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Finding Fertile Ground
In a new book from Wharton School Publishing, alumnus Scott Shane, G'92, identifies
key factors for success for high-tech startups.
If you're starting a business, your
best odds of success are in high
technology industries—not just
computing and telecom, but also
biotech, aerospace, electronics,
manufacturing and materials, medical
devices, pharmaceuticals, robotics, and
other knowledge-intensive fields.
In a new release from Wharton
School Publishing entitled Finding
Fertile Ground: Identifying Extraordinary
Opportunities for New Ventures, Scott
Shane, G'92, identifies the drivers
behind the world's successful knowledge-intensive
startups and offers readers
strategies for aligning those drivers
behind their own businesses. Along the
way, he shows how to account for critical
issues such as network externalities, and
the emergence of dominant designs and
technical standards. In short, Shane's
book offers entrepreneurs the tools they
need to beat the odds; in fact, David
Courtney, Executive Vice President and
Board Member of TiVo, Inc., has called
the book "a 'must read' for anyone considering
starting a new venture."
Shane, who is a professor of economics
and entrepreneurship at the
Weatherhead School of Management
at Case Western Reserve University,
has authored over 50 scholarly articles
on entrepreneurship. His
other books include A General Theory
of Entrepreneurship, Foundations
of Entrepreneurship, Academic
Entrepreneurship, and Wealth Creation
and Entrepreneurship. He also edits
the Innovation and Entrepreneurship
Division of the leading scholarly journal,
Management Science. He has taught
at MIT's Sloan School of Management,
Georgia Tech's DuPree School of
Management, and the University of
Maryland's Robert H. Smith School of
Business.
In the following Q&A, excerpted
from Soundview Executive Book
Summaries, Shane answers questions
about his new book and navigating the
high-tech startup field. (The complete
interview with Soundview editor-in-chief
Chris Murray is available on an
audio CD included in Shane's book.)
Q: What is a high-technology venture?
A: These days, when you turn on
CNBC or read the Wall Street Journal,
and you hear or see the word "technology"
to describe something, it is
usually in reference to IT companies.
This book uses the word "technology"
in a broader, more traditional sense.
Technology is the embodiment of
knowledge in ways that make it possible
to create new products, exploit
new markets, use new ways of organizing,
incorporate new raw materials, or
use new processes to meet customer
needs. Certainly, information technology—the
use of zeros and ones in
digital form on computers—is an important
technology, but there are many
other important technologies as well.
Biologically based technologies, such
as those used to create new drugs or to
clean up pollution, are also important.
Similarly, mechanically based technologies,
such as those that make pumps or
valves, matter. New materials, such as
those in new ceramic composites, are
valuable.
Q: You say that high-technology ventures
have a greater chance of success than
low-technology ventures. Why is a high-
technology business more likely to be successful
than a low-technology business?
A: High-technology businesses are based
on advances in technology—developments
in materials, drugs, software,
equipment—that make it possible
to develop new products, design new
production processes, create new ways
of organizing, and target new markets
to meet customer needs that could not
previously be satisfied, or satisfy those
needs in a way better than the competition.
They also provide ways to capture
the returns to entrepreneurship so the
profits go to the entrepreneur, not imitators.
This can be done much more easily
in high technology than in low technology.
And the numbers reflect that.
Q: Also, doesn't the mass of dot-com
busts indicate that online ventures are just
as risky or riskier than off-line ventures?
A: Even at the height of the dot-com
bust, a smaller percentage of dot-com
start-ups went under than the percentage
of new restaurants or retail stores.
So, no, dot-com ventures are less risky
than typical retail businesses.
Q: You say that "if you start a biotechnology
firm, your chances of success
are much greater than if you start a
restaurant." That seems absolutist.
Aren't there situations that change that
equation? For example, I live in a rural
community that is booming with new
home construction, bringing in hundreds
of middle- to high-income families to
the area. There are great opportunities
for entrepreneurs in that area, because
there is a huge demand that is not being
met—including for restaurants.
A: To be successful, an entrepreneur
needs to identify a need, find a way to
satisfy that need and come up with a
way to keep others from imitating the
solution. The problem with restaurant
businesses is twofold—first you might
benefit from some local demand, but
there are going to be limits to how large
your business can be. If you develop a
drug that cures heart disease, you have
worldwide unmet demand that is very
large. There is no world-wide unmet
demand for your restaurant. Second,
you can patent your drug, making it difficult
for others to imitate you. But your
restaurant can be imitated. If you see
excess demand in your area, so will others.
They, too, will start restaurants. The
number of restaurants founded in your
area will be proportional to this excess
demand and, unless you have something
that makes you better than the competition
(perhaps your mother's secret recipes),
you will not capture the profits.
These forces are what show up in
the data. The average new restaurant's
rate of becoming an INC 500 or IPO
firm is about 1/265 that of the average
biotech firm.
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