When Should You Launch Your Startup?

Source: Reuters

Should you launch your startup right after college, or might you benefit from gaining some work experience before becoming an entrepreneur? Recently, Amazon founder Jeff Bezos told Italian Tech Week that gaining work experience is the smarter strategy. He explained, "Go work at a best-practices company somewhere where you can learn a lot of basic fundamental things [like] how to hire really well, how to interview, etc. There’s a lot of stuff you would learn in a great company that will help you, and then there’s still lots of time to start a company after you have absorbed it.”  Bezos argues that college dropouts such as Bill Gates and Mark Zuckerberg are the great exceptions rather than the rule.  

Is Bezos correct?  What do the data show?  Johnny Wood, writing for World Economic Forum, profiled a key study on this topic.  Scholars Pierre Azoulay and Daniel Kim examined the link between age and entrepreneurship.  They published their findings in the American Economic Review.  The researchers examined nearly 3 million ventures over a 7 year period.  They found that experience leads to a higher probability of entrepreneurial success, confirming Bezos' intuition.  Wood writes:

The research looked at 2.7 million business start-ups between 2007 and 2014, and found the average age of people who founded a business and went on to hire at least one employee was 42.  The team also found that experience counts. Those entrepreneurs who had worked in the same sector as their business start-up were found to be 125% more successful than those without a background in their chosen sector.   Azoulay and Kim’s findings show that a small proportion of high-performing start-ups in the study period were founded by 20-year-olds, less than 1%. Those with the highest growth had an average entrepreneur age of 45.

Many reasons exist for this advantage that experience offers.  Building on what Bezos argued, I think that you not only learn best practices, but you learn worst practices too.  You discover what NOT to do by operating in different businesses.  You witness dysfunction, inefficiency, cultural barriers, and customer pain points.  By seeing how companies fail, you increase your odds of succeeding. 

60 Minutes Apparently Airs Infomercials Now

What was that on Sunday night on the CBS 60 Minutes program?  Charlie Rose interviewed Amazon founder Jeff Bezos in a roughly 15 minute segment on the popular news show.  In the now infamous interview, Bezos unveiled his vision for how drones might someday deliver Amazon products to people's homes.  Rose swooned.   But wait... did anyone at 60 Minutes even bother to think about the timing of the interview?  It ran on the DAY BEFORE CYBER MONDAY!  It amounted to a huge 15 minute infomercial for Amazon on the day before the biggest online shopping day of the year.  Where is the journalistic integrity here?  Did anyone at CBS even question the timing?  Of course, Rose didn't ask much about a tiny little word that somehow conveniently never receives much attention when journalists swoon over Bezos (shhh... let's not talk about profit, or the lack thereof).   I don't blame Bezos or Amazon here.  They had an opportunity to participate in a feature on a highly popular news show.  They took advantage of the opportunity for some great public relations.   The fault here lies entirely with Rose and the 60 Minutes producers.  When do the small independent merchants in every small town in America get there 15 minute infomercials on CBS? 

Questions about Amazon

Vacation was wonderful, and now it's back to preparations for the new academic year... as well as a return to blogging.  As I'm catching up on various business news, I began thinking a great deal about the future of Amazon.  I have a few questions for readers to ponder:

1.  Will Amazon reach a point of  diseconomies of scale and scope sooner rather than later?   Many firms strive to achieve the benefits of size and scope, hoping it will juice their profit margins and overall return on invested capital.  At some point, though, size and scope become a handicap rather than a strength.   The complexity of managing a large, multi-business enterprise becomes problematic.  As we watch Amazon, as well as its founder Jeff Bezos, moving into more and more lines of business, one has to wonder whether the company will reach that point of diseconomies BEFORE it ever generates strong profit.  For years (17 years, in fact), investors have bet on Amazon, in hopes that its strategy would eventually yield high profits.  They have been very patient, incredibly so in fact.   What if the profits never materialize because Amazon gets too big and complex to manage?  I'm not predicting this fate, but I am wondering about how thin Bezos may become stretched as the company expands, and as he engages in other ventures such as the Washington Post.

2.  What exactly is the Amazon business model, and how new is it?    I read the other day that Amazon Prime accounts for a significant share of the company's rather thin profits.   That reminded of another business model.  Think about Costco.   The successful company makes a big chunk of its money from the membership fee.  Amazon Prime is essentially the membership fee.  In other words, Amazon's business model resembles Costco much more so than a traditional retailer.   Most warehouse clubs operate with very thin margins, and they use the membership fee as their profit engine.  Amazon may be the same, more similar to brick-and-mortar retail than many have imagined.

Break Up the Washington Post Corporation

If I told you that a company had the following business units, what would you say? 

• an education and test preparation business
• a set of local television stations
• an internet company that helps churches engage in outreach and raise money
• a company that makes components for industrial furnaces
• a home healthcare and hospice provider

Most analysts would say that this company has a scattered strategy.   The company: the Washington Post Co. - or whatever it will be called now that Jeff Bezos has bought the flagship newspaper for $250 million.   With the newspaper gone, the Washington Post Co. will soon face pressure for more strategic change.  Investors will argue that this unrelated diversification strategy makes no sense.  Investors can diversify risk much more effectively and less expensively on their own.  They don't need the executives at the Washington Post Co. to do that diversification for them.  

Most people are focused on the Bezos' acquisition right now.  They are examining the future of the newspaper.  Can Bezos transform it?  Soon, though, many eyes will turn to the company that remains.  Expect investors to push for more change.   They will, rightfully, demand a clear strategy moving forward.  The key question: What does the Washington Post Co. want to be moving forward?

Decision Narratives at Amazon

In this article by Drew Hansen as well as this one by Adam Lashinsky, we learn about an important facet of the decision-making process employed by Jeff Bezos and his top management team at Amazon.  Here's an excerpt from the latter article:

Meetings of his "S-team" of senior executives begin with participants quietly absorbing the written word. Specifically, before any discussion begins, members of the team -- including Bezos -- consume six-page printed memos in total silence for as long as 30 minutes. (Yes, the e-ink purveyor prefers paper. Ironic, no?) They scribble notes in the margins while the authors of the memos wait for Bezos and his minions to finish reading.

Amazon executives call these documents "narratives," and even Bezos realizes that for the uninitiated -- and fans of the PowerPoint presentation -- the process is a bit odd. "For new employees, it's a strange initial experience," he tells Fortune. "They're just not accustomed to sitting silently in a room and doing study hall with a bunch of executives." Bezos says the act of communal reading guarantees the group's undivided attention. Writing a memo is an even more important skill to master. "Full sentences are harder to write," he says. "They have verbs. The paragraphs have topic sentences. There is no way to write a six-page, narratively structured memo and not have clear thinking."

The use of narratives at Amazon reminds me of this article written many years ago in Harvard Business Review about strategic planning at 3M.   The innovative industrial conglomerate had adopted the use of storytelling during its strategic planning.   In the article, the authors explained that bullet points on Powerpoint slides have several deficiencies.  Bullet point lists often prove rather generic, fail to clarify causal relationships, and leave crucial assumptions unstated.   One manager quoted in the article explains, "If you read just bullet points, you may not get it, but if you read a narrative plan, you will.  If there's a flaw in the logic, it glares right out at you.  With bullets, you don't know if the insights is really there, or if the planner has merely given you a shopping list."  Stories or narratives enable you to think more holistically, and they provide the basis for a more thoughtful dialogue and debate.  Finally, stories prove much more compelling than lists.  If we hope to persuade others that a strategy makes sense, a good story works much more effectively than a set of bullet points.