[Music] bill Salman has been a dear friend of G s fees a dear friend of mine he has led entrepreneurship studies at Harvard Business School for the last 37 years yep 37 years and so today he is going to give us give us lessons learned in 37 years of entrepreneurship and and be ready with your QA okay so thank you very much wonderful to be here listening to the great struggle of all life which is the distinction between correlation and causation that's actually what all academics do that's what I've tried to accomplish in my life and it is still a work in progress as Deborah mentioned I've been in Harvard Business School for 46 years I entered as a student and never reached escape velocity I joined the faculty in 1980 I started studying entrepreneurship in the early 1980s I developed a course called entrepreneurial finance and I taught over the years 6,000 students and I want to talk just a little bit about competency in grades just for a moment 6,000 students a lot of students and you should know one thing about Harvard Business School which is there are 600 of those 6,000 students who are to this very day pissed off at me and the reason is that I am required to give 10% of every class what's called a low-pass or category 3 it's a failing grade now these 600 students reveal themselves typically to me at cocktail parties someone will walk up to me and say you're the who gave me the only low grade I got in my entire academic life and then everyone of course says well what happens if you have a really good class and I always respond you'd be shocked but there's always a bottom 10% it's just an amazing regularity the system and if they've done well I take credit for it by spurring them on to improve if they've done badly I say proof the grading system worked so entrepreneurship is one of those funny things if I say what is entrepreneurship what comes to mind words I mean we have word clouds up here but startup risk resilience small business innovation founder about personality any okay so look there are a lot of words that people used for a long time Schumpeter all manner of economists and philosophers have tried to understand entrepreneurship so how many people know someone who gets up each morning in search of risk so my my version of risk is crossing the mass turnpike blindfolded and then if you make it to the other side saying what a genius you were I don't know anyone who tries to find risk I know people who try to find reward and it turns out you can't get reward without risk and so I'll try to talk a bit about risk reward management as opposed to risk avoidance or risk seeking behavior because I think that's a better way to think about it second issue about innovation how many people here believe that Bill Gates invented the spreadsheet the word processor the operating system the presentation graphics the game console or what am I missing Al Gore did it yes I had forgotten there was a creation story that had truth ring of truth the other thing I describe about my path at Harvard Business goes in 1974 I took a real estate course that had two fellow students one named George Bush and the other named Mitt Romney as fellow students one of them was incredibly handsome articulate and you knew he would do well and the other became the president of the United States and so in this existential search for knowledge and wisdom and correlation and causation I've been puzzling that one for a long time one of the things that so innovation is hard I mean because frankly a lot of great entrepreneurs are in the execution business they're taking ideas their hind the right teams they're raising the right money from the right people they're doing a series of things that I think you would not describe as particularly innovative now I think Bill Gates is one of the finest entrepreneurs in the history of the world he's a great commercial Iser in many ways one of his great innovations was bundling which they did for the education market and that turned out to create a compelling offering that beat all of the individual offerings like Lotus 1-2-3 or WordPerfect I think founders a problematic definition of entrepreneurship only because it's really easy to start something it's hard to build something interesting so you have to have in mind a journey with a beginning a middle and an end and if you only focus on the early process it seems to me you miss most of what's interesting about the businesses we would all describe as successful or attractive or important someone once did research that said you had to have a domineering mother to be an entrepreneur so just as a quick show of hands how many of you had a domineering I really don't want to know some of you like you Deborah I know your mother just turns out not to be a particularly interesting thing because I don't think there are any single set of characteristics that are invariant to the contact' store to the a age or time whatever it might be so that didn't seem to be very helpful so my colleague Howard Stevenson studied entrepreneurship for a long time he decided that entrepreneurship was a way of managing and it's a defining characteristic the pursuit of opportunity beyond resources currently controlled so what does that mean I might be in an existing enterprise think General Motors in the 1970s and as opposed to trying to find opportunities and then marshal the required resources I'm really in the protect my business model where I'm trying to create trade barriers I'm trying to optimize the resources that I have under management I'm behaving more like an administrator or trustee and at the other end of the world you're saying well is there a potential gap between what customers are willing to pay and what it will cost me to deliver that customer value and then I'll figure out what resources I need and for example I don't need to hire people I might outsource everything I might create a virtual company I don't have a hierarchical system in which your title and the number of people who report to you determine your compensation so I'm going to have a different approach that's more opportunity driven than sort of a process focused on the existing resources and that turned out to be liberating because you got out of this personality trait you got out of this description of risk seeking you got out of innovation per se it's question is what's an opportunity it's a gap an idea about a gap between the present value of what customers will pay and the present value of all the outflows to employee employees or co-founders or suppliers or the government and taxes it's a gap and the first insight has been all opportunities begin as hypotheses that is you simply have an idea that there will be this potential for creating a sustainable cash flow positive business but it's just a hypothesis and to put this in perspective I now think I've read 10,000 business plans I don't know how many business planes I've read but others have been in my office and they're all there so anyone who wants to come count I have boxes in the hall I've got thousands of things I've only seen three companies meet their plan of the 10000 business plans and I'm beginning to think that that's a pattern that's an important pattern by the way one of them is Lotus Development they thought they do thirty five million dollars in year five they did fifty six the first year and made 19 million yes they did better than their plan but they're only a few others that did so it can't be about planning so the process that we describe is something where you have a hypothesis and what you do is you create a test and the test is designed to give you information about whether this gap might exist between what people are willing to pay and what it costs you and again a test involves getting a little human capital a little intellectual capital little physical capital often financial capital and having some end point at which you are able to make a better informed decision I would call it a value inflection point a point at which you know whether you're on the right path or you're headed in the wrong direction and if the test comes out negative sometimes you abandoned the whole project sometimes you change what you're trying to do if it comes out positive you simply step on the gas or you run a new test and so it turns out that entrepreneurship is about a sequence of tests now the interesting observation is that the people who invest in entrepreneurs have discovered several things over the years the first thing they discovered was every entrepreneur says well I'm gonna build the XYZ company and it's going to take me ten million dollars in three years and I'd like ten million dollars today and if you give them ten million dollars they will spend ten million dollars and then they will ask for more it has never been the case that an entrepreneur said it's a really bad idea I'm giving up it's always just gimmie a I'm just a quarter away from having figuring this market thing out just a quarter away so what investors do is they stage the commitment of capital they give the entrepreneurial team just enough money to run a test to produce information on the basis of which they to get to make the next decision do they give them more money do they change management what do they do so the the process I'm describing is one of testing that's what entrepreneurs do that's when investors do best way to think about it is entrepreneurs are in the business of producing information and investors are in the business of buying information now the other thing I should tell you is that when I started studying entrepreneurship I decided that I would get involved in various entrepreneurial ventures that instead of doing consulting or speaking whatever it was I would actually write checks my wife has questioned the advisability of this I've now been involved in 205 private companies of the 205 private companies 80 have sent me what I call crash letters so I'll give an example I got involved with a man in New Hampshire named Dean Kaman and our goal was to produce two-wheeled self-balancing devices that we thought would be transformative for the economy and they were transformative for me not for the economy so they're in mall cops and tours that the primary goal there we went through nine CEOs which is a personal record and at the end of that process I got a letter saying dear former shareholder [Music] how about you I've never received a letter dear former shareholder and then the guy who bought the company was riding his Segway in Scotland and inadvertently went off a cliff and died [Music] so again my goal was to acquire wisdom and you acquire wisdom through good and bad experiences this was a bad one I back to company that made fat-free potato chips just a heads up all of the taste is in the fat [Laughter] and if I had just listened to Carol this tastes like crap and she also had negative things to say about self-balancing two-wheeled devices the only consumer test for which by the way was in my backyard where we had 60 people riding segways in my backyard with a guard out in the driveway which was in well for the other thing I should say is that there was a distinction between men and women so women got on the Segway and went slowly and went in small groups talking to each other what did men do race tried to jump off every single hill and bump in my backyard we probably should have learned something so fat-free potato chips then I invested in a company called Dunn and it was and I keep going because I've now invested in the company called toast and I'm a little frightened but the point about reward is you don't get reward successful companies without investing in Louise's fat-free potato chips and Segway and it turns out the distribution of outcomes is pretty constant across time so today in a professional venture capital fund at least 50% of the ventures failed now by the way that used to be 35% but today it's a number between 50 and 60% and fortunately you can only lose a hundred percent of your money and on the others you can earn more so the way the distribution of outcomes I'd like you to think about for any given opportunity or venture is something where there's a high likelihood of zero value created over some period of time there's very low probability of creating a little value because companies either achieve scale or they and then there's a hump the nature of the hump is interesting almost all of the action turns out to be in the right hand tail of the distribution because that's how you can find things that offset the losses that you have in the 50 or 60 percent of the things that turn out to be called Segway so the other thing you learn about running tests is you're not in the prediction business as so much as you are in the discovery business and your job as an entrepreneur is simultaneously to lower the likelihood of a goose egg or keep the losses lower if it is a goose egg and the time commitment lower if it's a goose egg and then your other objective is to increase the likelihood of achieving a right hand tail positive event and the fundamental idea there is that you want to change the odds you don't want to accept any probability distribution the goal of management the goal of creating teams the goal of doing all the things we've described in the past day and a half is to change the likelihood magnitude of success so the other insight I had was you have to create a simple framework in order to have a way to approach any given venture or to understand the process of entrepreneurship so I I created a very simple model that has four elements it's the people the opportunity the context the set of things outside the control of the individuals involved and the deal and you could think about evaluating each of those individual you say what are the people done what have they accomplished what's their experience what are their networks you could look at the opportunity and you could ask does it have the potential for differentiation or cost advantage are there network effects can you create entry barriers you could look at the deal and describe how clever it was does it have a reverse upside down potable first child participating preferred but the real issue in life is not looking at each of those individually but rive that rather asking how do they relate to each other are these the right people for the opportunity what do they know about creating scalable operations say in a restaurant business or in an education business what's the context what are the regulations what's going on in the capital markets I'll describe for example that Softbank is a contextual tsunami in the world of entrepreneurship it has weaponized finance every single decision people are making today has to reflect the fact that Softbank is prepared to anoint and announce winners and that affects the supply of human and financial capital to everyone else in a given market so that's an example of a contextual shift the deal where people often focus on you know what valuation do I get I have students who are constantly trying to maximize the valuation say well you know my company was valued at a billion what they don't say is that it is triple participating preferred with a warrant position and debt in which case if they were to sell it for that number that billion-dollar valuation they would get approximately a dollar fifty and a letter of recommendation the other comment about experiments is and they're really the fundamental rule of entrepreneurship is don't run out of money so running out of money is running out of time and the way to think about that is you don't run out of money because you actually run out of ashin in the bank it's because you run out of trust you have produced information about yourself your team your idea that causes people to lose faith because the fundamental nature of entrepreneurship is you'll always need more money they never give you enough money to get to this nirvana of cash flow independence and so you run out of money when the value inflection points are such that the the math doesn't work you can't create and capture enough customer value to pay the people who give you their services as employees or their financial resources so the goal here is don't run out of cash so people opportunity context deal the other thing I did was I created a simple set of questions what can go wrong you can't believe how good students are at what can go wrong you just can't believe the creativity they bring to bear on of those sharks Mike Circle Trump might get elected stuff that's really way out there the second and related question is what can you go right it turns out we are not good at what can go right and everything in life is about what can go right and making it happen and the third question is how do I make what can go wrong less likely to occur or if it does occur kick me out of the game cost me to run out of cash in time how can I make what can go right more likely to occur and in a sense how do I then manipulate the team the people inside and outside the organization how do I change what the opportunity is my strategy my tactics my positioning how do I make sure that I have access to money not only today but to run future tests so I have not given away too much of the pie I've not got terms that make it hard to raise money for the next round so effectively my goal is to maximize the likelihood and magnitude of success by changing the team the opportunity and the deal so that's what I've learned about entrepreneurship over the years it's a process I see played out everywhere in the world recently I went to Brazil I went to visit entrepreneurs in Brazil so I went to visit a company and it was a meeting of maybe the 40 top people in the company interesting company they had started six years ago with the goal of trying to improve the payment system for small and medium-sized business and they introduced me to the head programmer and when the company started he was 13 and he was still unable legally to drink that company went public this last year and has a market cap of six billion dollars and what I want to say is it was a globally competitive company probably one of the finest entrepreneurial ventures I have ever visited and so the world as it has changed is entrepreneurship is a global phenomenon the idea can come from anywhere the money can come from anywhere the markets can be anywhere the production can be anywhere and so we should imagine that what used to be a little bit more concentrated in certain geographic areas has now been democratized across the entire world the second thing that's occurred is that the cost of experimentation is approaching zero so think of programming tools the ability to test and get feedback from the marketplace using the web think about Amazon Web Services and so the other thing we'll see is that the amount of experimentation and entrepreneurial behavior in the economy is going to go up dramatically and when I'm focused on there is not small business but rather high potential entrepreneurship simply reimagining how something can get done and that's what this whole room is about is reimagining in recent years I've been giving two speeches one is called intergenerational robbery it's a really uplifting speech it's about how politicians are using your grandchildren's money to buy votes and the second speech that I've been asked not to give that speech anymore well it does have a good slide revealing that Trump went to Wharton second speech I give is the case for hope which is about entrepreneurs and we have an infinite supply problems in the world but entrepreneurs view problems as opportunities so in education and healthcare we have a disastrous situation so in the u.s. just to give two examples there are three taxes that are completely unacknowledged and never talked about one tax has to do with health care we spend 5,000 dollars extra per person and deliver mediocre results and disproportionately bad for poorer people they live with a degree of uncertainty and agree of low health that simply is unacceptable and I point out that there be and half people in the world who would work for five thousand dollars per year the amount that we waste in health care in education it's even worse because we destroy opportunity and hope and we spend much more on education than anywhere else in the world and frankly for our kids the results are just hunky-dory but for a lot of the world that simply is not true and that's a great tax and so the ultimate tax turns out to be the uncertainty tax the corrosive impact of not having access to opportunity access to good health feeling like the game is rigged and I think that's the biggest problem that we have today and I'm always happy when I come with Debra and and learned that there are people attacking that I'm gonna stop there happy to answer questions [Applause] [Music] no it's a great question the students first of all it's a much more diverse crowd that come from 70 countries we're approaching 45% women in other professional schools that's reach parity are actually gone higher female to male it comes from lots of different industries so we're trying not to get all private equity people or all former consultants or all people who had the same experience so I would say the richness and diversity of the classroom has improved they used to come from Procter & Gamble and Ford and General Electric and as you can imagine that's no longer true Google and Facebook have replaced Procter and Gamble and GE so and the risk-averse jobs they go to turn out to be called Google and Amazon and Facebook so they don't go consultants have been unable to hire they used to McKenzie used to hire the top hundred ranked students they struggled to hire people investment banks used in 1987 they hired 35% of the class they hired no one last year hedge funds and other private equity so the shift in where people think they can make their mark it has changed and then as you correctly point out many more are interested in early-stage companies or in starting their own now what we've done is we've created the Harvard Innovation Lab that is a place where you have hands-on experience with running the first test which is does this idea make sense how can we get feedback from customers how can we decide whether or not an idea is feasible we have lots of courses we went from having three faculty members who were not highly regarded I among them to a group of 35 people teaching in entrepreneurship and again my job is not to have people go start a company because many people ought to learn something first they ought to understand the problems and opportunities in an industry learn how to manage people learn how the all the things that we were talking about this morning so roughly 7% of the students start companies probably 10 to 11 percent go into earlier stage companies more students now go to San Francisco then to New York by the way they're gonna live in a very small space and they're gonna spend a lot of time in a high-speed Internet bus commuting and their life is going to suck just as in this side [Music] Northern California is in the process of self-destruction this is a constant process that occurs and for startups it's very hard because Google and Facebook and Microsoft everyone is true right here in Kendall Square are willing to pay salaries that are infeasible if what you're trying to do is to run a test with really competent people or prepared to risk something not get that 250,000 or $300,000 guaranteed job so that's the other contextual shift in entrepreneurship that I think is interesting I'm optimistic about lots of other places for entrepreneurial action that indicate possible success so I don't think there's a full set first of all I've learned that all opportunities are based on people and all problems are people problems so you go from your early business education imagining that if you can model the financial numbers better life will be great and you learned that they're all people issues so the folks who can recruit retain and organize teams to have a strong supportive culture by the way Katie did a fabulous job this morning I wanted to I wanted to work for her I wanted to hire her I wanted to get her to teach but I would say having that kind of person having that mentality about what you're trying to accomplish having it be more than just making money having it be a life something that that has value is important curiosity and the willingness to ask why not I teach a whole series of things about what how do you find an opportunity and often it's just question base like why does it take so long why does it cost so much why are these assets sitting idle 97% of the time what could we do with that asset so curiosity persistence without with a sense of humility that is persistence down a bad path will destroy a company and then communication I find that when companies go radio silent and I've had 205 tests of this when they go radio silent it is not good that if you only communicate when times are good or news is good when you deliver bad news you will be kicked out of the game so they have to have the ability to get trusted and to retain that trust through honesty and non self-interested behavior of the 205 companies three have been involved bad integrity issues which i think is pretty low but I feel horrible about them I don't feel horrible about losing money and the others I lose I lose sleep about having made bad people judgments it was outstanding thank you very much I wanted to ask a question of you in your studies of entrepreneurship yeah when you've looked outside the halo of Harvard and the venture world to entrepreneurs that bootstrapped from the first dollar if there wasn't something different about that person a first dollar bootstrap entrepreneur well the way I would think about it is the best money comes from customers not from investors so the folks who are able to create value for customers they they could be on recurring engineering revenues could be some way to pre-sell or subscription business whatever it might be I have enormous respect for them but what I've learned is that your choices are not always yours to make by which I mean there are some companies that do have to try to grow more rapidly if you're in a network effects business or something where the value Rises exponentially as you add customers or suppliers arithmetic ly you don't have the luxury of saying I want to retain control I want to bootstrap this because you will be blown out of the water so I think the comment I would make is there is no requirement that you go to high school and finish high school there's no requirement you go to college there's no requirement you have an MBA there's no requirements you have a technical degree there is a requirement that you find a way to create and capture customer value and I honor everyone who gets in that journey even those who don't make it but I don't think they're so there's no necessary or sufficient there are a lot of things that can go into it and there's some you know 50% of the companies never got institutional capital so it's a lot of success across the country during the pitch have you built a catalogue of it might be non-starters do you hear or see anything that as soon as you hear it's like the old gong show you hit the gong immediately and is there anything that you see in here during the pitch that mean that caused you to lean in and listen more okay well first of all remember I have a small investment committee I met there are no limited partners I mean Carol Jarrell's a limited partner but I asked advice now about products and ideas occasionally about people if anybody is glib if anyone has done something that would suggest they're going to go close to the edge I'm not going to get involved immediately almost all of my decisions are not because they're almost always people I think can do something special and it's almost always a team I really have individuals come into my office almost always a team second they have to be realistic about the process if they don't understand that when I invest I fully anticipate I will have more opportunities to invest and that they will come sooner than they expect and I try to give them that advice so if they've got a truly stupid idea which happens maybe 5% of the idea I wish them good luck I send them down the river here to MIT that's not true but you know every business plan I read said we conservatively project we took our best estimate and divided by two three out of 10,000 plants have met their numbers so anyway I'm just people I would get on a journey with and a journey that's gonna have good bad ugly and moments at which by the way I can be helpful because I have experience and connections so yeah Debra close relationship with through HPS I assume is Ray Dalio and obviously culture and a big part of our conversation here is where legend could you just make a few observations about Ray and his unique culture and how he's okay so just people who don't know ray started Bridgewater on this money management firms largest hedge fund now in the world 160 billion dollars ray has this radical transparency model you can't talk about someone unless they're there in the room every conversation is recorded every conversation is accessible by everyone right now he's got an iPad app so during a meeting like this you would be giving me red green yellow feedback and I might be able to see that in real time and so a lot of people think well that's that's nuts I mean that's just taking all of this too far and what I would say is half the people who come to Bridgewater to get a job leave within the first year and half stay for a very long period of time and the culture works but only for the people who buy into the model that they're gonna get radical positive and negative feedback that the worst thing they can do is hide a mistake the best thing they can do is talk about the mistake and how they're going to fix it and the organization is going to function as an entity that has these this this deep operating system what Ray has created as an operating system and I've been in conversations with other tremendously successful people in Ray and they all look at each other like they're from a different planet like the whole idea of transparency is something some people don't exactly but it works and the one thing I would say you have to have a culture that works it attracts the right people it retains the right people it gives the right kind of feedback and if you can't create that system in your own image and light then you will fail and so what I admire about ray is that he's thoughtful about the process he's articulated the process there is no uncertainty about how people will be evaluated and it works by the way let me just make one more comment about Jeff Bezos someone I've also spent time with and what I have other than his most recent texting behavior which is problematic Jeff is the single best experimentalist I've ever met the most curious person so he's constantly running tests to figure out if there's a way to create and capture value and he too has built an operating system inside of Amazon that's as effective as any operating system I've ever seen but it's about following a set of rules to deliver customer value does it increase the breadth of choice and does it lower price does it occur quicker and frankly I think that's another example of a culture that sustains and continues to focus on opportunity so I'm thankful yes yes Deborah right we're going to the next thing thank you all very much [Applause] [Music]
