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January 12, 2005

A Blueprint for Successful Entrepreneurship

Chris Charuhas

Last week I wrote about the benefits of entrepreneurship for Frederick County, and how difficult it is for us to harness its power. Fostering entrepreneurship is difficult, but not impossible. There is a lot that Frederick County can do to grow new companies here, and get the numerous, high-paying jobs that successful startups bring.

Basically, here is how we can do it: Don't rely on traditional brokers, and beware the "government entrepreneur." Concentrate on innovation, form public-private partnerships, and welcome oddballs and outsiders.

Don't rely on traditional brokers:

Bankers and lawyers are the traditional "gatekeepers" and brokers of startup deals. But in the Information Age, they don't cut it because they're steeped in old business models. A banker plucked from Renaissance Florence and trained on computers could still do his job at Farmers & Mechanics. A lawyer from Medieval Paris could, after boning up on current law, get a job in Scott Rolle's office. There's not much mystery in starting a bank or law firm.

Also, they're trained and inclined to avoid risk. Bankers demand collateral to eliminate loan risk. Lawyers settle cases to avert courtroom risk. These options aren't available to entrepreneurs, who, since they can't avoid risk, must fight to tame it. That's why a large percentage of entrepreneurs in Israel are ex-paratroopers and military pilots – people who've taken big risks and learned how to manage them.

Finally, bankers and lawyers work by numbers and precedent, while the behavior of business startups can't be predicted statistically or by past actions. The most important startup questions, such as "What's in the customer's mind?" and "Can the CEO persevere?" are answered by on-the-ground observation. The most profitable new companies grow where no precedent exists.

MBA’s aren't much better than bankers and lawyers when it comes to entrepreneurship. Just like Army officers need years in the field to learn how real units work, MBAs need real-world entrepreneurial experience to be useful to startups. Before he got a Harvard MBA and started, Jeff Bezos got his first job at a high-tech startup.

Beware the Government Entrepreneur:

Can government step in and jump-start entrepreneurship? It depends. If a city government works with private sector organizations, it can help quite a bit. But if it tries to act like them, it'll do more harm than good.

According to the director of the Wharton Entrepreneurial Research Center, "Government agencies have squandered hundreds of millions of dollars on misguided attempts to (encourage) entrepreneurship." Most of these involved top-down, large-scale projects, in which city leaders aim to become the center of some industry they designate.

In smaller cities, this approach usually involves "incubators." Basically, this means providing startups with cut-rate office space. This is nice, but not sufficient. For most new companies, office space is the least pressing of their needs. A garage, basement, or spare bedroom works just fine.

Concentrate on innovation:

To get the most bang for its buck, Frederick should concentrate on helping new kinds of companies, such as science and technology-based startups, and firms with national and global markets.

In the most common startups – small retail operations such as restaurants, profit margins are comparatively low; growth is often slow; and the knowledge required to make them work isn't useful in exploiting new markets. As the founder of Internet powerhouse UUNet says, "The dumbest (investment) money I have ever seen is from people who own chains of pizza stores. The other really bad one is dry cleaners."

Big money and fast growth come from new business models. If a city wants lots of tax revenues and employment, it doesn't want another used car lot; it wants the headquarters of used-car superstore CarMax. It doesn't want another law firm downtown; it wants the headquarters of online law clearinghouse And once an innovative company becomes successful, its founders usually finance new ones, leading to a virtuous cycle of entrepreneurial growth.

Form public-private partnerships:

Fairfax County, VA, is a good model. Its government works closely with the Northern Virginia Technology Council, a private organization, to spend economic development funds. George Mason University set up The Century Club, a partnership between the university and area companies which introduces entrepreneurs who need funding to investors. These partnerships have borne fruit: for the past decade, the economy of Fairfax County has grown at twice the national rate.

Welcome oddballs and outsiders:

Frederick needs more entrepreneurs. How can it attract them? The usual method used by cities is to lower taxes. This works for established companies and keeps capital in town, but what's more important to entrepreneurs is a friendly cultural environment for people like them. Basically, if a city wants an entrepreneurial culture, it must accommodate oddballs.

Many entrepreneurs are like a great number of the pioneers who settled the American West: kooks, malcontents, and mavericks. As new-economy expert Nicholas Negroponte puts it: "Innovative people are a pain in the ass." What do you get when you put a bunch of these folks in one place? California. While regarded by many as the nutball capital of America, California has also spawned the most entrepreneurial place on Earth: Silicon Valley.

Frederick must also accommodate outsiders, because immigrants often become great entrepreneurs. Again, Fairfax points the way. Bob Kang, a Korean-American in Fairfax County, founded one of the first mortgage companies to do business online. The Fairfax-based Indian CEO High Tech Council has over 800 members. Anna Maria Arias, a Fairfax resident of Chilean descent, founded Latina Style, a magazine with over half a million readers nationwide.

A Five-Step Plan for Frederick:

To harness the power of entrepreneurship, Frederick should:

1. Get entrepreneurs involved. Ask for the advice of entrepreneurs who've "been there and done that" about how to create programs that help startup firms succeed.

2. Accommodate outsiders. Roll out the red carpet for the pony-tailed hacker, the "skunk at the picnic," and the guy in the turban. And tell State Senator Alex Mooney to cool it with the right-wing rhetoric about "gun-grabbers/environmental extremists/radical gays," and opposing biomedical research. That sort of stuff sends entrepreneurs running the other way.

3. Educate the rookies. Send every new company founder in Frederick a handbook that lists sources of support, and warns them away from the most egregious startup errors. Make sure it includes a good reading list of books like “The E-Myth Revisited,” “Under the Radar,” and “The 22 Immutable Laws of Marketing.”

4. Copy the Netpreneur Exchange. Establish an entrepreneur support organization on the Netpreneur Exchange ( model. It doesn't matter whether it is funded by public or private money, just that it fulfills the same functions. And make sure it is free or really cheap.

5. Provide micro loans and grants. Few beginning entrepreneurs have much capital. They either haven't amassed any, or lost it all when their previous startup tanked. Banks won't touch them, and investors don't trust them yet, but a little government help can keep them in the game.

By doing these things, Frederick can attract and create more entrepreneurs, while reducing their learning curve from around five years to only two or three. It will generate more startups, each with a better chance of success.

If it can provide strong startup support along these lines for five or 10 years, Frederick County will find itself with a thriving economy. We'll have more high-paying jobs, more secure jobs, and cut hours off many residents' daily commute.

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