Entrepreneurs or Predators?

About five years ago the New Yorker magazine abandoned its official nonpartisanship and, for the first time in eighty years, endorsed a Presidential candidate. Their preferred candidate, John Kerry, didn’t win, but the partisanship continued. If you want to read about art, culture, literature, music, personalities, trends, and pretty much anything that isn’t political in nature, the New Yorker remains probably the best general interest magazine in the English language. But when it comes to politics, the New Yorker has become a high-brow version of your average left-wing alternative weekly free newspaper.

Now one of the New Yorker’s regular writers, Malcolm Gladwell, has issued a muddled dissertation on entrepreneurs (The Sure Thing, January 18th, 2010) that reads, if you skim the piece, as a blatant attack on entrepreneurship, and under closer scrutiny, comes across as simply muddled thinking. The premise of the article is that entrepreneurs are not risk takers, but in fact are risk averse. Quoting other authors, Gladwell then describes entrepreneurs as predators.

Gladwell’s primary example of an entrepreneur is Ted Turner, a spectacularly successful entrepreneur. Gladwell argues that Turner took far fewer risks than one might think. His first example is Turner’s purchase of a UHF television station in Atlanta. Gladwell points out how Turner bought the station in a stock swap, meaning “he didn’t have to put a penny down.” He explains how Turner was able to market the station by using unsold billboard space owned by his current company. He suggests that Turner “realized he could persuade the networks in New York to let him have whatever programming their affiliates weren’t running.” And Gladwell suggests this meant Turner was not taking any risks!

The reality is that without the benefit of hindsight, these were all extremely risky premises. A stock swap isn’t free money. Try thinking that and see what happens when your company goes under and the stockholders sue you. Try to navigate the terms and conditions of a stock swap and eliminate all the contingency risk – dilution, failure to complete milestones, options to convert to debt, to name a few pitfalls in the equity game. And what about these New York networks? What if they didn’t get persuaded? What if they decided they wanted into the UHF game, or wanted to pull the plug once Turner’s ratings started cannibalizing the audiences of their affiliates? What about the fact this UHF station in question was losing a half-million per year, had equipment “that was falling apart,” and had “incompetent” staff? No risk there?

Gladwell is correct to state Turner had an appreciation for the synergy created by the advertising that his billboard company could offer his new UHF TV station, but it is difficult to imagine how this justifies the suggestion he took minimal risk, and what’s more, knew it at the time.

In another example using Ted Turner as his foil, Gladwell suggests there was minimal risk to Turner when he purchased the Atlanta Braves baseball team, because “Turner had realized how important live sports programming could be in building a television brand.” But what about the fact the team was losing a million dollars a year, and wanted a ten million dollar asking price? The fact that Turner ended up talking the Braves into taking this money over an eight year time span is irrelevant. If he couldn’t turn the franchise around, he would have eaten a million per year in operating losses, and another million per year paying the former owners. It is fine to say Turner had vision, hindsight makes this quite clear, but to say he wasn’t taking a risk is unfair.

Gladwell builds on the idea that entrepreneurs are better described as predators, and they are not risk takers, but are risk averse. Paraphrasing the French scholars Michel Villette and Catherine Vuillermot,” he writes: “The truly successful businessman is anything but a risk taker. He is a predator, and predators seek to incur the least possible risk while hunting.” Later in the article, Gladwell conflates business entrepreneurship (or business predation) with financial entrepreneurship (or financial predation), an unfair comparison that invites additional criticism, but let’s stay on point.

There are two huge problems with describing entrepreneurs as predators. Most importantly, Gladwell gets the nature of entrepreneurship precisely wrong. Successful entrepreneurs are not predators, they are altruists. They identify a need, they invent a solution, and they invest their fortunes and their lives in bringing that solution to reality. If their altruistic vision is true to their time and place, and if they manage to navigate the many pitfalls of growing a new business, eventually they earn money, and society gains a new comfort or cure. The predator consumes. The entrepreneur creates.

The other problem is Gladwell wants to have it both ways – if an entrepreneur is successful, he is a predator, and if he is unsuccessful, he is just an entrepreneur. Notwithstanding the cruelty of suggesting only losers can be entrepreneurs, this dichotomy depends on hindsight. You can’t predict in advance which entrepreneurs will be successful, if you could, no entrepreneur would ever fail. And Gladwell is at his worst when he shares his reasons why entrepreneurs fail. Apparently only entrepreneurs who take risks fail – and the risks, according to Gladwell, could be avoided if entrepreneurs simply follow “the established principles of new business formation,” such as adequate capitalization, acquiring an existing business instead of starting from scratch, and writing a business plan. This is naive. Wonderfully formulated business plans often yield nothing, most of the truly revolutionary innovations that make our lives better were ushered in by entrepreneurs who started from scratch, and often breakthrough ideas of staggering potential are way too far out of ordinary investor’s comfort zones to allow for adequate capitalization. Risk is endemic to entrepreneurship, and the greater the altruistic potential, the greater the risk.

Given the biases of writers like Malcolm Gladwell, it is no wonder left-wing commentators have little aversion to the government coming in and running more and more sectors of our economy. Apparently business failures are predicated on predictable shortcomings that good academic training and proper bureaucratic decision-making can avoid – and anyway, successful entrepreneurs are dangerous predators. This mentality informs the thinking of far too many people who have never been on the front lines of a small business; their influence is poisoning the minds of America’s youth, infesting our government, and, most tragically, corrupting industry after industry as they go galloping to government for hand-outs instead of earning the voluntary consent of the consumer – risking failure in the process.

Mr. Gladwell might try starting up a business of his own. To make his experience instructive, he should start a business that makes something tangible – developing land, extracting resources, producing energy, manufacturing a product – in a free market where the only value you can sell is the worth of your product to a willing customer. He might see things differently. He might know the nature of risk and reward in a completely different way. He might see the entrepreneur as an altruistic risk taker, betting everything on the chance to make the world a better place, and he might recognize the true predators – who inhabit the safe corridors of government, and the back rooms of union halls, where coercion is the currency of success, instead of inspiration and hard work.

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