A Value Beyond Money
By David E. Gumpert
A few weeks ago, several business-school professors who teach entrepreneurship courses held a spirited online discussion that grappled with this question: Are some businesses more important than others? Note I used the word "important," not "valuable."
They didn't state it quite that way, but that is what their discussion boiled down to. It all began when a professor on a listserv sponsored by the Academy of Management, an organization of business educators, posed this problem to his colleagues: "I co-teach the business plan course [and] we get plans for businesses that are a slam dunk financially and operationally (e.g. a spinoff of an existing family business to minimize estate hassles) and some that are highly speculative and risky…It is easier to get an 'A' for the low-risk slam dunk that might be a modest or small-scale operation than for the high-risk venture with a large upside…I was wondering if any of you have any experience with or thoughts about risk-adjusted grading?"
One professor responded, "You could simply require all plans to be 'gazelle' [fast-growth] types with some minimum growth rate or exit valuation, forcing everyone to go for the home run. (Some schools do that already.)"
Another said that "the grade should have a combination of whether the venture is asking for the right amount of funding based on their current situation and their growth strategy, and whether the [business plan] judges would invest in the project…. A different way to deal with this is to divide the competition in groups based on the amount of capital being sought. This would mimic the real world somewhat by placing smaller startups within the requirements of angels and riskier and larger projects in a more demanding VC type environment."
A couple of professors departed completely from the previous train of thought by pointing to the importance of the real-life marketplace. "Just get [the business] going if it's feasible and learn from the market, is my idea," stated one. Another echoed that idea: "We might as well grade them subjectively…on the basis of a sound, evident logic, good research and analytical skills, presentation, and the like. The 'real' grade would be for those students who eventually start a business based, in one way or another, on their course work, but that would be OUR grade, not the student's."
MONEY ISN'T EVERYTHING.
Part of the problem these professors are grappling with is the notion of 'grading' a business based on a written business plan, much as you grade a history paper or English composition. As the latter two observed, it's difficult for any professors, or even professional investors, to know for certain how a plan will work out in real life.
As I noted at the outset, there's another issue at stake here, and that's trying to grade business ideas entirely on the basis of financial return. The professor who initially posed the problem revealed his prejudices when he referred to "the low-risk slam dunk that might be a modest or small-scale operation," suggesting in his language that that kind of business is somehow less important than the fast-growth high-risk business. While I would take exception to the idea that many businesses in today's highly competitive business environment are "slam dunks," my primary concern is that these professors feel that the high-risk potential 'gazelles' are the one most deserving of our admiration and of entrepreneurs' focus. After all, we are often reminded, these are the businesses that create the nation's new jobs.
I wasn't sure exactly how to comment when the online discussion was ongoing, but I knew I was uncomfortable with its direction. I've since realized that I'd like to see additional criteria added to the entire discussion.
THREE BIG QUESTIONS.
First, where do the entrepreneur's personal goals and aspirations fit into the entire scheme? Not all entrepreneurs are cut out to run "gazelle" type businesses, and some are best off starting more modest businesses, in terms of personal satisfaction and likelihood of success. An entrepreneur who believes strongly in his or her business has a better chance of success than one simply trying to start and run a huge enterprise.
Second what about a venture's benefits to society? A small construction company that builds environmentally-friendly houses (reducing energy consumption and pollution) might be preferable to a fast-growth maker of high-fat snack foods.
Finally, why must high risk be associated with a higher grade? I always thought that the most successful entrepreneurs succeeded by learning how to control, and even reduce, their risks.
So what is the answer to the question I posed at the start? I don't believe there is one definitive answer. I do believe the time has come to think about starting and growing a business in terms broader than pure finance.