Entrepreneurism: Creating Value versus Making Bets

Stephen DeAngelis

February 12, 2010

This is the final post in my week-long series about entrepreneurism. As an entrepreneur, you can understand my bias towards trumpeting the positive benefits that entrepreneurs can bring to a country’s economy. In yesterday’s post, Luke Johnson, chairman of the Royal Society of Arts in Britain and who runs Risk Capital Partners (a private equity firm), reminded us that often “pioneers die broke.” In another more recent article, Johnson reiterates that for every “winner” entrepreneur, there are probably a lot more “losers”; but the focus of his more recent article is on the value that successful entrepreneurs create for society — not just the personal wealth they generate [“Malcolm Gladwell’s business blindspot,” Financial Times, 3 February 2010]. As the headline on Johnson’s article implies, his op-ed piece is a criticism of a Malcolm Gladwell article in The New Yorker magazine entitled “The sure thing: How entrepreneurs really succeed.” Before proceeding to Johnson’s criticism, let me provide you with a brief description of Gladwell’s piece taken from an abstract provided by The New Yorker:

“[Gladwell writes] about Ted Turner, John Paulson, and other predatory entrepreneurs. … In a recent study ‘From Predators to Icons,’ the French scholars Michel Villette and Chatherine Vuillermot set out to uncover what successful entrepreneurs have in common. They present case histories of businessmen who built their own empires—ranging from Sam Walton of Wal-Mart, to Bernard Arnault, of the luxury-goods conglomerate L.V.M.H.—and chart what they consider the typical course of a successful entrepreneur’s career. The truly successful businessman, in Villette and Vuillermot’s telling, is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting. Would we so revere risk-taking if we realized that the people who are supposedly taking bold risks in the cause of entrepreneurship are actually doing no such thing?”

Johnson takes umbrage with Gladwell’s assertion that successful entrepreneurs are predators rather than risk takers. Before discussing his own views about entrepreneurs as risk takers, however, he launches into a personal assault on the quality of journalism contained in Gladwell’s article. He writes:

“If you want to understand and write about entrepreneurs, then there is no substitute for working with them. I have spent more than 25 years partnering entrepreneurs, and indeed practising as one, and the past nine years writing about them every week for national newspapers. Unfortunately, best-selling author Malcolm Gladwell has not – and it shows. A recent issue of The New Yorker magazine includes an essay entitled ‘The sure thing: How entrepreneurs really succeed’. This is a classic Mr Gladwell piece, suggesting that our preconception of business legends as risk-takers is wrong. He asserts that ‘successful entrepreneurs are seen as bold gamblers; in reality they’re highly risk-averse’. His speciality is a counter-intuitive revelation about human behaviour that demonstrates that our preconceived ideas are wrong. If this article is anything to go by, I think his journalism is shoddy. The only sources he cites are biographies of tycoons such as Ted Turner and John Paulson, a slim book I wrote about a while ago called The Illusions of Entrepreneurship and similarly derivative material. Seemingly this grand new concept about how riches are accumulated is not founded on original interviews with entrepreneurs, or indeed direct experience with them. Therefore, at best, Mr Gladwell’s theory could be described as a hunch based on a few carefully selected examples, rather than a representative study.”

Ouch! That’s a pretty stinging rebuke. Johnson doesn’t demean Gladwell’s talent as a master storyteller; he simply states that in this case Gladwell got the story wrong. Johnson goes on to describe his experience with entrepreneurs:

“I have participated in dozens, and observed in detail hundreds, of business moves by entrepreneurs. These include takeovers, product launches, start-ups and disposals. In hindsight the really profitable ones all appear one-way gambles and risk-free. But at the time, generally speaking, they were neither. The launch of BSkyB, perhaps the most lucrative media project of our time, was fraught with danger and almost bankrupted News Corp. Similarly, the launches of the iPod and iPhone by Apple were both high-risk strategies and might have flopped. We remember the winners but forget the hundreds of losers – they all appeared to be ‘sure things’ at the time. That is why venture capital investing is hard to do well. Genuine innovation is a perilous game.”

Most people, I suspect, agree with Johnson’s assessment that entrepreneurs are risk takers. Johnson thinks that Gladwell went astray in his conclusions because he drew on too few examples and, even then, selected some people who don’t really qualify as entrepreneurs. The example that seems to irk Johnson the most is John Paulson. Here’s what The New Yorker abstract says about Gladwell’s story on Paulson:

“[Gladwell] tells about the hedge-fund manager John Paulson. By 2004-05, Paulson was increasingly suspicious of the real-estate boom. He decided to short the mortgage market, using a financial tool known as the credit-default swap, or C.D.S. [Gladwell] explains how C.D.S.s work and tells about research conducted by Paulson and his employees into the housing market, which showed that the bubble was about to burst. He bought C.D.S. contracts by the truckload and Wall Street thought he was crazy. In 2007 alone, Paulson & Co. took in fifteen billion dollars in profits. Paulson’s story makes it clear how different the predator is from our conventional notion of the successful businessman.”

What isn’t clear in Gladwell’s article, Johnson argues, is that Paulson doesn’t qualify as an entrepreneur. In fact, he has very few kind things to say about Paulson. Johnson writes:

“I have another, perhaps more serious dispute, with the article’s assertion that ‘entrepreneurs only back sure things’. Much of the piece is given over to a discussion of Mr Paulson, the massively successful hedge fund manager who in essence shorted US housing mortgages. He is seen as the archetypal entrepreneur who bets big only when he knows he cannot lose. But Mr Paulson is not an entrepreneur: he is a Wall Street financier who takes short-term speculations, mainly, it seems, using derivatives – gambling with paper on paper. Entrepreneurs, on the other hand, build real companies that employ people and generate value for an economy. They do not amass riches through the misery of others; they create wealth and jobs, and make the capitalist system work. This is not simply a matter of semantics. It is a moral and philosophical issue. To me, Mr Paulson and others like him are the opposite of heroic – they are in essence parasitical. And his story should never serve as a case study in how to become a billionaire. The idea that he could be a model for anyone wanting to find a sure thing is odious. It is asserted that his fund made $20bn punting that the value of subprime mortgages would fall. He has become very rich thanks to a housing disaster and the near collapse of the US financial system. Millions of homes are likely to be foreclosed, and the US taxpayer was obliged to invest billions in near-bankrupt businesses such as AIG. Mr Paulson did not cause this mess, but characters like him are a catastrophic advert for capitalism. He may be rich, but is what he does to enrich himself productive in the slightest degree? By highlighting such figures, Mr Gladwell is naively trumpeting bad capitalism and doing a disservice to real entrepreneurs. He reminds me of the ‘useful idiot’, the sort of sympathiser who acted as a cheerleader for Soviet communism, while the system was oppressing and imprisoning its citizens.”

Although Johnson’s attack may be a bit too vicious, my sympathies and sentiments lie with his arguments. Real entrepreneurs create things. They build companies, create jobs, and provide real value. That’s why I’ve been so insistent in past posts about the importance of fostering a business environment in which entrepreneurism can flourish. Entrepreneurism is important whether you’re talking about a well developed country looking for economic growth or a developing country still struggling to find its economic legs. Having spent so many years dealing with entrepreneurs and helping them succeed, it’s easy to understand why Gladwell’s article started Johnson’s blood boiling.