Ego Makes Entrepreneurs?

I spent all morning at the Palais des Congrès here in Montreal attending a conference on entrepreneuship which was sponsored by the Board of Trade of Metropolitan Montreal and financial institutions like the Business Development Bank of Canada as part of Small Business Week 2010:
The Board of Trade of Metropolitan Montreal and its team of experts in entrepreneurship – Info entrepreneurs – today announced the programming for Small Business Week 2010 in Montréal. The program will feature a series of activities that will bring together hundreds of entrepreneurs from the Montréal area. “This prestigious event is a special one for Montréal small businesses,” said Michel Leblanc, President and CEO of the Board of Trade. “It combines helpful training, presentations by experts and the perfect opportunity to establish or develop a professional network.”

The week offers a variety of activities that meet the needs and reflect the interests of all small businesses. On October 19, participants will have a chance to explore the different avenues available to them for financing their business projects. This day devoted to the search for financing will offer invaluable advice on developing business plans and using management tools. The day of October 20 will be devoted to expanding and growing companies, dealing in particular with export and innovation. The day will end with an exclusive evening to celebrate the top performing companies of the year. The week will close on October 22 with a major seminar on entrepreneurship. Panels throughout the day will feature renowned conference speakers who will share their experience and best advice. For details on the program, please visit the

At the same time the Board of Trade also unveiled the confidence index for its members for the third quarter of 2010, which has dropped slightly, moving from 5.95 during the second quarter to 5.93 during the third. “Entrepreneurs remain fairly confident about the growth of their businesses, but their confidence in the Montréal economy has flagged somewhat,” said Michel Leblanc. “The results show that Montréal businesses are resilient, in spite of the deteriorating global economic outlook.”

The Business Development Bank of Canada, the presenter for Small Business Week, also presented the conclusions of a survey conducted as part of the Angus Reid Forum. “This survey presents an enlightening picture of the outlook for small business,” said Mr. Leblanc. “It shows us that small businesses have understood the importance of innovation, that they remain prudent in their intentions to invest, but that they are optimistic about their growth objectives.”

This morning's presentations were excellent. There is nothing like listening to entrepreneurs tell their stories and how they succeeded with their companies. I was struck by two things in particular. There were quite a few young women in the audience and as panelists. It seems like women have more of the entrepreneur spirit here in Quebec (maybe elsewhere too).

The second thing that struck me is that while financing remains a big concern, it's not the biggest preoccupation for entrepreneurs. In fact, the bankers and financial experts made it clear that you need to choose your partners well and make sure they bring a lot more to the table than just money.

Jean-René Halde, President & CEO of the Business Development Bank of Canada (BDC) started things off this morning and gave an incredible speech. I've heard Mr. Halde speak a few times while working at the BDC - and was always very impressed - but this speech was amazing. Mr. Halde masters the French and English language and his speeches are both inspiring and thought provoking. Listening to him speak, I almost wish he'd run as the leader of a federal party (we desperately need leaders like him, but he serves us better at the BDC).

Mr. Halde said that the culture of entrepreneurship is lagging in Quebec. He said that the 60s produced some great entrepreneurs and business leaders but in recent years there has been a marked lack of entrepreneurship in Quebec, especially compared with Western provinces. He said that while "we identify, promote and support hockey players with talent starting at a young age, we do little to identify, promote and support our young entrepreneurs."

There was something else that struck me in Mr. Halde's speech. He talked about learning through failure. "In Quebec, we penalize people who fail" but in reality we should not penalize people who take on entrepreneur risk. There is value in failure and some of the best entrepreneurs have failed many times in their lives before succeeding. At one point, he referred to hockey great Wayne Gretzky who once said "You miss 100% of the shots you don't take" (see BDC's latest press releases for more).

Mr. Halde was followed by a panel of young and seasoned entrepreneurs which included:

Daniel Drouet, co-founder, Montreal Start Up
Caroline Saulnier, President, Synetik Ergonomic Solutions
Mary-Eve Ruel, President, Uranium

Élisabeth Deschênes, President, Zoum Armada
Daniel Schneider, Vice-President, Meubles Foliot inc.
André Morissette, President, Campagna Motors

I absolutely loved listening to their presentations. We spend so much time worrying about the stock market, bond market, black swans, etc., but these are the people who are producing and creating real wealth and jobs in our economy. I admire their perseverance, dedication and willingness to chase their dreams. We need more entrepreneurs, less financial engineers.

The ladies really impressed me. Ms. Saulnier spoke of how she developed her business and still has aspirations to pursue other ideas. Ms. Ruel said something very true "If being an entrepreneur was easy, everyone would be doing it". Ms. Deschênes spoke on the importance of branding.

The men were equally impressive. Mr. Drouet spoke on the low barriers to entry of web businesses and how entrepreneurs are using the web to grow their businesses. Mr. Schneider spoke on the importance of succession planning and integrating everyone when important decisions have to be made. He used the term "sociocratie" which is a mode of decision making and governance that enables an organization to behave like a living organism, self-organizing. The primary objective is to develop co-responsibility to the players and put the power of the collective intelligence of the organization's success (pension funds take note!!!). Mr. Morissette spoke of how he started the company at the worst possible time, facing unbelievable odds. "the greatest entrepreneurs are rebels".

A panel discussion then took place with Mr. Halde, Gaétan Morin, First Vice-President, Investments at Fonds de solidarité FTQ, Luc Bernard, Vice-President, Small and Medium Sized Enterprises at Laurentian Bank and Stephen Rosenhek, Associate Director at RSM Richter Chamberland. Michel Leblanc, President of the Board of trade moderated the discussion.

The panelists answered questions from Mr. Leblanc and the audience and gave aspiring entrepreneurs some sound advice: Be transparent, know your clients' clients better than they know them, keep your business plan simple/ realistic and remember you only have one shot to make a first impression. Importantly, choose your financial partners well, and make sure they offer you sound advice and consult you in good times and bad times. And Mr. Gaétan gave some sound advice: "Don't be afraid to surround yourself with people who are better than you."

Finally, Yahoo carried an article on Being Steve Job's Boss and I ran across a 2005 article from Bloomberg BusinessWeek, Ego Makes Entrepreneurs?:
Just how much appetite for risk do entrepreneurs really have? That's the question Wharton doctoral student Brian Wu began asking himself while examining their behavioral patterns. He found the general assumption to be that entrepreneurs are risk seekers -- but the empirical evidence suggests that, surprisingly, they weren't. But if entrepreneurs are more cautious than everyone presumes, then what accounts for their risk-bearing behavior?

That question is at the crux of Entrepreneurial Risk and Market Entry, which received the annual Best Doctoral Paper award from the Small Business Administration's Office of Advocacy this month. Co-written with Professor Anne Marie Knott of the University of Maryland, the paper describes entrepreneurs as inherently overconfident, which helps cancel out their sensitivity to risk.

A native of Shandong province, China, Wu has also studied the influence of the euro on his country's foreign exchange reserve and the staged financing of entrepreneurs. He came to the U.S. three years ago, after earning degrees from Tsinghua University in China and the National University in Singapore. BusinessWeek Online reporter Stacy Perman recently spoke with Wu about uncovering a seemingly inherent contradiction on the nature of entrepreneurs. Edited excerpts of their conversation follow.

Q: The accepted understanding has been that entrepreneurs have a greater tolerance for risk than the rest of the population, and yet your study found the opposite to be true. How so?
While conventional wisdom assumes entrepreneurs have great risk tolerance compared to the rest of us, in controlled experiments that tracked attitudes to risk, we consistently found that they aren't really that different. In some cases, they're even more risk averse [than the norm], and yet they continue to bear risk.

Q: So you're debunking the conventional wisdom?
I wouldn't say that so much as I wanted to make clear that there are dimensions of uncertainty. This disparity confronts two dimensions of uncertainty: One, the uncontrollable risks or market uncertainty, and two, the uncertainty of ability.

Entrepreneurs, like everybody else, hate uncontrollable risks, but on the other hand, they're overconfident in their own abilities -- they think they can control their abilities in a random drawing of people. It's like the Lake Wobegon effect in assessing their position among peers. They think they're above the average.

Q: That being the case, what then accounts for their willingness to bear risk?
It's their overconfidence in their ability. Their confidence is greater than their risk avoidance. It compensates for their aversion to risk.

Q: How does that influence their behavior?
Entrepreneurs appear to be risk seeking with respect to their ability. For example, if there are two industries and one has a high cost of ability uncertainty and the other has a low cost of ability uncertainty, the entrepreneur will choose the first case because of his overconfidence.

Even though the second industry has the same mean value, he would be considered just average [there]. While in the first, he thinks he can be Bill Gates. It's that overconfidence in their ability that encourages them to be entrepreneurs.

Q: Is this then the main differentiating factor between what makes an entrepreneur compared to the rest of the population?
There are many sources [of difference], like education, culture, social environment, and family tradition, but in the end, it's their overconfidence that drives them to be entrepreneurs.

Q: What's the advantage to this approach?
I wouldn't say it's advantageous. These findings help us understand why entrepreneurs take risks. If, in fact, entrepreneurs with low capabilities and high overconfidence enter [ventures], they're likely to fail in the end because they have overestimated their abilities.

For example, look at the airline industry. There's much uncertainty, and it's volatile. Still, we see a lot of entrants into it because they think they understand the industry. They think they have a higher ability then the other guys. They say, "I will be the next Southwest Airlines."

Q: Then is this an inherent disadvantage?
Of course, [the venture] is a failure for the entrepreneur, but the average person benefits. Overconfidence encourages [entrepreneurs] to enter an uncertain industry, and their low ability in it may lead to failure. But without that, the average person wouldn't enjoy the creativity of the entrepreneur and their innovations that lead to lower prices due to competition.

Q: What's the broader implication of this research?
It helps us to understand the entry-pattern behavior of entrepreneurs across industries. We can see the dynamic of entrepreneurial behavior. When there's a high degree of uncontrollable uncertainty but a low degree of ability uncertainty, we won't see a sufficient level of entry into an industry. But if there's a high degree of ability uncertainty, we will see a sufficient amount of entrants because their overconfidence compensates for the uncontrollable risks.

Q: As a native of China, how do you see the American entrepreneur in comparison to the Chinese entrepreneur?
I think mainly the difference is in culture, in terms of confidence and, in particular, overconfidence. I would characterize American entrepreneurs as confident. I wouldn't say they are overconfident, but they're confident, which is good.

Chinese entrepreneurs in some sense used to be constrained by all kinds of social, political, and cultural factors. Now, they're changing, as China enters the World Trade Organization, and they're becoming more and more confident.

The second thing is that, especially in technological startups, many Chinese entrepreneurs in the big cities are trying to learn from the Americans. More and more, there's a flow of information between the two economies. I'm not sure, but I feel there could be a convergence in entrepreneurial behaviors as China and the U.S. are becoming the two most important economies.
I end by telling you that I had a long and fascinating discussion with Leo de Bever, President and CEO at AIMCo on Friday afternoon and will prepare something over the weekend for you to read. It's going to be an absolute must read for senior pension officers, asset managers and all investors.