Listen to the podcast:
It’s common practice today for entrepreneurs, especially those in Silicon Valley, to start a business, reach a certain level of success and then sell their project to the highest bidder. But Princeton University professor and entrepreneur Derek Lidow believes the trend isn’t always helpful to the broader economy. His book, Building on Bedrock, looks to the entrepreneurs of the past for examples of how to build lasting success. He visited the Knowledge@Wharton show, which airs on SiriusXM channel 111, to explain why a slow burn can be better than a quick spark.
An edited transcript of the conversation follows.
Knowledge@Wharton: It does seem like everyone is trying to be an entrepreneur these days and it’s become a little bit like house-flipping. Why?
Derek Lidow: That is a fantasy that many people have, but it does not describe how most of the wealth created by startups actually happens in our country. This is a false myth that comes out of our fixating on companies like Spotify that create billionaires. This is a handful of companies. In the United States every year, there are 600,000 new incorporations. And every year for the last 20 years, venture capital has invested in 1,400 new companies a year. That’s a very small percentage. If we want to be a society that relies on our entrepreneurs for our new jobs, a significant fraction of our innovation and a significant fraction of all our growth and GDP, then we have to understand how entrepreneurs really create the wealth, which is the law of large numbers. Look for bedrock entrepreneurs.
Knowledge@Wharton: In your book, you look at individuals who have had phenomenal careers. What made you want to link today’s entrepreneurs to people like [Walmart founder] Sam Walton, Walt Disney and Ray Kroc [who built McDonald’s]?
Lidow: Because they’re accessible role models. The way people internalize and decide on what to do are based upon what they see others have done that has worked or not worked. This causes the visceral reactions for those things to be lodged in your brain — “I can do this!” or “I’m never going to do that!” I wanted to illustrate the facts about entrepreneurship today using entrepreneurs that we may have heard about but don’t know what truly made them successful.
Knowledge@Wharton: You were in Arkansas for a celebration of what would have been the 100th birthday of Sam Walton. Walmart is a legacy company that is evolving to stay competitive with companies like Amazon. What did you find out about Mr. Walton that made him the success that he was?
Lidow: I was very fortunate that Walmart and the Walton family allowed me to have exclusive access to their archives, to Sam Walton’s papers going way back. I could literally have in my hands the tally sheet of the day or the week that he looked at while he wrote, “This is what we need to do next.”
“So, 52-year-olds, absolutely you can be world-class bedrock entrepreneurs if you want.”
That gives you a great deal of insight in terms of how he thought and what allowed him to grow a nearly bankrupt, small town, franchised variety shop into the largest corporation the world has ever known. On a global scale, it’s the largest revenue producer in the world.
Knowledge@Wharton: How did he do it?
Lidow: It was very slow and steady. The first Walmart store was not opened until 17 years after he started in business. For 17 years, he perfected his techniques, particularly his merchandising techniques. This was done on a relentless weekly basis. Every week after he opened his second store, he’d get together on Saturday morning with his store managers and say, “What are we going to do better next week? What didn’t work out the way we expected last week?” Relentlessly, week after week for year on year, he would figure out how to improve things.
But it was 17 years later when he decided no longer to just be a franchise owner. He opened up his first Walmart. His first Walmart was not an instant success. The second Walmart was the runaway success that ultimately led to the company that we know today.
Knowledge@Wharton: What happened between the first and second store opening that changed the dynamic within the company?
Lidow: In the second store, he amped up the cost savings, the “everyday low price.” It wasn’t yet a concept that he described so simply, but he offered incredible prices on staples like toilet paper and toothpaste. It was the summertime, and he bought every fresh watermelon within a day’s drive, piled them up, and you could get them for 10 cents. The locals couldn’t resist deals like that. They never saw something like that before, so they flocked to the store in unprecedented numbers, in spite of the fact that it was such a hot day that the watermelons started bursting open because they were outside.
To attract families, he had arranged for donkey rides to be offered in the parking lot. The guy who was doing the donkey rides was so busy, he couldn’t clean up all the donkey poop. The donkey poop and the watermelon juice mixed together and flowed all over, inside the store, so everything had this acrid smell. But in rural Arkansas at that point in time, that was considered homey.
Knowledge@Wharton: Walt Disney is another person you write about in this book. What was the path to his success?
Lidow: Walt Disney went bankrupt on his first attempt in Kansas City. He did it using what today we would call more the Silicon Valley model of entrepreneurship, where he raised a lot of money from the Kansas City elite to create an animation studio in Kansas City. But his skills weren’t good enough to make it in the big time. He was more or less run out of town and went to live with his uncle in L.A.
“It’s bedrock entrepreneurship that we need to keep our country competitive.”
Being run out of Kansas City made him aware of the fact that he could no longer rely on investors if he was going to nurture his own talent, so he enlisted the help of his brother, who had worked in banks, to be the financial guy. They started relentlessly, on tiny little bits of money, making animated shorts that finally sold. His first big hit was an animated rabbit, but that whole idea was stolen from him by his distributor.
In reaction to that, he created Mickey Mouse, which was not an instant hit. He couldn’t sell the first two shows. He decided to risk every dollar he had to put sound to it. He was the first person to put sound to an animated short. Literally, it was down to the last second where one movie theater person decided to take a risk on showing this short and paid him $500.
Knowledge@Wharton: What are the common themes of the entrepreneurs that you profile in the book?
Lidow: The book is organized according to the who, what, when, where and how of entrepreneurship. I’m trying to help everybody extract from these stories who becomes entrepreneurs, why they do it, what they do, the things that made them successful, how much they needed to start, where they did it and when they did it in their lives. I want each person who reads the book to be very clear on whether entrepreneurship is a good thing for them.
Sixty percent of the working population aspires to be an entrepreneur today; 50% are actually going to try. So, having a fix on how entrepreneurship really works for most people is extremely important because you’re likely to try. If you don’t try, somebody in your household or somebody you care about is going to try. If you want to be in a position to help them be successful, you’d better understand how this all works.
Here’s the rub of what’s happening today: Entrepreneurship is in a steady decline, as measured by the number of new companies that are being started. I quoted 600,000 new companies started last year, approximately. It used to be 800,000. The failure rate is higher than it has ever been. Why? Because we’re sending a message that the Silicon Valley model of entrepreneurship, which I call high risk, which is an important model for these 1,400 companies a year, is what all entrepreneurs should follow.
That scares off a lot of people from being entrepreneurs who have huge things that they can contribute to making our lives and our society better. They think that because they’re not a coding savant and like to get eight hours of sleep a night that they’re no longer going to be able to be successful, so they don’t try.
Then there are all these other people who have good talents, but we say, “Go high risk.” The failure rate for high risk is more like 1 in 500. Whereas, if you go bedrock with the classic bedrock principles of entrepreneurship, it’s 1 in 3. So, we’re leading a lot of lambs to slaughter here.
Knowledge@Wharton: Can you talk more about risk?
Lidow: There’s this myth that our entrepreneurs are risk-tolerant. The facts do not show that whatsoever. There are ways that entrepreneurs have classically operated to minimize their risks. Most entrepreneurs want to do that because they can’t afford to wipe out their bank accounts and let their wives and kids starve to death. They manage their businesses to minimize risk by achieving profitability as early as possible. They reinvest profits, and not strangers’ money into their business. They can take loans, but they do it judiciously. Sam Walton had 17 years of runway before he started Walmart. But when he started Walmart, there was no stopping him.
Knowledge@Wharton: What about the story of Ray Kroc, who built McDonald’s?
Lidow: Ray Kroc is really interesting. I profile him in the book because he started so late. There’s this myth that entrepreneurship is for the young, where the facts show that you have the highest chances of success for when you start in your 40s or late 30s. Ray Kroc started at 52.
By the time he retired in his late 70s, McDonald’s franchises were a huge [global] thing in a short period of time because he was somebody who knew what he was looking for. He was looking for that opportunity, he found it, and he pounced on it. So, 52-year-olds, absolutely you can be world-class bedrock entrepreneurs if you want. There is this myth that entrepreneurship is really for the young — you need to drink Red Bull constantly and not sleep. But the facts don’t support that.
I do need to point out this other thing we discuss in the book: this myth about the idea. The idea is not the starting point for successful enterprises. I tell the story of William Shockley, one of the great scientists of the 20th century who was the co-inventor of the transistor. The transistor is the founding idea that led to personal computers and the internet and our smartphones and everything. This was important. It made The New York Times.
“Entrepreneurship is a real viable path for the vast majority of people out there.”
Everybody realized it was going to change the world, and he wanted it to be his legacy. He hired the nine smartest people that he knew in the country and moved his company to be next to his mom. His mom happened to live in Palo Alto, Calif. Silicon Valley is where it is today because of William Shockley’s mother.
The world’s waiting with baited breath to buy Shockley transistors. Nothing happens. Not a single device is produced. He is screaming at these smart people. He’s going behind their backs. He takes all the credit for their ideas, but he changes his mind on a weekly basis. It’s chaos. His leadership is nonexistent, and the people flee. They create Intel and Kleiner Perkins. All these legendary companies of Silicon Valley were refugees from William Shockley.
So, the greatest idea of the 20th century [foundered] in the hands of somebody who doesn’t have the basic skills, who can’t take that idea and make any money out of it.
Knowledge@Wharton: You also talk about Estee Lauder. What was the tipping point in building her company?
Lidow: Her genesis is really interesting. She was raised in a home with probably no savings whatsoever, and she was compelled to get a job. She helped her aunt who had something like a dress shop. She liked selling and cosmetics. When she graduated high school, she made a living selling cosmetics that another uncle of hers made out of his little shop, along with rat poison and eczema ointment. She was selling to her friends and perfecting her sales techniques. Again, it wasn’t like an overnight success. She learned how to sell cosmetics at a greater and greater scale before she ultimately borrowed money to start Estee Lauder.
Knowledge@Wharton: What do you hope will be the signature takeaway of your book?
Lidow: I want them to understand how they feel personally about entrepreneurship, whether it’s something they should consider or reconsider. But I also hope that it changes the conversation in business schools and even among policymakers about what sorts of entrepreneurship we’re trying to encourage. Ultimately, if we encourage too much high risk, we’re just going to encourage more and more failure. It’s bedrock entrepreneurship that we need to keep our country competitive in many, many different areas, and not just in social media.
An entrepreneur, even a super successful entrepreneur, is no smarter, no wealthier, no stronger than the average. There is no trait that knocks you out of the box of being a successful entrepreneur. You may have to consider how you’re going to mitigate some issue you have, but everybody needs to do that. Entrepreneurship is a real viable path for the vast majority of people out there, and if more people choose the bedrock way, our GDP will grow faster. We’ll create more jobs, and more innovation will be introduced.