As for the essentials of what breakaway brokers need to know, it’s a good bet that Professor Carl J. Schramm will live up to his nickname, “The Evangelist of Entrepreneurship,” so dubbed by The Economist. Not only does he preach entrepreneurship, he’s a major myth-buster when it comes to the nitty-gritty of business startups, as he tells ThinkAdvisor in an interview.
The Syracuse University professor argues, provocatively, that in launching a new business, there’s absolutely no need for a business plan. In fact, he called his new book “Burn The Business Plan: What Great Entrepreneurs Really Do” (Simon and Schuster).
In the interview, the economist, 70, reveals just why a plan isn’t necessary. After all, revolutionary companies ranging from Procter & Gamble and General Electric to Amazon and Facebook had none, he stresses.
The former president of the entrepreneurship-promoting Ewing Marion Kauffman Foundation and a consultant about innovation to large companies (carlschramm.com), he also talks about why four out of five start-ups fail within the first 10 years — and how to avoid such disaster.
A venture investor, he has founded or co-founded five companies in health care, finance and information technology and is former chair of the Commerce Department’s Advisory Committee on Measuring Innovation in the 21st Century Economy.
Schramm maintains that entrepreneurship has been misrepresented and glamorized, and that the best way to succeed as a business owner is to first gain experience and insight by working in a large corporation.
ThinkAdvisor recently interviewed the professor, on the phone from his office near Baltimore. He presented do’s and don’ts for starting a business that are likely to be of value to large-firm advisors flirting with the idea of going on their own or those who are already putting such a plan into action. Here are excerpts from our conversation:
THINKADVISOR: What are the chances of entrepreneurial success for a financial advisor who’s been working at a large firm?
CARL SCHRAMM: The odds aren’t against them. The whole issue is brand. If you’re working at, say, Fidelity or Morgan Stanley, the brand protects you. The advisors who are ready to break out know that what they want to do for their clients is better, on average, than what the big bank they work for [provides]. The trick is getting people to go with you and that, performing with your own research on the outside, you have confidence you’ll be as protected as you were being with a huge institution.
Conventional wisdom says that when starting a business, you need a business plan. Why do you disagree?
A business plan doesn’t really help you have a successful business. Secondly, there’s the cost in terms of time to develop one. Third, the business plan was invented principally as a way of communication between an aspiring entrepreneur and the venture capital community. But venture capital backs less than 1% of all new businesses every day. So there’s no reason to create a document to talk to people you’ll never talk to.
Didn’t companies that grew to be very large start out with a business plan?
Most businesses never had a business plan, which is a relatively new idea. There was no business plan for Procter & Gamble, Alcoa, General Electric, General Motors, American Airlines — or for Google, Amazon, Apple, Microsoft or Facebook.
Any other reasons for a business plan’s being unnecessary?
The notion of an exit strategy — getting out within five or six years [or other timeframe] — is totally foreign to the concept of why anybody would start a business. That notion never existed when most businesses were created. When GE was put together, the thought was that it would be around forever, just like the railroad companies and the banks.
You write that, nowadays, as more business plans are being written, there’s an increasing number of startups that fail. Surprising.
Twenty years ago the U.S. was benefiting from one 1 million startups a year. Ten years ago it was about 700,000 a year. This year there will be fewer than 500,000 startups. This has been a period in which the business plan was created as [a] way to recruit investors. It was also the period in which we invented business incubators. So the more you allegedly support new businesses, fewer new businesses get started.
What are the top reasons for financial advisors, and others, wanting to go on their own?
The most common reason that people want to become entrepreneurs is that they want to work for themselves. They want to be in control of their own destiny. They want to boss. They want to set the strategy. They want to determine how they’ll work and how much they’ll work. Other people do it because they just can’t tolerate the rules of a big business or because they’re frustrated that the business they’re working in isn’t innovative enough and they have ideas that the firm won’t pursue.
You write that an entrepreneur should be reluctant to share ownership in the company with employees until they’ve proven their value over a long time. Would that go for FAs too?
Yes. Every business is the baby of one person, such as the guy who leads a group to leave a bank. There’s one instigator that does it. But there are instances where two or three people are critical to the decision. In those cases, you can think of it as a partnership.
You write that the notion that “Greed is good” — the famous line from the film “Wall Street” — is, in the context of entrepreneurship, “a misleading portrayal of what constitutes business.” Please elaborate.
I don’t think most entrepreneurs start businesses just to make lots of money. They do it for the freedom to manage their own lives. They know they might get rich or make more money than working for somebody else, but that’s not what drives them.
You advise would-be entrepreneurs to carefully manage operating capital. Don’t most entrepreneurs do that?
Some people aren’t careful about how they use their resources. For example, a company I just saw advertise on the Super Bowl: I don’t know what their product is, whether it’s needed or who they are. What are they doing advertising on the [expensive] Super Bowl? The answer is that they’re venture-backed, and the strategy is they’re going to push like crazy and open the world to their brand and what they’re selling. But how effective was that ad? If the company doesn’t exist a year from now, it’s because they just blew about $15 million on a Super Bowl ad. Instead, maybe they should have done some trial marketing or an ad or two in New York, where there’s a concentration of demand.
You write that an entrepreneur needs to figure out their “burn rate.” What’s that?
Every business has to consider two things: the income coming in and the expenses of what’s required to keep the business going. The difference between expenses and insufficient revenue to pay for the cost of the company is the burn rate: you’re burning up your capital. The game is to keep getting those sales up and keeping expenses under control so that you don’t burn off capital.
That could very well apply to financial advisors making the stressful transition to operating on their own.
Yes. It’s very stressful because they’re not sure what clients will come with them. They have to get an office that looks credible [and incur other costs]. So they’re basically going to have to live out of their savings for a while. That’s all part of the cost of starting a company.
Please talk about how the entrepreneur’s role changes over time.
First, someone starts a company — and it’s doubtful whether it will survive and keep going. Then, if it’s successful, they may find themselves switching over from the starter of the business to the manager of a much larger business. In the case of financial advisors, they’re not sure the first year or two if their clients are coming with them, and they’ve got to recruit new clients. However, there are lots of advisors who have grown into billion-dollar firms and manage their own funds. But all of them had a period of time when they moved from instigator of starting a new company to manager.
You write that four out of five startups fail within their first 10 years. How does one avoid failure?
By not starting a company with a bad idea. Think about your startup as an innovation platform. Secondly, you have to be in charge of yourself and throw yourself into it fully. You need to have a full-time, full-focus commitment. The third thing is that you have to watch market signals: If the initial plan or product isn’t selling, you’d better quickly think about pivoting to something else.
But a financial advisor manages assets and gives financial advice. That’s their profession. They’re unlikely to switch to a different one.
Right. They can’t because that’s their skill. The best prescription for a financial planner is to first study the big company in which they’re [probably] working. That way, they can learn what’s necessary to run a small business. Then it becomes accurate self-assessment: Is your book of business really your book of business that you recruited? Or did it come to you because you were in a big firm with their brand over the door? If you’re not sure that you can bring a brand that will [create] sufficient revenue to support your company, you probably aren’t cut out to be a free-standing financial advisor.
Why do most startups fail?
The presumption is that they don’t have enough money. My feeling is that with good ideas in the hands of a good entrepreneur, the company may have shortfalls and pinching periods — but they’ don’t run out of money. I think the most [common] reason for a company’s failing is that the entrepreneur’s idea wasn’t good enough.
Any other myths that you care to bust?
One big myth is that starting a business is a young person’s game. The average entrepreneur is actually 39 years old [vs. image of super-young techies]. In the area of financial planning, nobody in their right mind would go to a planner who’s only 21. They couldn’t possibly know anything. Customers would be crazy to turn their money over to them.
Some planners who are about age 30 are catering to millennials. They have virtual practices and report good results. They consider themselves to be entrepreneurs. What’s their chance of success?
It might be high. It all depends on how the market would react. Some of those [practices] look kind of dubious to me, though, because they’re trying to do everything algorithmically. That may look like something cool right now — artificial intelligence and whatnot. But as many have observed about the recent horrendous drops in the stock market, that was basically automated-trading [based]. So clients may say it’s okay to have algorithmic thinking built into my car, but I’m not sure I want autonomous thinking built into my stock portfolio.
You note that, in a study, the Kauffman Foundation found 35% of all entrepreneurs to be dyslexic. Some prominent business people with dyslexia are Charles Schwab, Richard Branson, Ross Perot and, probably, Henry Ford. Why do such folks become entrepreneurs?
The research seems to indicate largely that they don’t want to work with a set of rules that come with a big company. They want to work inside their own world.
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