Enterprise and Small Business Principles

The discovery process

As pointed out at the beginning of this chapter, ‘discovery’ is used for the ideas side of business development, as opposed to the realisation side, which is called ‘exploitation’. It is important to point out that ‘discovery’ as used here does not imply that something exists objectively in the environment, ready to be discovered. Neither does it imply that the start-up will be successful. As conceived of here, discovery is about developing business ideas and business ideas are the creations of individuals’ minds. They may or may not reflect external conditions that make them viable. If someone is working on a business start-up in vain because it is based on a completely incorrect conjecture, the idea development side of that start-up is still an example of a discovery process, even­tually leading to the more or less costly insight that the idea will not work (Davidsson, 2003, 2004). Further, although some economic theorists conceptualise entrepreneurial discovery as instantaneous, i. e. as if in a flash of insight you had the ready-to-fly busi­ness concept rolled out before you (Kirzner, 1973), empirical research reveals this part of the story is also a process (Bhave, 1994; de Koning, 2003; Van der Veen and Wakkee, 2004). You start with a rough idea. Before the idea is converted into an up-and - running business it is likely to have been changed, refined and elaborated.

A hotly debated issue is whether or not it is possible to apply systematic search for entrepreneurial discoveries, i. e. for new business ideas. The theoretical argument against this can be summarised, in short, in this question: How can one search for that which one does not know what it is (Kirzner, 1973)? According to this view, entrepreneurial discovery always carries an element of surprise and all aspiring entrepreneurs can do is to subject themselves to a greater flow of information in general (through extensive networking and media use) in the hope that something valuable will turn up, although there is no way they can know in advance what specifically they are looking for.

Although there was some early support for successful entrepreneurs behaving in this way (Kaish and Gilad, 1991), common sense and later research suggest it is possible to apply a more directed search. For example, about half of Bhave’s (1994) cases were people that had more or less stumbled over a business opportunity without having a strong prior intention to go into business for themselves. Consequently they did not search for or consider multiple business ideas; they encountered one and decided to go for it. The other half, however, first made their minds up that they wanted to become independent business persons and then started looking more or less systematically for opportunities until they eventually decided they had found one that was promising enough. Research on a large, representative sample has since shown that these two dis­covery processes are about equally common (Gartner and Carter, 2003). Researching emerging internal ventures in small, owner-managed firms, Chandler, Dahlqvist and Davidsson (2003) could confirm that business ideas were the result of three different search processes: proactive search (actively looking for new opportunities because you want to), reactive search (ditto, but because you have to in order to make up for, for example, lost market share for existing products, or unemployment in the case of inde­pendent start-ups), and fortuitous discovery (that is, stumbling over an unsought-for opportunity).

So systematic search for viable business ideas is possible. Research strongly suggests aspiring entrepreneurs do not search randomly, or even for the idea with the biggest world market, but for ideas in a domain where they have relevant prior knowledge, for example because of work experience or a hobby (Fiet, 2002; Shane, 2000; Vesper, 1991). It is in these areas that aspiring business founders are likely to have or be able to develop the expertise and commitment that Klofsten (above) points out as corner­stones in new business development. Research further suggests using existing networks to find and hone business ideas (de Koning, 2003; Kaish and Gilad, 1991). In order to illustrate the possibility of systematic ideas search, as well as excelling in network use, consider the following example:

The entrepreneur in this vignette was already the founder of many companies based on his sophisticated technological knowledge. He travels frequently and during the trips he often arranges evenings out with management consultants that he knows. While he is quite happy to pick up the bill for an evening’s entertainment, he will press the consultants to tell him about some problem that their clients are struggling with, and which requires a technical solution. One such problem had a robot as its logical solution. However, the work environ­ment was such that contemporary robots did not like it any more than humans did. The entrepreneur then turned to his second network, consisting of university professors in engineering, to find out whether something like a ‘robust robot’ was technologically feasible. Having learnt that this was indeed the case, he again turned to his management consultant network in order to get in touch with the end users. He made these pay the development costs (which also ensured demand for the finished product) incurred by the company he set up together with his academic experts. In the end he cashed in a handsome profit - without hav­ing invested any significant means of his own in the project (McGrath, undated).

As Bhave (1994: 230) observes, the starting point for businesses that are not the result of systematic search is often that ‘the prospective entrepreneurs experienced, or were introduced to, needs that could not be easily fulfilled through available vendors or means.’ The non-existence of both entrepreneurial intention and current supply, how­ever, does not mean that this is the realm solely for relatively insignificant products or firms. For example:

Carin Lindahl, the inventor of the sports bra - now a world product - was a somewhat bosomy workout freak who had painful personal experience from the insufficient support and inconvenience of then existing bras, taping and bandaging. When years later she stumbled over a fabric that expanded in one direction while being completely stiff in the other she saw the obvious solution, bought a few yards of the fabric, and sewed a few bras for her­self. She also tried to make manufacturers adopt the product, but to no avail. She then decided to start her own firm to provide the market with sports bras (Davidsson, 2000; Lindahl and Skagegard, 1998).

In the late seventies, Bert-Inge Hogsved was the CEO of a medium-sized company. He also had some computing skills in his background. His wife was a chartered accountant. For serendipitous reasons they were among the first owners of a PC in Sweden. Bert-Inge decided to use his new toy to write some software that would unfetter his wife from some of the most repetitive and tedious number-crunching aspects of her work. Of course, not only she but also her colleagues loved what they saw, and they soon wanted to get a copy of the software. When demand had increased to a critical level the Hogsveds had to decide whether or not to go into business for themselves wholeheartedly. The result was to become the Hogia group, the biggest business software company group in Sweden, presently employing over 400 people in some 30 semi-independent firms that have diversified into related areas (Hogsved, 1996; www. hogia. com).

Tom Scott was 23 in 1988 when he started what was to become Nantucket Nectars - valued at around US$100 million in 2002. However, at that time he had no intention to make it big, nor become a juice producer. It all started with a business called Allserve, which involved going boat to boat in Nantucket Harbour, selling muffins and newspapers, taking trash, doing laundry. In Tom’s words, it was ‘like a floating 7-Eleven’. The second summer his part­ner Tom First joined in, but while the business became legitimate and grew, it was decidedly a lifestyle enterprise. The following winter they stayed on the island. They made making dinner for one another a competition, and one night, in Tom Scott’s words: ‘Tom made this juice for dinner, peach juice made fresh in the blender. Within five minutes we were saying, “Let’s sell this off the boat next summer. We’ll call it Nantucket Nectars.” ’ (Food and Drink Weekly, 2002; Nantucket Nectars, 2004; Scott, 1998)

Clearly, in these cases the facts that these ideas were not systematically searched for, and that nobody else had seized these opportunities, were not indications that these opportunities were in any sense small. Equally clearly, the discovery process was not completed in the moment these entrepreneurs first saw what they were already doing as a business idea. Innumerable steps remain between the end of the vignettes as described above, and the fully worked out business models these three firms serve their markets with today. This leads to the question: When does the discovery process end? The only defensible answer, arguably, is that it never does. There is every reason to continue to adapt and expand one’s business idea, even long after initial commercial­isation. When founder-owners of a business believe they do not need to re-examine their business ideas they are setting the seeds for their demise.