The professor illuminates the shadowy pitfalls of business.

Question: What are some typical entrepreneur pitfalls?

Saras Sarasvathy:  A lot of the time the early stage founding partnership is kind of like the courtship period leading to a marriage and nobody really wants to write a pre-nup and so a lot of the founding partners either don’t bother to sit down and think through how they will divide the pie, whether it is in terms of returns or in terms of responsibilities, or in terms of difficult decisions that might come down the road. So they just, you know, they are in this wonderful mood and they want to go, you know, if there are three of them it’s like the three musketeers, you know, “One for all and all for one.”  So they go into equal partnerships. And, professional advisers that I have talked to, you know, lawyers and accountants who deal with early stage enterprises tell me that, that’s one of the reasons a lot of ventures go down the drain, not because the market was not there, not because there wasn’t enough money or the idea wasn’t good but because the partners just could not get along after awhile. And they also tell me that it happens more often when the companies are actually growing and doing well.  When the two different partners or the three different partners have different views of how they want to grow it or what to do next and at that point in time because they have an equal partnership and they didn’t bother towrite down provisions on how to make decisions, the decision doesn’t get made or the partnership has to be dissolved and people have to start all over again and it becomes very difficult.  So I would guess that that is definitely one of the mistakes a lot of novice entrepreneurs make. 

The other one is this idea, this I can speak to with a little bit of authority and that is this idea that you can predict the future. So, you invest lots and lots of time and effort and money in writing a business plan or doing enormous market research and you analyze and analyze and analyze or you do some kind of statistical survey and you think that is how the world is going to go and then you put all your money because it requires that much money to make it.  So this idea that the future is predictable and that there is this perfect plan that you can write a priory and then implement, I think that is a real dangerous way to think about it. And just because of the way we have been teaching entrepreneurship around the world now because people take their cues from the US for the most part on what they teach in their business school classroom, it’s become almost a de facto way of thinking about entrepreneurship: business plan competitions, and so people spend enormous amount of time and effort in writing business plans for business plan competitions and I’m not sure that is the best way to build an entrepreneurial economy especially as the expert entrepreneurs would say, “If you really start believing your own numbers and you think you can actually deliver on this particular plan that you wrote then you are in real trouble.”  So I think that would definitely be a huge pitfall for a lot of novice entrepreneurs.  In fact, some of the experienced entrepreneurs actually talked about trying to do that and failing and learning the hard way that the future is not really as predictable as they thought and that is because of that world view in a way. Because in a world in which a lot of people act and believe that their action matters, there will be more uncertainty.  In fact, the future actually becomes less predictable and people actually start acting in innovative ways.  So it works both ways. It is unpredictable because people are doing creative things but also your trying to predict it becomes useless because that way a great venture will be more creative and more active in the way you do things. 

Recorded on: May 19, 2009