Poor entrepreneur, Part 1

My last post probably gave you the idea that my writing was going to focus on the financial aspects of entrepreneurial activity. Not so. There are way more entrepreneurs off the beaten path than there are investors, and the investors, given their raison d’être, don’t much care to look (much less invest) outside their controlled environments (before you take umbrage to that snide remark, please be aware that I understand why that is and don’t blame you for your reticence; also, see rule #2).

Will the entrepreneurs who stumble upon this blog find useful information in their struggle for survival? Absolutely. Will reading this blog ward off all evil and keep you alive? Sure! (and I’ve got beach front property in Cabo San Lucas real cheap). You’ll come to understand that what “Sure!” really means and why I didn’t include it in the rules…

What follows is the summary of the results of some very pointy research on the subject of entrepreneurship – I’ll sweep back one day and do all the required source cites and bibliography (hold your breath).

From what I’ve read, the mortality of entrepreneurial activity is very high in the most sophisticated markets. The good news is that once you leave those highly competitive environments, the mortality actually goes down! This is one “fact” that you’re going to have to take on faith and the following argument. On faith because, given that there aren’t any “big guns” pointed off the beaten path, researchers and consultants can’t make a whole lot of money -this is a fact I can personally corroborate- digging up facts and analyzing the fauna of the uncharted areas, so there is very little statistically stable information regarding entrepreneurial activity.

So how can I say that entrepreneurial activity has a higher survival rate in the long tail? It’s easy, the downside of risk is, at best, social death (you’d be surprised how unglamorous it is to be ostracized) and, at worst, death from starvation (literally!). So entrepreneurs, by the very definition of their existence, are survivors. This is clearly supported by the existence and growth of the micro-entrepreneurial class and the proven success of the micro finance industry worldwide as compared to highly developed countries. Thus, though there are many less entrepreneurs per capita, the ones that do make it are real scrappers.

Here’s how that comes to be:

1. Lack of restructuring process: very few jurisdictions have bankruptcy laws on the books, and the ones that do, have onerous terms for any real restructuring effort. This is true if only because there are only a handful of specialists who can help you really cut your losses legally – scarcity makes for price-takers and substitutes (cutting your losses by “alternative” -less legal or legally gray- means).

2. Highly developed social networks: this helps entrepreneurs who are “in” survive, but also shuts out both “outsiders” and “failures”. For example, in most countries (to a lesser degree in the economic hubs), if my brother fled the country because he couldn’t pay his bank loan (because there is no restructuring protection under the law), all bankers would quickly find out about it and classify me as high risk, regardless of my credit history. After an appropriately prudent “cautionary period”, say, 5 to 10 years, then I would have proven my mettle and allowed to grow my exposure in the formal banking sector again. Can you say “off-balance sheet” financing? That’s further complicated by the fact that, in some jurisdictions, my children will inherit my liabilities (especially those liabilities held by the post-Basil II bank system).

3. The high cost of doing business: all the Transparency International research aside (at it’s core, it’s all social “perception” veiled in statistical analysis), it really does cost a lot more to become an fully vested member of the formal economy in these markets – not only does the tax man know where to find you, his minions know how to extort you, and, given the fact that your competition isn’t playing by the rules, you’re at a cost disadvantage in very price-sensitive markets.

4. Human resources: due to many years of systematic brain-drain, coupled with very poor educational systems, and highly differentiated “expat” vs. “local” personnel systems (an argument onto itself: I need to bring in expats at high pay because the locals just don’t cut it), the talent pool is very, very shallow. Because the talent pool is shallow, business managers don’t like to pay high wages, forcing those who have the talent to migrate to where the salaries are commensurate with their expertise and experience, but they never come back because the expectations of hiring managers back home are so low – did I mention why I’m looking to relocate from South America? This applies to entrepreneurs, too – that’s why you find so many nationalities in the economic hubs throughout the continent, and why the brass ring is Silicon Valley (for example).

Now if you didn’t stop to ponder where I said “…there are many less entrepreneurs per capita…”, let me make my point: poor entrepreneur – though entrepreneurial mortality is low, it’s because many less people take the plunge in their markets of origin, preferring instead either to get regular jobs at low pay or to migrate to more sophisticated markets.