a substitute for what is contained here. No matter what you do after you have identified a business opportunity, it is good to have selected a valuable one. And the lessons contained here will help you to do just that.

Who Should Read this Book and When Should They Read It?

You should read this book if you are thinking of starting a business. Ideally, you should read this book when you are first deciding what type of business you are going to start. Because this book focuses on identifying the fertile ground for your new business—what opportunity you should pursue and how you should pursue it—it is designed to help you conduct a feasibility analysis of your business opportunity. The frameworks described in the following pages, along with the recommendations for “dos” and “don’ts” and the questions to ask yourself are designed to help you to think about the business ideas that you come up with. Are they good for starting a new business? Will your venture be planted in fertile ground? Or will it be planted in arid soil that will make it very hard for you to succeed even if you are a great entrepreneur?

Moreover, you have probably thought of three or four ideas for a new business and you don’t know which one to pursue. The discussion in the pages that follow will help you to figure out which of these opportunities is the best. After all, you are only going to be able to pursue one of your business ideas at a time. So you might as well pursue the best one first.

Even if you do not want to be the next Bill Gates, building the next big thing, taking your company public and becoming fabulously wealthy, this book will still be valuable to you. It is still easier to have a nice, comfortable business if you find fertile ground and pursue an opportunity that tends to favor start-up companies.

The Sources of Knowledge Underlying the Book

Because I have said that this book uses academic research to create a framework for understanding how to create successful technology-based new companies, it is only fair for me to tell you the source of information underlying this book. The book has two specific sources of information. Some parts of the framework and evidence presented here are based on my own primary research. Other parts are based on the research of other academics. Regardless of the source, this book compiles, combines, and translates into plain English, material that is otherwise available only in a variety of different academic articles and books. As a result, you will find all of the key concepts that you need to understand to be a successful technology entrepreneur summarized and explained in one place, presented in a clear and straightforward manner.

The Key Lessons

Successful technology entrepreneurs approach entrepreneurship differently from other entrepreneurs, not because they are smarter than or different from other people, but because they have learned how to identify valuable opportunities for new technology companies. This book presents ten rules for entrepreneurs to follow to develop a business concept that will provide the basis for a successful high-technology company. Each of these rules is explained in a different chapter of the book. The rules are

  1. Select the right industry

  2. Identify valuable opportunities

  3. Manage technological transitions

  4. Identify and satisfy real market needs

  5. Understand customer adoption

  6. Exploit established company weaknesses

  7. Manage intellectual property

  8. Create barriers to imitation

  9. Choose the right organizational form

  10. Manage risk and uncertainty

An Overview of the Chapters

The first rule of technology entrepreneurship explained in this book is to select the right industry in which to found a new firm. Some industries are simply better than other industries for the creation of new companies. For instance, fully one-fourth of all the companies listed on Inc magazine’s list of the 500 fastest growing private companies since 1982 have been software firms. Moreover, the proportion of start-ups in an industry that experience an initial public offering or are listed in the Inc 500 varies by a factor of over 800 times between some of the more favorable industries and some of the less favorable ones. Chapter 1 identifies the industries that are favorable for founding new firms and explains why those industries are more favorable to new firms than other industries. Specifically, the chapter examines five different dimensions of industry differences that influence the performance of new firms: knowledge conditions, demand conditions, industry life cycles, the presence or absence of a dominant design, and industry structure.

The second rule of technology entrepreneurship is to identify valuable opportunities. One of the ironies of entrepreneurship is that, despite the motivation of the world’s entrepreneurs, we do not really need many new businesses. Established businesses are already meeting most market needs quite effectively because, in the absence of some sort of external change, someone will have figured out already how to satisfy the needs of potential customers. Therefore, to be a successful technology entrepreneur, you have to find an external change that creates an opportunity for a new business. Chapter 2 explains why opportunities for new technology companies exist and what the sources of those opportunities are. In general, three sources of change—new technology, political and regulatory shifts, and social and demographic movements—open up opportunities. The chapter also discusses the types of innovations that generate entrepreneurial opportunities, as well as the place within and outside the value chain where those innovations tend to occur. Furthermore, the chapter explains why and how some people and not others identify those opportunities.

The third rule of technology entrepreneurship is to manage technological transitions. Entrepreneurial success is enhanced by starting a firm to transition from one technological paradigm to another because change in a technological paradigm undermines the advantage of established firms. For example, few entrepreneurs have ever been able to start new firms that challenge Kodak’s position in traditional film, but the shift to digital camera technology made it possible for many entrepreneurs to enter and compete with Kodak. Chapter 3 explains how you can manage technological transitions to become successful. The chapter explains

  • Why technologies follow evolutionary patterns of change that open up discrete points of transition between technological paradigms that are valuable to entrepreneurs.

  • How you can forecast the S-shaped pattern of technological development and use this pattern to manage when and how to enter industries.

  • How dominant designs influence competition by entrepreneurial ventures.

  • How you can exploit technical standards to enhance the success of your new business.

  • What you should do differently to be successful in increasing returns businesses, which are common in high technology.

The fourth rule of technology entrepreneurship is to identify and satisfy a real market need. To be successful, you must introduce a new product or service that offers an economical solution to an unsatisfied customer need or that satisfies a customer need better than existing alternatives. Chapter 4 explains how successful entrepreneurs go about identifying customer needs for high technology products and services in ways that go beyond the traditional market research methods of surveys and focus groups. The chapter provides insight into why and how the advantages of successful new firms lie in product development rather than in manufacturing or marketing. Finally, the chapter explains how successful technology entrepreneurs identify the key decision makers in purchasing decisions, as well as how these entrepreneurs price their new products and services to make them attractive to these decision makers.

The fifth rule of technology entrepreneurship is to understand customer adoption and market dynamics. Contrary to the popular conception that evaluating markets is as simple as looking for large markets, evaluating markets for new technology products and services is relatively complicated. In particular, it requires successful entrepreneurs to take a dynamic approach that forecasts the adoption patterns for new technology products and services and explains how markets for these products and services evolve. Chapter 5 explains why new companies have to focus their new product or service development efforts on particular market segments, but why choosing where to focus effort is hard to do. The chapter also explains how successful entrepreneurs evaluate the customer and their reasons to buy as a way to determine where to focus their efforts. Furthermore, the chapter discusses the evolution of markets for new technology products and services, particularly the dynamics of technology diffusion and substitution.

The sixth rule of technology entrepreneurship is to exploit established company weaknesses. Most of the time, established companies succeed when they compete with new firms because of the wealth of advantages in marketing and manufacturing that they have. However, established firms have several weaknesses that hinder their efforts to exploit technological opportunities that new firms can exploit. Chapter 6 identifies what you should do to compete successfully with established firms in high-technology settings. For instance, the chapter explains why you should pursue uncertain, disruptive technologies that demand new architectures, first focusing on niche customers in small market segments, and then expanding up market. The chapter also explains why you should focus on technologies that cannibalize established firms’ investments, make established firm capabilities obsolete, and impose large exit costs on firms using the old technology.

The seventh rule of technology entrepreneurship is to manage intellectual property effectively. Introducing a product or service that meets a market need is a necessary, but not sufficient condition to profit from innovation. You must also protect your innovation against imitation. Chapter 7 discusses basic ideas behind appropriating the returns to innovation, focusing on the choice between secrecy and patenting.

The eighth rule of technology entrepreneurship is to create barriers to imitation. Chapter 8 examines how you can create barriers to imitation by controlling resources, establishing a reputation, creating a first mover advantage, exploiting the learning curve, and making use of complementary assets in manufacturing, marketing and distribution.

The ninth rule of technology entrepreneurship is to choose the right organizational form. Chapter 9 explains when you are best off owning the various parts of the value chain, such as product development, manufacturing, and distribution, and when you are best off using market-based mechanisms, such as licensing, franchising, and strategic alliances, to control them.

The tenth rule of technology entrepreneurship is to manage risk and uncertainty effectively. Chapter 10 describes the tools and techniques that successful entrepreneurs use to reduce, reallocate, and manage risk. The chapter also discusses the use of real options and scenario analysis, as well as behavioral techniques for convincing others to bear risk, such as escalation of commitment, bringing together different parties at the same time, and closing skills.

The conclusion of the book returns to the theme introduced in the first chapter about the importance of understanding how to identify valuable opportunities for the creation of new technology companies. Specifically, it summarizes the key actions that you should take to come up with an opportunity that will support, and even foster, the creation of a new high-technology company.

The next chapter explores the first key lesson in starting a successful new high-technology company: picking the right industry.

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