Author: Daniel Isenberg

Cool ideas for new businesses are a dime a dozen. That — plus all the new tech enablers such as instant websites and e-commerce platforms — makes it deceptively easy to start up a new venture. The bigger challenge is to start up a big venture that just happens to be small at first.

Fortunately, real entrepreneurs are growth-obsessed: they cringe when you call them “small.” In fact, I don’t think you can call something entrepreneurship unless it is driven by big vision, big aspiration, and a burning desire and ability to grow — that is a key message in my new book, Worthless, Impossible and Stupid (due out in July). In the book, I tell the stories of scale-up entrepreneurs from around the world, and how they beat the odds to make a mark on their markets.

Here’s a quick test to help you figure out whether you are cut out to be a scale-up entrepreneur. Just answer each question as honestly as you can, Agree or Disagree.

1. Something inside compels me to make something that will impact the marketplace.
2. I am great at selling things to people that they may not know they want, nor think they have the money to buy.
3. I have people on my team who are better than me in several areas of knowledge or practice.
4. My venture already has the procedures, policies, and processes in place to be ten times the size we are today.
5. When I don’t know what my next step is, I have experienced people I can turn to for ideas.
6. There is money out there to fuel a venture that is growing fast; I just have to find it when I am ready.
7. When I achieve my objectives I keep raising the bar higher and higher.
8. I am one of the best sales people I know.
9. Think big; thinking small is a crime.
10. I know entrepreneurs just like me who have grown big, fast.
11. The sales process is just starting when the customer first says no.
12. If my venture stands in one place too long, it runs the risk of perishing. We have to keep moving forward.
13. I know how to find great people to hire.
14. Nothing gives me a bigger rush than closing a big sale.
15. It is more important to know of a big problem that customers have and then look for a solution, than it is to have a solution that is looking for important problems to solve.
16. I used to think our great technology would take us to leadership in our market — now I realize it is our team, our organization, our marketing and our ambition to sell.
17. Even though I am a startup, I think more like a market leader than a small business.
18. (extra credit) If Isenberg were smart, he would make millions from this test and retire.

If you scored 16 or more, the sky is the limit. Go for it.

Why the emphasis on sales? I recently met the head of a startup accelerator who said that entrepreneurs should not be concerned about selling; they can always go out and hire a vice president of sales when they are market ready. Indeed, many would-be entrepreneurs who are drawn by the romantic vision of developing a snazzy new app or product pooh-pooh selling as beneath their dignity.

I don’t think so. I learned a lasting lesson when I was in charge of the Japan market at Voltaire, the Israeli pioneer in the lab and field proven Infiniband open standard technology that makes super computers out of huge racks of commodity computers. Voltaire got the technology down pat but struggled with selling a product that enterprise customers were leery of. It was the CEO’s incredible persistence (and experience) in all aspects of selling — sales organization, compensation, pipeline management, and selling skills — that not only saved Voltaire from oblivion, but eventually propelled it to a NASDAQ IPO. Sale is a big part of scale.

Why the emphasis on attitude? I have found that ambition, which seems to have become a dirty word in some cultures, is a continental divide between self-employment and entrepreneurship. Without it, you will always be a mom-and-pop operation. In Denmark, they call this the “BMW Syndrome” — make enough to buy my BMW, and I have made it. Nothing wrong with that, it just isn’t entrepreneurship. As Apax founder Sir Ronald Cohen puts it, “Your business will grow to the size of your vision .”

I met Slovenian entrepreneur, Sandi Cesko, in 2007 when his Ljubljana-based multi-channel retail operation, Studio Moderna, had about $70 million in sales. Not bad. I met him again two months ago: six years later he had scaled up by a factor of ten — all the result of organic growth — and employs over 6000 people. Even better.

Scale-up means growth, and growth means jobs, wealth, and tax revenues. In a recent post on HBR.org, I called attention to the fact that we entrepreneurship promoters are too focused on start-up, and need to re-balance the dialog to support scale-up as well. That dialog includes all stakeholders, from the entrepreneurs themselves to investors to government policymakers. For you entrepreneurs, the challenges of scale-up are first and foremost the responsibility of managements and boards. Don’t go looking to public officials for help in growing your venture ten times bigger. But you policymakers can still play a key role in fostering an entrepreneurship ecosystem that supports scale-up entrepreneurs. So here are some suggestions, most of which by the way, happen to be essentially cost-free:

Removing barriers to growth should be your number one priority. Entrepreneurship is a natural act, a normal aspect of the human condition that spans geography, culture, and history. Three thousand years ago the Phoenicians in Tyre were as globally entrepreneurial as the startupists are today in nearby Tel-Aviv. This natural drive to grow something big and new needs to be unleashed, not pushed or incentivized. The Brazilian government recently decided to make life easier for very small businesses so they passed special laws and tax breaks for micro-enterprises, called “simples.” A great idea, and the Simples Nacional taxation system has indeed turbocharged formalization of Brazil’s informal economy.

But without solving the fundamental problem of an incredibly opaque and complex bureaucracy, the Brazilian government has, despite the best intentions, kicked the can down the road and it is precisely the scale-up entrepreneurs who suffer: there is now paradoxically an incentive for entrepreneurs to stay small because when they grow, they are suddenly hit with a harsh administrative reality. As one Rio-based entrepreneur told me, “I got to nine people, took one look at the huge regulatory stair that I would have to climb to get to ten, and went back to opening up additional small companies instead of growing one big one. It is hell to manage.”

The commonality of perverse behavioral outcomes from good policy intentions leads to a second prescription:

Do not discriminate in favor of entrepreneurs. “Not” is not a typo. If you remove the barriers, then you don’t need to incentivize entrepreneurs to commit their natural act. Because it is extremely difficult to define a priori what an entrepreneur is and is not, pro-entrepreneur incentives will inevitably create a direct or indirect cost for those entrepreneurs who don’t happen to fall into government’s typically limiting definition. How many programs divert scarce public funds to discriminate in favor of certain entrepreneurial ventures, often under the rubric of “small business”? For example, in France it is twice as likely to find a 49-person company as a 50-person company. Huh? Here, policy has created a distorted system, in which it is rational to want to stay small and suppress the drive for growth. Piecemeal policies, like angel tax credits, loan guarantees, reduced payroll taxes, direct investments, government venture funds, etc., have spread like wildfire. Their effectiveness is almost impossible to measure, yet compared to removing the obstacles to the “natural act,” they are quick fixes, and also use up scarce public resources.

Real entrepreneurs don’t mind paying taxes, so develop a clear, right-sized and strictly enforced tax system. Taxes per se do not hinder entrepreneurship. I have talked to many entrepreneurs and policymakers in Denmark, one of the highest tax regimes in the world. Of course, no one likes to pay taxes, but the Danes don’t complain as much as you might expect in part because they receive a high quantity and quality of public services for their taxes. And no less important, company tax administration is relatively fast, simple, predictable, and logical.

Anyone from Mexico or Ukraine knows that many tax regimes are hostile to business in general, but some of them seem to diabolically target the entrepreneurs who otherwise would be creating the next wave of jobs. Taxes on revenues (not to be confused with VAT), taxes on assets, taxes that are paid in advance of profits or receipts, tax refunds that take months to be repaid — these are a huge burden to a rapidly scaling company in which cash flow management is a matter of survival. If we want the jobs these companies create, then we have to design (and strictly enforce) a better tax system, rather than manipulate taxes as incentives. We don’t need to incentivize people to act naturally.

Want to solve the capital problem? Start by paying suppliers on time. Here is a paradox: In Puerto Rico every government supplier knows that it will take them at least a year to be paid, despite the fact that the law stipulates payment within 40 days. So Puerto Rican entrepreneurs hire consultants to badger government procurement to pay up, and in parallel they jack up their prices to finance the long receivables cycle. There is a law making it a crime for the government to pay late, but it is widely believed that if you try to enforce the law, it will be a long time before you see your next contract.

I once guestimated that about a billion dollars of cash are used by suppliers to finance the Puerto Rican government’s late payments, not to mention the extra cost to the public of the price increases that suppliers charge. Oh, and by the way: Puerto Rican growth ventures are starved for capital, and government agencies have invested public funds to try, unsuccessfully, to kick start a venture capital sector.

Unjam the exit if you really want to improve entrance and scale-up. Not having a reliable exit channel for businesses creates a traffic jam at the start-up on-ramp. For example, it is nearly impossible for scaling ventures in many countries, including Brazil and Denmark, to count on an IPO for a successful exit. This blockage slows down the entire flow of ventures and venture capital, with lack of risk capital and lack of highly scalable ventures each keeping the other below their potential.

The blockage of capital flows also has follow on effects: Why would any rational person leave a secure, soft, high-status job at state-owned Petrobras or Vale without a really compelling prospect of making it rich? Having startup policies without taking care of access to IPO markets is like having a fast new ramp onto a pot-holed dirt road.

Stay off of ventures’ balance sheets — and get onto their income statements. Policymakers seem more and more to be looking to play venture capitalist or banker. We see the results of this confusion in the (again, well-intentioned) US Department of Energy loans and loan guarantees for cleantech companies. Being a company shareholder or debt holder can and should misalign your interests in broader public goods with those narrower interests of rapidly building a growing and competitive venture. Governments and shareholders should have different motivations. The only occasionally valid excuse for being on a venture’s balance sheet (and then for only a very short period) is to create a “demonstration effect” that shows unaware investors that there are profitable opportunities to invest in.

That does not mean government offices are irrelevant to entrepreneurs’ profit and loss statements. At an entrepreneurship ecosystems workshop I ran in St. Petersburg, Russia, last November, a confident entrepreneur publicly challenged a famous priest: “With such a large purchasing budget, what is the church doing to buy from entrepreneurs?” The same can be asked of governments: you can stimulate a lot of entrepreneurship by clearly defining and allocating resources to social problems that need solving. The “space race,” “cold war,” “war on poverty,” and many other initiatives created powerful and natural new markets for entrepreneurs (and big companies as well) to compete in. Obamacare is creating more opportunities for entrepreneurs by boosting a new market to address a brand new social priority.

Convene, celebrate, catalyze. Mayor Thomas Menino launched the Boston Innovation District in 2010 with his fifth inaugural address. He and his staff had created a simple compelling vision around work-play-live, a set of operating principles and a digital community, and then worked to bring different actors together: real estate developers, startup competition organizers, entrepreneurs, advertising agencies, investors, established high-tech companies, private incubators, a college (Babson), community organizations and artist associations. 4000 new jobs later, the mayor’s office has spent virtually no money, fielded only a virtual team, and, with one exception, offered no monetary incentives to locate there. The private sector has footed the entire bill of accommodating over two hundred new scale-driven companies, primarily because they saw it as a good investment.

Of course, as we all know, the devil in policy effectiveness is almost always in the details, and I have simplified the argument. But this does not weaken the larger truth that when it comes to encouraging scale-up entrepreneurship, the first and best thing policymakers can do is to get the artificial barriers to this natural act out of the way.

When a whale dies, the 30-100 ton body — or “whale fall” — slowly, silently sinks to the ocean bottom where it becomes the wellspring of a complex new microcosm of seabed flora and fauna that can thrive for well over half a century. These new ecosystems with their hundreds of species from flesh-eating sharks to sulphur-metabolizing worms also include “innovative start-ups” — previously undiscovered new sea animals that have naturally selected to flourish in the unique ecosystem.

There are many ways that live “corporate whales” can cultivate entrepreneurship ecosystems — as investors with capital for ventures to grow, as customers who buy innovative products, or as marketing partners to give the small dynamic firms global reach. I am a big believer of the symbiotic necessity of large companies and entrepreneurial ventures living side by side: You simply cannot have a flourishing entrepreneurship ecosystem without large companies to cultivate it, intentionally or otherwise.

But one of the deep, dark secrets of the flourishing of entrepreneurship in parts of the world as diverse as Israel, India, Colorado, and Denmark has been “corporate fall” — the death or shrinkage of large corporate incumbents whose detritus feeds the entrepreneurship culture. We don’t have far to look for current examples: Today Finland is witnessing an upsurge in entrepreneurship now in part because corporate giant Nokia is in the midst of shedding 10,000 high-quality jobs. As it happens, the “Nokia Bridge Program” is a socially minded strategy for both easing the pain of layoffs, and intentionally supporting the more talented.

A similar drama is taking place in aptly-named Waterloo Canada as RIM’s BlackBerry smartphones have become overripe. Initially fueled by RIM’s success, Kitchener-Waterloo’s “Quantum Hub” is now being fed by its turbulent ups and downs, with thousands of highly trained people flooding the small region.

Whereas superficial accounts of the rise of entrepreneurship in societies selectively glorify government interventions, few tell the story of death. In August 1987, for example, under severe United States pressure, the Israel government abruptly and controversially cancelled the Lavi fighter development project that was to be Israel’s answer to the F-16 and the societal equivalent of NASA’s moon program. Estimates of jobs eventually lost from the closure of the multi-billion dollar project range from 1,500 to over twice that many. But it is no coincidence that Israel’s entrepreneurship skyrocketed in the late 80s and early 90s just after the Lavi was grounded. Many of the thousands of highly qualified engineers either started companies or joined growing start-ups — it did not take too many talented people with experience in developing advanced technology products to turbocharge Israel’s entrepreneurial revolution. Less glitzy than start-up glam perhaps, but the reality in this case is that it took the death of a once-promising project to generate the life of many new ventures.

In India in the late 1970s, there was a similar story. Until 1977, IBM — in those days the first-choice mainframe supplier to governments, enterprises, and armies — operated freely in India. When the government passed a law requiring foreign companies to transfer 60% ownership to local shareholders, IBM’s management said, “Not on my watch,” and unceremoniously closed shop. The result? Thousands of IBM-trained Indian executives helped to feed the emergence of a number of young BPO services providers, and some started their own software companies. Whatever quips we might have heard about IBM’s corporate bureaucracy, it has always been considered a premier training ground for computer sales, service, and engineering. As one local computer services start-up advertised, “IBM May Not Stay but IBM Talent is Here to Stay.”

Another IBM story, different setting: Boulder, Colorado, that vibrant entrepreneurship ecosystem, continues to remain true to its rocky, turbulent past: Waves of downsizings of IBM in the past three decades (as recently as 2010) in the small Boulder community have been highly correlated with the burgeoning of this vaunted start-up community. As some have observed, “In the Boulder area, the early layoffs of talented IBM employees played a large role in supplying individuals to start ventures or to be hired by other start-ups.” Ditto for Boulder’s Storage Technology (which went bankrupt), as did Necton Bylinnium.

In 2008, financial services firms, primarily in and around New York City, dumped hundreds of thousands of people into the ranks of the unemployed (26,000 alone at Lehman Brothers). Lo and behold! New York City is undergoing an entrepreneurial revolution, now the second or third biggest deployment of venture capital in the world (depending on which mayor you believe, New York’s Bloomberg or Boston’s Menino).

“Corporate fall” is an important component of “entrepreneurship rise” (one component of many, it should be noted). What happens to entrepreneurship ecosystems when corporations fall? The reality is, they almost always adapt and grow in creative and novel ways. I make this observation fully cognizant of, and sympathetic with, the pain of being tossed out into the street, as so many people are when corporations fail, downsize, or restructure. The practical implication here is obviously not to encourage or applaud corporate death, just as recognizing the ecosystem renewal after a the loss of a whale is obviously not a call to go out and kill whales. But in an ever more complex and volatile world, business leaders and policy makers would be well served in allowing nature a little more rein in playing out its course.