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What do books, songs, movies and entrepreneurship have in common?

Entrepreneurship Entrepreneurship
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Duncan Hull

Prof Dimo Dimov of the Bath School of Management analyses whether entrepreneurial success can be predicted.

What do books and entrepreneurial businesses have in common?

There are a few big hits and many, many moderate or poor performers. The vast majority of books will sell at best a few hundred copies, and only a tiny minority will sell in the millions.

Two-thirds of new businesses would barely employ anyone and only a tiny minority (0.05%) employ more than 1000 people, let alone become today’s Google or Facebook.

This performance pattern represents a scale-free distribution, which is ubiquitous in other social and natural settings such as music performance, movie performance, citations, earthquakes, avalanches, size of cities, etc. The notion of average is meaningless in such settings.

Preferential attachment

A common generative mechanism underlies these patterns. For natural phenomena, it is self-organized criticality, well captured by the phrase “the straw that broke the camel’s back”.

For social phenomena, such as the performance of books, movies, music, and ventures, which is based on market transactions with autonomous, interdependent agents (consumers), the mechanism is positive feedback or preferential attachment.

The more people like something, the more likely it is for others to like the same thing. This process is difficult to foresee, as a few random choices of a particular product early on can sway future choices disproportionately in favour.

Facebook’s early success is a prominent example here: what seemingly started as an expression of frustration was found “cool” by a few friends and eventually spread all over the Harvard campus; just like a disease would in a closely connected community, and eventually beyond, taking a life of its own.

This is a not a matter of selective interpretation. A recent experiment involving the rating of songs clearly shows that when choice is influenced by observing the preferences of others, standalone quality has a very weak relationship with ultimate success.

More often, the “hits” were songs that had relatively low independent ratings.

Predicting the hits

Book publishers as well as movie and music producers have long recognzsed the difficulty of predicting hits and spend vast efforts to trigger a social avalanche of support. Indeed, the nature of promotion and publicity efforts readily attests to that.

But what’s most interesting here is that in such cases, as far as the product itself is concerned, the author’s work is done – the book is written, the song is sung, the movie finished – well before the market success mechanism is set in motion.

What happens ultimately is detached from the creative effort. In this sense the success of a “hit” is a collective product of the market participants.

When asked to explain the huge and unanticipated success of Eats, Shoots and Leaves, Lynne Truss said simply: “It sold well because a lot of people bought it.”

Whether a book is good is for refined critics to judge; whether it is successful is for market participants to interact. The label “bestselling” says it all.

It carries no connotation of whether the artist is good or bad, just that his or her works sold well. And just as selling well does not necessarily mean “good”, not selling well (or at all) does not mean “bad”.

Entrepreneurial ventures

This brings us to entrepreneurial ventures, and particularly those few “hits” among them. If the positive feedback mechanism explains the success of other social products, it should be our choice to explain entrepreneurial success.

We should use the term “bestselling” to distinguish successful entrepreneurs, without passing judgment on the less-achieving but equally aspiring rest of the entrepreneurial community.

But this is not what we do when we praise the genius, vision, perception, superior gut feeling, or perseverance of someone in explaining their entrepreneurial success, thereby implying that the rest lack some or all of these.

Are entrepreneurs successful because they are special, or special because they are successful?

Success makes you special

Success does make one special. The second time around, it is easier to raise money: the recognition entices people to give the new product the benefit of the doubt, and of course the wealth and connections from the previous success ensure that one starts running not from the starting line but from a point far down the track.

Second success is not guaranteed, of course, but significantly more likely. But the specialness is impossible to ascertain before the first success comes around.

Trigger events

What would sway the market in one’s favour? If you dig under any entrepreneurial success story, you will inevitably find some trigger events that could not have been anticipated and that are crucial for the unfolding of the story the way it did.

Kiva, the peer-to-peer lending site that facilitates microloans from lenders in the Western World to aspiring entrepreneurs in developing countries, was consistently seen as not viable.

Its being featured on the popular blog DailyKos on October 27, 2005 and being the subject of a TV documentary on October 31, 2006 were watershed events.

What followed was an explosion of lenders, which ended up proving the viability and ensuring the ultimate success of the concept. To date, it has almost a million

lenders, over $400 million in disbursed loans, and over 99% repayment rate.

Or think of Paul Terrell’s placing an order for 100 Apple I computers (worth $50,000) for his Byte Shop Computer Store, having earlier seen Steve Wozniak’s demonstration of the computer at Homebrew Computer Club meetings.

Up to that point, Job’s and Wozniak’s business concept had been to sell printed circuit boards to fellow club members.

Black Swans

When thinking of such events, the recently popularised idea of Black Swans comes to mind. These are rare, not anticipatable events with extreme impact that are relatively easy to explain retrospectively.

It seems plausible then to think of (successful) entrepreneurship as herding Black Swans.

No matter how skilled or ambitious the herder, without a few of these rare birds in the flock, the entrepreneurial journey may never turn out to be historic or exciting.

But how would one know if something is a Black Swan? Or a swan for that matter.

What makes the swan black is the extreme impact of the event, but the size of the impact depends on the social interactions that follow it. It is thus the market participants that collectively paint the swan black; until it happens one has just a white swan … or a duckling.

The Kiva and Apple events above are Black Swans because of the way people reacted to them.

But those reactions, while imaginable beforehand as possibilities, are impossible to pinpoint as certainties, even probabilistically.

An entrepreneur is left with herding ducklings, some of them “ugly” enough, hoping that some of them might turn into Black Swans, if they survive the winter that is.

The only choice at the entrepreneur’s discretion is to keep herding forward; stopping ensures failure.

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