Wednesday, August 24, 2016

We are the Uber of Hype: When Entrepreneurs Crowd

Teaching entrepreneurship at a business school has its annoyances, and prime among them is students visiting to seek opinions and support for their business idea, which they describe as “We are the [insert famous company] of [insert market]”. That is a quick and catchy way of summarizing the idea, but there are problems with it. The main one is that it also summarizes that the idea is copied from something else. Copied ideas are not always bad, but very often they are. The first problem is that copying is easier than originality, so a copy faces competition. The second problem is that copies of successful firms (and yes, they are more common than copies of failed firms) involve too much excitement to understand the source of success. I have earlier written about DoorDash, which can be described as the Uber of meal delivery. Except that Uber gets its competitive advantage from knowing where all its cars are, always. It is not so hard to know where a restaurant is, so DoorDash is uber-like without a key uber advantage.

Well, going against logic and annoying business school professors are not decisive problems of copying successful firms. After all, none of them say what will happen in the market. So what happens, really? Now we know, thanks to a forthcoming paper in Administrative Science Quarterly by Elizabeth Pontikes and Bill Barnett. Their idea is simple. Look at spectacular successes in the financing of ventures, as well as agonizing failures of firms, and see if they result in crowding around successes and flight from failures. Then, see if the success crowd fails, and the entrepreneurs who stay near failures succeed.

Their answers are in support of the annoyed business school professors, and against the “uber of something” entrepreneurs. Yes, entrepreneurs crowd success and flee failures. But also, venture capitalists react exactly like business school professors, and they simply turn off the funding for entrepreneurs who crowd success. Also, firms that crowd success are more likely to fail, whereas firms that follow failures are less likely to fail. Clearly the impulse to chase success is a trap, whereas trying near a failure calls for thoughtfulness, which is often a step toward good outcomes.

So does this mean that entrepreneurs should be thinking about how to make a Blackberry variation, given its recent failure? Well, not so fast. Unthinking copying of anything is a problem, so they should not unthinkingly enter near a failure. Instead, they should think carefully about the elements of success, and those that led to failure. Blackberries had devoted followers because of the keyboard, and were also well liked for their security. They were hit by the sheer breadth of smartphone capabilities, and also by the market power by the largest high-price firms (Apple, Samsung) and the race upward in the market by the low-price firms. Is it still possible to make a device that keeps the Blackberry strength and survives the current market? Asking that question is the way to get from failure to success.

Pontikes, Elizabeth G., and William P. Barnett. 2016. "The Non-consensus Entrepreneur: Organizational Responses to Vital Events." Administrative Science Quarterly forthcoming.