What will turn today’s entrepreneurs into tomorrow’s big-time business people? After tracking the careers of dozens of contemporary moguls, one author concludes that it has as much to do with the content of their character as with the make-up of their balance sheets.

 

The 1999 Forbes 400 list included 251 individuals whose source of wealth was described as “self-made.” These self-made entrepreneurs are among the greatest creators of new wealth in the country. They include billionaires whose money comes from medical devices, computer software, railroads, testing laboratories, real estate, home building, stock market investments, trading stamps, oil and gas, computer assembly, direct sales organizations, retailing, heath care, mobile phones, music and records, newspapers and media, insurance, cable TV, public storage, plastics, and a dozen other businesses.

The first characteristic of a successful entrepreneur is perhaps the most obvious one: a wilingness to take risk. Regardless of other attributes, this first, primordial requirement must be present.

These days, of course, entrepreneurs are regarded as something far greater than just ordinary businessmen – hired hands and administrators. Indeed, today’s entrepreneurs may have become the cultural replacement for the famous American “rugged individualists” of the last century, the ones who tamed the West and built great industries from nothing. They can be extreme risk-takers, and colorful, self-confident persons of strong character and personality. Think of Bill Gates, Steve Jobs, Michael Dell, Richard Branson, Ted Turner, and Donald Trump.

Stripped of all the hype and filler, however, “entrepreneurs” are simply people who, as individuals or in small groups, have started or acquired businesses and attempted to grow and/or alter them to a point where they could cash in successfully on the rewards. But achieving entrepreneurial success may be the greatest challenge available to anyone in business. According to the Small Business Administration, there were about 6.6 million corporations in the United States in 1996, the vast majority of which were small businesses. Only the tiniest sliver of them will grow into big businesses.

Academics have been studying self-made businessmen, hoping to find a methodology to teach to young entrepreneurs. We have not yet found, of course, a simple, repeatable formula for turning small or substantially restructured businesses into gold mines. And many academics believe that great entrepreneurial success is as much influenced by luck as by skill, or by fortuitous (if unwise) risk taking as by any other quality.

Nonetheless, I believed there is something to be learned from studying what the successful entrepreneurs actually did to become successful. And while conducting research for my recently published book, The Wealth Creators: The Rise of Today’s New Rich and Super-Rich, I learned a good deal about factors that seem to increase the probabilities of success. And there are in fact several sine qua nons – factors without which entrepreneurial success probably cannot happen.

 

The Vision to Take Risks

The first characteristic of a successful entrepreneur is perhaps the most obvious one: a willingness to take risk. Regardless of other attributes, this first, primordial requirement must be present – the willingness to step off into the void, risking most of what other people think of security and well being. An entrepreneur must first quit his or her “day job.”

A second requirement is the ability to identify and develop viable plans for capturing an attractive business opportunity – possessing the vision. After all, when an entrepreneur decides to enter a business, an equilibrium already exists between those products and services that are in circulation, and those that could be, but aren’t. Unless a new product or service can overcome the existing barriers to entry into the market, it has no chance.

The entrepreneur seeks a way around this equilibrium by finding something new or different that will reset the equilibrium more advantageously. It doesn’t have to be an entirely new product or idea (like Edison’s electric light, which took a long time to introduce and required expensive power plants and transmissions lines). But it has to be sufficiently new to change the original configurations of the market.

John D. Rockefeller did not invent the oil lamp. But after the discovery of crude oil in Titusville, Pennsylvania, in 1859, the dry goods merchant foresaw the opportunity of producing large quantities of kerosene from petroleum to be sold as a cheap, efficient fuel for illumination. At the time, whale oil was the principal source of lamp illumination, but it was expensive and not available in large quantities.

The market was totally new at the time, and there were no barriers to entry, so a large number of small refiners and oil producers sprung up. The fledgling firms cut prices, and conspired with or against each other to try to make progress. Since business conditions in the industry became chaotic, Rockefeller changed his central idea – instead of just refining crude oil, he would focus on consolidating the refining, transportation and marketing components into a new industry. This decision, a vision of opportunity and a wholly different way to develop it, played to all of Rockefeller’s organizational and administrative strengths – his comparative advantages – that enabled him to become a success.

Starting a business with an idea that is not new at all, something that just presents another choice for the consumer, can be a very tough grind for the entrepreneur. Another bank branch on the corner, or a new videotape recorder, may take forever to gain any kind of market share and could divide the total profits available in the market into increasingly smaller pieces. Something somewhat new, however, can capture the market’s attention without having to completely reeducate it. It can quickly change market dynamics, increasing total demand for, say, tennis shoes because they are no longer perceived as tennis shoes but as performance enhancing footwear favored by professional athletes with a different shoe for every sport. Of course, the idea, or vision, has to be strong enough to alter the dynamics. But it is clear that many of the most powerful new business ideas have not been all that new.

 

Making it Big – Thinking Big

Any new (or somewhat new) business vision ought to lead to a business with a large potential market. The national market for kerosene must have seemed enormous to the young Mr. Rockefeller, who became a billionaire long before the automobile assured the future of the oil business. Ray Kroc, a traveling milkshake-machine salesman, became a billionaire because he realized that a small hamburger stand could be cloned into thousands of McDonald’s stores nationwide through a franchising process. Only the concepts that can be applied nationally, or even better, globally, have the potential to be truly big.

Ted Turner, the founder of CNN, saw that the value of cable television ultimately depended on what went through the cables. He knew that many new channels would be made available through the cable hookups, and that these channels would be offered to subscribers who would pay to get certain kinds of programming. Turner already owned some sports teams and WTBS, an Atlanta-based UHF broadcasting station. In 1976, he pioneered the “superstation” concept by arranging to transmit his UHF signal by satellite to content-starved cable system operators all over the country. The idea caught on. And in 1980, Turner introduced the all-news channel for his system – CNN. Critics thought Turner’s idea was a bit crazy, because most people could not imagine tuning in just to news all day long. But the cable operators, who were selling a package of several channels for a fixed cost, were eager to add it to their range of offerings. The rest is history. By 1985, Turner’s cable offerings reached 80% of the American homes equipped with cable and CNN was frequently the item that was most in demand. Before long Turner had tens of millions of subscribers essentially paying to have CNN in their house for a few minutes each day – especially after the 1991 Gulf War.

 

Making It Happen – Execution

Distributing a product to the national or global market quickly is a very complex and difficult undertaking. At all times, an entrepreneur must be able to make the critical sale at the right time, or deliver on promises made. Some “breaks” may appear to be just luck, and luck is an important factor in all equations for success. But the good field operator helps good luck along by constantly finding other ways to accomplish things, and by marshalling talent and resources just where they are needed at just the right time. In other words, successful entrepreneurs must execute.

In 1995, Marc Josephson, who trained as an engineer, formed a new company to connect New York City’s new Information Technology Center (ITC) at 55 Broad Street to the Internet “backbone” network. The ITC was to become the focal point of New York’s effort to create a new media and technology industry, and it needed efficient, reliable, and, above all, fast access to the Internet.

Years before, New York City had been encircled in fiber-optic cable. Several of these cable circuits were essentially idle, but contained bandwidth ample for any known purpose. Josephson figured out how to connect 55 Broad to the cable circuit directly, and was able to pass the bandwidth advantages on to the building’s occupants at low cost. To capitalize on his discoveries, he set up a small company to lay the necessary wiring and lease Internet access to the tenants directly, which he could do at much less cost than the regular access providers. Josephson offered to wire Manhattan’s Jacob Javits Convention Center and then persuaded Rockefeller Center to let him wire up the whole complex, which he then had to lease to the tenants, one office at a time.

With such high-profile assignments, Josephson was a happy entrepreneur. But he was faced with the challenge of building out his business as quickly as possible so another Internet access provider didn’t figure out what he had done and offer the same service. To launch his business nationally, he needed a team of competent engineers and capital. Through a lawyer friend he met an “angel” investor, who invested a few million dollars of seed capital. By the end of 1998, two years after finishing 55 Broad, Josephson’s company, now called IntelliSpace, had wired 50 buildings for online services in New York City; there would be 140 a year later. The building space wired by the company was growing at 400% per year, and Josephson was shaping up plans to replicate its business in Philadelphia, Boston and Washington, DC. In 1999 IntelliSpace completed a $35 million second round of financing. Josephson was able to attract the investment largely because his investors had confidence in his engineering skills and executive ability to carefully plan out a step-by-step program for building out the business.

 

Margins Matter

The biggest ideas, no matter how well they are executed, will certainly fail if adequate margins cannot be earned. Henry Ford’s mass manufacturing of Model T’s was an operation designed to exploit economies of scale so his cars could be sold at prices low enough to turn the automobile into a mass consumer product. Although the cars were sold cheaply, the volume was large enough for him to capture healthy operating margins. These permitted Ford to pay generous wages to increasingly skilled assembly line workers and to invest in facilities to make almost everything that went into the car at Ford’s huge central factory at River Rouge. The investments increased his margins further, permitting even more investments to improve and expand the business.

One small business I know called MaxFlight, founded in 1994, makes aircraft flight simulators for amusement parks. The founder, Frank McClintic, a former helicopter pilot and a natural, tinkering mechanic, was familiar with aviation training simulators and thought he could improve on their motion characteristics. However, he believed that selling the product to the military or the airlines would mean having to lower margins to unworkable levels. So he decided to change his product to make it into a cheaper, glitzier model for the amusement business, where it could be sold by the ride. The product became an enclosed audio-visual enhanced, aircraft cockpit that rotated on all axes. The rider would be treated to dramatic virtual carrier takeoffs and landings, or realistic dogfights. Big park operators thought they could sell a lot of rides, and the public liked it enough to pay up to $10 for a five minute ride.

McClintic knew he had to keep his costs lower than his competitors, so that he could create a barrier to potential market entrants. Mostly, his costs were in the sophisticated parts that the machine required. So McClintic focused on lowering these costs, scouring technical publications for lower-cost replacement parts. He found several, including surplus government equipment that he could buy at a distressed price. These efforts substantially lowered his costs and maintained his margins well into double digits. Like Henry Ford, McClintic knows he must continually re-engineer his machines and improve their performance capability to keep ahead of his larger competitors.

 

Timing

Michael Bloomberg stepped into the financial data market with his Bloomberg machine just at the right moment. He understood the business well enough to know of the machine’s coming importance and that his competitors might be slow to develop a similar product – but only for a while. He moved within his two to three year window and successfully launched his product. Just so, Charles Schwab was an early exploiter of the opportunities in discount stock brokerage, and gained a significant market share and $1.8 billion of net worth in the process.

In early 1998, Greg and Glenn Morello, two brothers in New Jersey, decided to expand their Bridgewater Autobody repair business from two shops into a dozen or more. Their idea was to gain some economies of scale by operating at a larger size, and then to contract with auto insurance companies for bulk-purchases of repairs. The insurance companies wanted to be sure that the repair shops they used were reliable and honest, but they particularly wanted to be able to contract for repairs at a lower cost. The two brothers believe they have a year or two to be able to pull their new company together, before an aggressive or better financed auto-body repair chain comes into their market and forces them out. Time is critically important for them.

In the fragile world of the entrepreneur, a good idea performed too early or too late is not worth nearly as much as one performed at the just right time. Indeed, a good idea may be worth very little if badly timed. For most hard-pressed entrepreneurs who take one busy year at a time, good timing, however, can mean the difference between being quickly established in a marketplace, or not at all. But that early market position has to be reinforced and defended against strong competitive efforts, better products, and, of course, trend changes.

 

The Right Stuff

Tom Wolfe’s best-selling book about American astronauts, The Right Stuff, describes the skills and the characters of the first Project Mercury team, men like Alan Sheppard, John Glenn, Scott Carpenter, Gordon Cooper, Wally Shirra, Deke Slayton, and Gus Grissom. Wolfe sensed that as different as they all were from one another, they all had something that seasoned aviators knew to be “the right stuff.” They behaved like people think fighter pilots should – they were fearless, of course, and somewhat reckless, though always confidently so. They had extremely quick reflexes, remained cool under pressure, and never showed any concern that they might end up among the gruesome statistics of their profession. Not everyone had the right stuff, but you had to have it to make it to the top in combat aviation or the test pilot business. It was hard to define, but everyone knew it when they saw it.

Entrepreneurs, too, must have the right stuff if they are going to make it big. For people in business, the right stuff is the special software inside the product that makes amazing things happen, that allows them to have vision, to think big, to execute, and to have good timing. Indeed, the quintessential American big time entrepreneur is a composite of experiences, skills, toughness of character and self-control that are, like our astronauts, unique to their profession.

They have to have a certain mindset that most business people do not have. They want to bet on themselves and their abilities, even if the odds look pretty long. They are not especially concerned with security, or appearances, or creature comforts. They perform well under pressure, and adapt optimistically to even harsh disappointments. They believe totally in what they are doing, but are prepared to change things often, so that what they end up doing may not have been what they started out believing. They often demonstrate a disdain for large, bureaucratic working environments, and the lines of authority that go with it. They can be hard and ruthless competitors, but, when successful, much more generous with their time and money than those who inherit wealth and slowly feed the old money charities. In short, they are highly driven to succeed, and to do things “their way.” They have a lot of attitude.

Most real estate investors will tell you that the three most important factors in determining the success of a real estate investment are “location, location, and location.” Most investors in small businesses will tell you that for them the three most important factors are “the CEO and the management team,” in first, second and third place. Regardless of the brilliance of its product idea, or the potential size of its market, an entrepreneurial company’s survival frequently depends on whether or not its leader has the right stuff.

Roy C. Smith is the Kenneth G. Langone professor of entrepreneurship and finance at NYU Stern. This article is adapted from his new book, The Wealth Creators: The Rise of Today’s New Rich and Super-Rich (St. Martins Press).