Category: Entrepreneurship

Frugal Entrepreneurs May Be Able to Self-Finance Their Innovations

In my Economics of Entrepreneurship seminar we spend part of an evening reading the summary chapter of The Millionaire Next Door, discussed in the tribute below. In the seminar I suggest that at key early moments, innovative entrepreneurs may need to self-finance their innovations. They will be more likely to be able to do so if they have followed Stanley and Danko’s advice on how to live frugally.

(p. B1) . . . the enduring lesson of the classic personal finance book, “The Millionaire Next Door,” is this: Most of the rich grow wealthy because of modesty, thrift and prudence. They live happily in starter homes. They don’t subsidize irresponsible adult children. They have an allergy to luxury automobiles.
. . .
The book, which has sold more than three million copies since its publication in 1996, made its co-author, William D. Danko, a millionaire himself and helped Mr. Stanley achieve similar security and leave academia for research and writing.
. . .
(p. B2) . . . even Mr. Danko, who ought to know better, has not always been able to resist the siren call of the Germans and their advertising. He bought one older Mercedes from a widowed friend, but his other one came new. “I was planning on buying a used one again, but the salesman was very good, and I was weak,” he said. “These luxury cars are clearly overrated when you have to get your oil changed, and it costs $200.”
. . .
. . . I was curious that Mr. Stanley died behind the wheel of a 2013 Corvette, rammed by another driver who might soon face charges in the accident. Mr. Stanley too, it turns out, couldn’t help but have a taste for the finer things in life.
So does that make him a hypocrite? Or just a human being? All the best research tells us that we get much more joy out of doing things than having things, and a weekend drive in a car that goes really fast probably falls into both categories. But he earned that drive — and that car — by putting untold numbers of readers in a position where they’d be lucky enough to have that same choice themselves.

For the full commentary, see:
RON LIEBER. “YOUR MONEY; A Tribute to the ‘Millionaire Next Door’.” The New York Times (Sat., MARCH 7, 2015): B1-B2.
(Note: ellipses added.)
(Note: the online version of the commentary has the date MARCH 6, 2015, and has the title “YOUR MONEY; Paying Tribute to Thomas Stanley and His ‘Millionaire Next Door’.”)

The book under discussion is:
Stanley, Thomas J., and William D. Danko. The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. First ed. Atlanta: Longstreet Press, 1996.

Economic Growth Depends on the Talented Becoming Entrepreneurs Instead of Rent Seekers

(p. 6) In an influential paper, the economists Kevin M. Murphy and Robert W. Vishny, both at the University of Chicago Booth School of Business, and Andrei Shleifer at Harvard University argue that countries suffer when talented people become what we economists call “rent seekers.” Instead of creating wealth, rent seekers simply transfer it — from others to themselves.
Job titles don’t tell you whether someone is primarily a rent seeker. A lawyer who helps draft precise contracts may actually be helping the wheels of commerce turn, and so creating wealth. But trial lawyers in a country with poorly functioning tort systems may simply be extracting rents: They can make money by pursuing frivolous lawsuits.

For the full commentary, see:
SENDHIL MULLAINATHAN. “Economic View; Maximizing the Social Returns to a Career in Finance.” The New York Times, SundayBusiness Section (Sun., APRIL 12, 2015): 6.
(Note: the online version of the commentary has the date APRIL 10, 2015, and has the title “Economic View; Why a Harvard Professor Has Mixed Feelings When Students Take Jobs in Finance.”)

The paper praised and summarized above, is:
Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny. “The Allocation of Talent: Implications for Growth.” Quarterly Journal of Economics 106, no. 2 (May 1991): 503-30.

As an Entrepreneur “You’re Much More in Control of Your Life”

(p. C1) The financial crisis rocked and reshaped Wall Street, forcing many people to reassess their careers. Since then, a steady stream of executives has left Wall Street firms and multimillion-dollar salaries to hang out their own shingles. But for many, the allure of autonomy quickly gives way to everyday realities that can be jarring.
. . .
(p. C2) . . . , the jump from Wall Street to entrepreneurship, and any potential fall, can be steep. Unlike in Silicon Valley, where entrepreneurs benefit from an ingrained startup culture and network of venture-capital backers, Wall Street exiles often launch startups midcareer and without an equivalent institutional framework.
. . .
Milton Berlinski, a founding member of Goldman Sachs’s financial institutions investment-banking group, hopped from one work location to another as he figured out what he wanted to do after he left the bank in 2012.
. . .
This month, Mr. Berlinski moved his team of 13 people into a 6,000-square-foot office that his entire group helped design, from choosing the paint to picking the furniture. “In some ways, you’re starting from scratch,” said Mr. Berlinski. “You’re spending time working harder, but you’re much more in control of your life.”

For the full story, see:
ANUPREETA DAS. “Financial Startups Take Leap Sans Net.” The Wall Street Journal (Weds., April 8, 2015): C1-C2.
(Note: ellipses added.)
(Note: the online version of the story has the date April 7, 2015, and has the title “Financial Startups Make the Jump Without a Net.”)

Fongoli Chimps, Where Prey Is Scarce, Show “Respect of Ownership”

(p. A10) The Fongoli chimpanzees live in a mix of savanna and woodlands where prey is not as abundant as in rain forests. There are no red colobus monkeys, and although the chimps do hunt young vervet monkeys and baboons, the much smaller bush babies are their main prey.
Dr. Pruetz argues that less food may have prompted both technological and social innovation, resulting in new ways to hunt and new social interactions as well. Humans evolved in a similar environment, and, as she and her colleagues write in Royal Society Open Science, “tool-assisted hunting could have similarly been important for early hominins.”
. . .
By and large, said Dr. Pruetz, the adult males, which could take away a kill, show a “respect of ownership.” Theft rates are only about 5 percent. The chimps she studies also have more mixed-sex social groups than chimp bands in East Africa.
Travis Pickering, an anthropologist at the University of Wisconsin, said that with less food available it seems that the Fongoli chimps, “have to be more inventive” and that “these hunting weapons even the playing field for non-adults and females.”
Early hominins may have been in a similar situation, he said.

For the full story, see:
JAMES GORMAN. “Hunter Chimps Offer New View on Evolution.” The New York Times (Fri., APRIL 15, 2015): A10.
(Note: ellipsis added.)
(Note: the online version of the story has the date APRIL 14, 2015, and has the title “Chimps That Hunt Offer a New View on Evolution.”)

The academic article discussed above is:
Pruetz, Jill D., Paco Bertolani, K. Boyer Ontl, S. Lindshield, M. Shelley, and E. G. Wessling. “New Evidence on the Tool-Assisted Hunting Exhibited by Chimpanzees (Pan Troglodytes Verus) in a Savannah Habitat at Fongoli, Sénégal.” Royal Society Open Science 2, no. 4 (Weds., April 15, 2015), URL: http://rsos.royalsocietypublishing.org/content/2/4/140507.abstract .

Resilient Italian Entrepreneur Planned to Build Trattoria and Ended Up Building Museum

FaggianoAndSonsDigToFixPipe2015-04-19.jpg “Luciano Faggiano and his sons were digging to fix a pipe in Lecce, Italy. They found a buried world tracing back before Jesus.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A1) LECCE, Italy — All Luciano Faggiano wanted when he purchased the seemingly unremarkable building at 56 Via Ascanio Grandi was to open a trattoria. The only problem was the toilet.

Sewage kept backing up. So Mr. Faggiano enlisted his two older sons to help him dig a trench and investigate. He predicted the job would take about a week.
If only.
“We found underground corridors and other rooms, so we kept digging,” said Mr. Faggiano, 60.
His search for a sewage pipe, which began in 2000, became one family’s tale of obsession and discovery. He found a subterranean world tracing back before the birth of Jesus: a Messapian tomb, a Roman granary, a Franciscan chapel and even etchings from the Knights Templar. His tratto-(p. A8)ria instead became a museum, where relics still turn up today.
. . .
If this history only later became clear, what was immediately obvious was that finding the pipe would be a much bigger project than Mr. Faggiano had anticipated. He did not initially tell his wife about the extent of the work, possibly because he was tying a rope around the chest of his youngest son, Davide, then 12, and lowering him to dig in small, darkened openings.
. . .
Mr. Faggiano still dreamed of a trattoria, even if the project had become his white whale. He supported his family with rent from an upstairs floor in the building and income on other properties.
“I was still digging to find my pipe,” he said. “Every day we would find new artifacts.”
. . .
Today, the building is Museum Faggiano, an independent archaeological museum authorized by the Lecce government. Spiral metal stairwells allow visitors to descend through the underground chambers, while sections of glass flooring underscore the building’s historical layers.
His docent, Rosa Anna Romano, is the widow of an amateur speleologist who helped discover the Grotto of Cervi, a cave on the coastline near Lecce that is decorated in Neolithic pictographs. While taking an outdoor bathroom break, the husband had noticed holes in the ground that led to the underground grotto.
“We were brought together by sewage systems,” Mr. Faggiano joked.
. . .
“I still want it,” he said of the trattoria. “I’m very stubborn.”

For the full story, see:
JIM YARDLEY. “Home Repair Opens a Portal to Italy’s Past.” The New York Times (Fri., APRIL 15, 2015): A1 & A8.
(Note: ellipses added.)
(Note: the online version of the story has the date APRIL 14, 2015, and has the title “Centuries of Italian History Are Unearthed in Quest to Fix Toilet.”)

Creativity Was Permissionless on the Internet Before Obama Made It a Regulated Utility

(p. A15) Critics of President Obama’s “net neutrality” plan call it ObamaCare for the Internet.
That’s unfair to ObamaCare.
Both ObamaCare and “Obamanet” submit huge industries to complex regulations. Their supporters say the new rules had to be passed before anyone could read them. But at least ObamaCare claimed it would solve long-standing problems. Obamanet promises to fix an Internet that isn’t broken.
. . .
Utility regulation was designed to maintain the status quo, and it succeeds. This is why the railroads, Ma Bell and the local water monopoly were never known for innovation. The Internet was different because its technologies, business models and creativity were permissionless.
This week Mr. Obama’s bureaucrats will give him the regulated Internet he demands. Unless Congress or the courts block Obamanet, it will be the end of the Internet as we know it.

For the full commentary, see:
L. GORDON CROVITZ. “INFORMATION AGE; From Internet to Obamanet; BlackBerry and AT&T are already making moves that could exploit new ‘utility’ regulations.” The Wall Street Journal (Mon., Feb. 23, 2015): A15.
(Note: ellipsis added.)
(Note: the online version of the commentary has the date Feb. 22, 2015,)

Successful Billionaire Mathematician Would Have Lost Math Contests, But Was Good at Slow Pondering

(p. D1) James H. Simons likes to play against type. He is a billionaire star of mathematics and private investment who often wins praise for his financial gifts to scientific research and programs to get children hooked on math.
But in his Manhattan office, high atop a Fifth Avenue building in the Flatiron district, he’s quick to tell of his career failings.
He was forgetful. He was demoted. He found out the hard way that he was terrible at programming computers. “I’d keep forgetting the notation,” Dr. Simons said. “I couldn’t write programs to save my life.”
After that, he was fired.
His message is clearly aimed at young people: If I can do it, so can you.
. . .
(p. D2) “I wasn’t the fastest guy in the world,” Dr. Simons said of his youthful math enthusiasms. “I wouldn’t have done well in an Olympiad or a math contest. But I like to ponder. And pondering things, just sort of thinking about it and thinking about it, turns out to be a pretty good approach.”

For the full story, see:
WILLIAM J. BROAD. “Seeker, Doer, Giver, Ponderer; A Billionaire Mathematician’s Life of Ferocious Curiosity.” The New York Times (Tues., JULY 8, 2014): D3.
(Note: ellipsis added.)
(Note: the online version of the story has the date JULY 7, 2014.)

Italian Traditional Family Stunts Individual Enterprise

(p. 15) Hooper’s book, both sweeping in scope and generous with detail, makes persuasive arguments for how geography, history and tradition have shaped Italy and its citizens, for better and sometimes for worse. Roman Catholicism, for example, has indelibly conditioned Italian society, even as the Vatican’s restrictions are widely ignored. Catholicism’s great allowance for human frailty has translated into a great propensity for forgiveness, as evinced in the Italian justice system, but also resistance to the notion of accountability. It’s a word, Hooper adds, that has no counterpart in the Italian language.
. . .
There’s . . . mammismo, the propensity of young Italians to remain too closely tied to the maternal apron strings. But while “the traditional family has been at the root of much of what Italy has achieved,” Hooper writes, dependence on the family can infantilize, and lack of individual enterprise has held the country back. Indeed, various sections of Hooper’s book return to Italy’s economic decline and its underlying causes.
He notes that the paperwork and formalities of Italy’s cumbersome bureaucracy rob the average Italian of 20 days a year. And he wonders what other country could ever have had a Minister for Simplification to deal with its plethora of often conflicting laws and regulations.
Circumventing some of that bureaucracy partly answers another common question: Why is Italy so prone to corruption? After all, Italians are masters at sidestepping regulations, or, as the saying goes, “Fatta la legge, trovato l’inganno” (“Make the law, then find a way around it”). It’s no wonder foreign investment in Italy is so low.

For the full review, see:
LISABETTA POVOLEDO. “Under the Italian Sun.” The New York Times Book Review (Sun., March 1, 2015): 15.
(Note: ellipses added; italics in original.)
(Note: the online version of the review has the date FEB. 27, 2015, and has the title “‘The Italians,’ by John Hooper.”)

The book under review is:
Hooper, John. The Italians. New York: Viking, 2015.

Chinese Communists Crush Innovative Entrepreneurs by Banning Open Internet

(p. A1) BEIJING — Jing Yuechen, the founder of an Internet start-up here in the Chinese capital, has no interest in overthrowing the Communist Party. But these days she finds herself cursing the nation’s smothering cyberpolice as she tries — and fails — to browse photo-sharing websites like Flickr and struggles to stay in touch with the Facebook friends she has made during trips to France, India and Singapore.
Gmail has become almost impossible to use here, and in recent weeks the authorities have gummed up Astrill, the software Ms. Jing and countless others depended on to circumvent the Internet restrictions that Western security analysts refer to as the Great Firewall.
By interfering with Astrill and several other popular virtual private networks, or V.P.N.s, the government has complicated the lives of Chinese astronomers seeking the latest scientific data from abroad, graphic designers shopping for clip art on Shutterstock and students submitting online applications to American universities.
If it was legal to protest and throw rotten eggs on the street, I’d definitely be up for that,” Ms. Jing, 25, said.
China has long had some of the world’s most onerous Internet restrictions. But until now, the authorities had effectively tolerated the proliferation of V.P.N.s as a lifeline for millions of people, from archaeologists to foreign investors, who rely heavily on less-fettered access to the Internet.
But earlier this week, after a number of V.P.N. companies, including StrongVPN and Golden Frog, complained that the Chi-(p. A6)nese government had disrupted their services with unprecedented sophistication, a senior official for the first time acknowledged its hand in the attacks and implicitly promised more of the same.
The move to disable some of the most widely used V.P.N.s has provoked a torrent of outrage among video artists, entrepreneurs and professors who complain that in its quest for so-called cybersovereignty — Beijing’s euphemism for online filtering — the Communist Party is stifling the innovation and productivity needed to revive the Chinese economy at a time of slowing growth.
“I need to stay tuned into the rest of the world,” said Henry Yang, 25, the international news editor of a state-owned media company who uses Facebook to follow American broadcasters. “I feel like we’re like frogs being slowly boiled in a pot.”
. . .
The vast majority of Chinese Internet users, especially those not fluent in English and other foreign languages, have little interest in vaulting the digital firewall. But those who require access to an unfiltered Internet are the very people Beijing has been counting on to transform the nation’s low-end manufacturing economy into one fueled by entrepreneurial innovation.
. . .
Avery Goldstein, a professor of contemporary Chinese studies at the University of Pennsylvania, said the growing online constraints would not only dissuade expatriates from relocating here, but could also compel ambitious young Chinese studying abroad to look elsewhere for jobs.
“If they aren’t able to get the information to do their jobs, the best of the best might simply decide not to go home,” he said.
For those who have already returned to China and who crave membership in an increasingly globalized world, the prospect of making do with a circumscribed Internet is dispiriting. Coupled with the unrelenting air pollution and the crackdown on political dissent, a number of Chinese said the blocking of V.P.N.s could push them over the edge.
“It’s as if we’re shutting down half our brains,” said Chin-Chin Wu, an artist who spent almost a decade in Paris and who promotes her work online. “I think that the day that information from the outside world becomes completely inaccessible in China, a lot of people will choose to leave.”

For the full story, see:
ANDREW JACOBS. “China Further Tightens Grip on the Internet.” The New York Times (Fri., JAN. 30, 2015): A1 & A12.
(Note: ellipses added.)
(Note: the online version of the story has the date JAN. 29, 2015.)

Brin: Regulatory Burden Discourages Health Entrepreneurs

(p. A13) Earlier this month, at a private conference for the CEOs of his portfolio companies, venture capitalist Vinod Khosla interviewed Google co-founders Sergey Brin and Larry Page, asking them if the company might jump into health care. “It’s just a painful business to be in,” Mr. Brin replied, later noting that “the regulatory burden in the U.S. is so high that I think it would dissuade a lot of entrepreneurs.”
Mr. Brin is right. As a neurosurgeon-scientist and entrepreneur who co-founded a bioelectronic medicine company that deploys implantable technology to supplant drugs, I wish he were wrong.
. . .
. . . entrepreneurs should be allowed to carve out their own turf and let patients choose their own level of risk.
Consider the case of Goran Ostovich, a burly, 47-year-old truck driver from Mostar, Bosnia. Mr. Ostovich has suffered from long-standing rheumatoid arthritis and needed near-permanent bed rest. With his hands and wrists swollen and aching, he could no longer hold on to a wheel or even play with his small children. He tried a variety of medications. None worked.
When I met Goran at his doctor’s office in 2012, however, he didn’t seem at all afflicted with the disease. That’s because, one year earlier, he had been offered the opportunity to be the first participant in a clinical trial of a new therapy based on my invention. He received a bioelectronic implant and rapidly improved.
. . .
Since news of this clinical trial’s success became public, people from all over the U.S. stricken with rheumatoid arthritis have emailed, called and sent letters pressing for their shot at potentially effective–but not yet FDA-approved–treatments.
. . .
Some patients are very willing to take a calculated risk, . . .

For the full commentary, see:
KEVIN J. TRACEY. “Let Patients Decide How Much Risk They’ll Take; Take a tip from Sergey Brin: The health-care regulatory burden stops entrepreneurs from getting into the game.” The Wall Street Journal (Mon., July 28, 2014): A13.
(Note: ellipses added.)
(Note: the online version of the commentary has the date July 27, 2014, and has the title “Let Patients Decide How Much Risk They’ll Take; Take a tip from Sergey Brin: The health-care regulatory burden stops entrepreneurs from getting into the game.”)

Recovery Slows When Start-Ups Are Taxed to Pay for Bailouts of Failed Firms

Vernon Smith, whose views are quoted below, won the Nobel Prize in economics in 2002.

(p. A11) The rescue of incumbent investors in the government bailout of the largest U.S. banks in the autumn of 2008 has been widely viewed as unfair, as indeed it was in applying different rules to different players. . . .
. . .
The rescue, . . . , had a hidden cost for the economy that is difficult to quantify but can be crippling. New economic activity is hobbled if it is not freed from the burden of sharing its return with investors who bore risks that failed. The demand for new economic activity is enlarged when its return does not have to be shared with former claimants protected from the consequences of their risk-taking. This is the function of bankruptcy in an economic system organized on loss as well as profit principles of motivation.
. . .
Growth in both employment and output depends vitally on new and young companies. Unfortunately, U.S. firms face exceptionally high corporate income-tax rates, the highest in the developed world at 35%, which hobbles growth and investment. Now the Obama administration is going after firms that reincorporate overseas for tax purposes. Last week Treasury Secretary Jack Lew wrote a letter to the chairman of the House Ways and Means Committee urging Congress to “enact legislation immediately . . . to shut down this abuse of our tax system.”
This is precisely the opposite of what U.S. policy makers should be doing. To encourage investment, the U.S. needs to lower its corporate rates by at least 10 percentage points and reduce the incentive to escape the out-of-line and unreasonably high corporate tax rate. Ideally, since young firms generally reinvest their profits in production and jobs, such taxes should fall only on business income after it is paid out to individuals. As long as business income is being reinvested it is growing new income for all.
There are no quick fixes. What we can do is reduce bureaucratic and tax barriers to the emergence and growth of new economic enterprises, which hold the keys to a real economic recovery.

For the full commentary, see:
VERNON L. SMITH. “The Lingering, Hidden Costs of the Bank Bailout; Why is growth so anemic? New economic activity has been discouraged. Here are some ways to change that.” The Wall Street Journal (Thurs., July 24, 2014): A11.
(Note: last ellipsis in original, other ellipses added.)
(Note: the online version of the commentary has the date July 23, 2014.)