Sunday, April 03, 2011

Manufacturing Entrepreneurs

I think every politician/economist in the world has by now accepted the fact that entrepreneurship is vital to long-term economic growth and prosperity. Much less understood, however, is how one would best go about creating more entrepreneurs in the society.

Do you create more entrepreneurs by copying "Silicon Valley" (whatever that means)? Do you do so by pouring more money into science education and R&D? Or by giving more tax incentives for engaging in entrepreneurial activities? Or is a liberal-arts education the missing ingredient, as Vivek Wadhwa recently suggested in The New York Times and TechCrunch?

As an entrepeneur with a liberal arts background (Philosophy, Economics, and Law), I do firmly believe that having had some exposure to the liberal arts is of great value in leading a well-rounded and grounded life. However, when it comes to entrepreneurship, I am not sure how much credit I can justifiably give to my liberal arts training.  As a matter of fact, I think the role of financial incentives, sciences as well as the liberal arts in creating more entrepreneurs in a society is quite limited at best. In other words, they may be considered necessary conditions for more entrepreneurship, but by no means sufficient. This is supported by existence of plenty of countries/states/regions/universities in the world that produce excellent scientific and liberal arts scholars and provide lots of tax incentives for entrepreneurial activities (such as in Canada), but those efforts do not produce the desired entrepreneurial activity in the target population who opt for more traditional career paths.

Why? Because the emphasis on  individual incentives and particular college degrees misses the essence of entrepreneurship, which is fundamentally a social activity and therefore mostly influenced by the prevailing culture. Some cultures (be it within a society, a company or a single family) kill entrepreneurship desires while others nurture and grow it.  In my experience, entrepreneurship only thrives in a culture that is forgiving towards those who fail at taking entrepreneurial risk.

Wherever I have seen strong cultural punishments (e.g., guilt, shame, etc.) associated with failed entrepreneurial endeavors (as in Canada, Germany and so many other societies), entrepreneurship has been stifled. Conversely, the culture in Silicon Valley intrinsically celebrates and values taking entrepreneurial risks. Having had near-hits with one's past ventures, in the Valley, is something to be proud of (even brag about) rather than hide. Behind most successful Valley executives and entrepreneurs is usually a trail of failed prior attempts. Counter-intuitively to outsiders, past misses make an entrepreneur even more "fundable", as those experiences are deemed invaluable to VC's and Angels alike.

Regardless of whether the Valley mindset was created by amazing foresight or sheer historic accident, it is apparently exactly what our mammalian brains need to take on risk. According to a recent psychology experiment recounted by Jonah Lehrer on his blog, our brains' pleasure centers hardly distinguish between almost winning and actually winning, which explains why so many people flock to Vegas and actually enjoy throwing hard-earned cash at one-sided gambles. He goes on to provide an evolutionary explanation:
Why would the mammalian brain be designed this way? One answer is that we didn’t evolve for Vegas. Rather, near misses help us stay motivated when engaged in activities that require actual skill, and not dumb luck. Let’s say we’re learning to play basketball. At first, our shots are going to be all over the place, a seemingly random distribution of bricks and airballs. And yet, as we slowly get better, those shots will get closer to the rim. A few might even go in, which is pretty thrilling. The purpose of near misses, then, is to keep us motivated while we slowly improve our form. If we only got excited by makes, we’d quickly give up, which is why the brain also needs a mechanism to register progress.
Now imagine that you lived in a society where everytime someone missed the basket during training or in a game, they were boo'ed off the court or worse yet, threatened that they could never play basketball again. How many star basketball players would that society produce?

Just like in professional sports, entrepreneurship requires "actual skill, and not dumb luck." If the culture discourages risk taking entrepreneurial endeavors by punishing those who fail at it, then you start messing with those brain centers responsible for motivating people to become entrepreneurs in the first place. In which case, no amount of rewards, tax incentives, scientific or liberal arts education can motivate people to get in the game and start practicing.