You have probably heard of the dark matter puzzle in astronomy. I don’t remember that much from the astronomy unit that I took as part of my science degree but dark matter is one of those big questions that just gets undergrad students thinking. Put simply, the universe is really heavy (!) but if we make a best estimate of all the matter that is around in stars, planets and other stuff then we still fall short of accounting for all of the mass by more than 50%. This is not a simple measuring error (it’s very hard to hide half of the universe behind a corner somewhere) and it means that current explanations of the structure of the universe are incomplete.
I’ve just written a conceptual paper with a colleague here at UQ Business School and some friends from the Kelley School of business at Indiana U, which starts with a similar ‘dark matter’ puzzle. Entrepreneurship has become a major area in business schools and the most fundamental question in entrepreneurship research is why do some ventures succeed and some fail? Now, different people have tackled this problem in different ways. Psychologists have tried to describe an entrepreneurial personality that has a greater appetite for risk. There are even twin studies, which show that if your twin is an entrepreneur then you are also more likely to be an entrepreneur. While these studies can identify the characteristics of entrepreneurs, linking psychological traits to new venture success has not provided convincing results.
With complex problems like this, what we usually try to do is build models with a whole range of different factors that might explain success. In addition to psychological factors, we can also add to the model the type of industry, previous new venture experience, team experience, venture capital involvement, just to name a few variables. While research can show that these many of these factors can be correlated with new venture success, even the most comprehensive models can only explain about 20% of success. Just like the dark matter problem in astronomy, using our conventional thinking on new ventures means that 80% of success can’t be explained by established theory.
But maybe we have been looking at the success of new ventures in the wrong way. What if we start thinking about it as a process of building connections and growing a network. Usually when Tim and I talk about networks, we mean contacts between people. Another way of thinking about a business is as a network of all sorts of things including machines, documents, reporting systems, finance, supply and distribution chains and, of course, people as well. An entrepreneur has to build this network AND hold it in place. In other words, the main task of an entrepreneur is as a filterer and connector. Filtering matters because it is about screening opportunities to change and build the network, but the connecting and holding it together is the real work of the entrepreneur. Holding the connections in place is often the biggest test of the new venture. Pulling different technologies together, making them do something different and keeping partners in agreement on the business plan are all examples of where ventures fail because the connections fall apart.
So, how does this help us with the unexplained 80% of new venture success? I think the answer to this lies in thinking about a chess game. A chess board only has 64 squares and 32 pieces but beyond the first handful of moves, virtually every chess game evolves differently. The process of continually forming and adjusting connections means that every new venture has a different pathway and a lot of the opportunities and success depends on being in the right place at the right time. In other words, chance plays a significant role in the success of new ventures. We are never going to be able to build a model of new venture success that explains everything.
Having said that, the real task ahead of us is to research new ventures as dynamic systems that evolve over time. It won’t give us simple answers, but it might give us a better understanding of the wide variety of challenges that these businesses face and from there we may be able to derive some general principles of failure and success.