23 January 2007

Employees Becoming Entrepreneurs

If anything has defined the great institutions of Western Civilization, it is their eventual adoption of a model that allows individuals greater freedom and autonomy. We’ve seen this in the church, in the state, and even in financial markets. I suspect that we’re about to see it in the corporation. Popularizing entrepreneurship within corporations will inevitably spill into other sectors as well. As we do, the impact will be a century in which social innovation will become as common as technological innovation has become in the last century. The consequences of this can hardly be imagined.

Entrepreneurs typically start businesses. More broadly, entrepreneurship refers to creating some kind of social construct, institutionalizing a solution to some need that was previously not met or not met as well. There are, in my mind, layers to this. The first guy to start a drive-through hamburger stand was a pioneering entrepreneur; the guys who imitated him were also entrepreneurs, but of a lesser kind; the guys who franchised from those imitators were entrepreneurs as well, but, once again, of an even lesser kind. All accept variability in their income – variability that is ultimately a function of how well they’ve put together an operation that meets market demand. This is in contrast to the employee who accepts little variability in income. Additionally, entrepreneurs almost invariably risk not just their income but their capital. But the lesson of the pioneer with the concept, the imitators who follow, and the franchisees who follow the imitators, points out that there is not simply one level of entrepreneurship.

So let’s look at a traditional company, using an example from 50 years ago. An entrepreneur starts it. One of his acts is to hire employees. If the company does well, those employees have “job security,” but it is only the entrepreneur who sees increase in his wealth because of increases in company equity.

Now, let’s take an example from 7 years ago. An entrepreneur not only starts a business, but he makes his employees a part of it through stock or stock options. Now, if the business increases in value, the employees see their net worth rise as well. They have capital in the game as well as their efforts.

Finally, let’s take an example 5 years from now. A traditional entrepreneur starts a business and in the course of the business has to establish legal, accounting, IT, finance (etc.) infrastructure. He has employees. Once the business is underway, a subset of the employees sees an opportunity to create a new market or to patent a new product.

At this point the company can handle it one of two ways. The traditional way would be for these employees to undertake the project and enjoy whatever rewards the company has – promotions, stock sharing, a bonus.

If the company were more entrepreneurial, the original entrepreneur would see this as an opportunity to become a venture capitalists of sorts. He would potentially finance this new venture and the employees who came up with the inner-business plan might even put some of their own money into the venture. They would now make the same or less than before, they would have invested their own money, they would be using the existing infrastructure for its expertise (the patent attorney, the accountants, the IT guys, etc.). They would be able to focus on developing the product and market (or perhaps only the product, using the existing marketing group).

If the product takes off, the original entrepreneur does really well – better than those venture capitalists who do so well. Why does he do so well? Because he’s not just got a piece of the venture, as a venture capitalist would, but his piece is bigger because he has basically provided these employee-entrepreneurs with an incubator, providing them with the core elements of the business that they might not have the capital, inclination, or expertise to provide.

The employee-entrepreneurs make more money as well. Whether the venture is actually spun off or merely valued by an outside agency, it will have some equity value. As the “entrepreneurs,” the guys who started this venture will have a chunk of this. That chunk they have may actually generate more money for them than what is paid to the CEO.

What this suggests is that the corporation slowly changes over. It started as a bureaucracy that employees you in a function and is beginning to transition into a project-centric company that puts more emphasis on regularly creating new products or services than in maintaining the bureaucracy. Finally, I predict that the evolution will continue until you have a created a place where innovation within the corporation has echoes of innovation within a country. This is possible in part because of the transformation of financial markets – corporations have access to capital and the capital investment tools that previously only banks had.

I see this transformation as a means to stimulate an enormous amount of innovation and equity creation. And, of course, provide more autonomy to the individual. In my mind, the employee would not be required to become an entrepreneur, but would have the opportunity to become one without risking everything to do it.


Vladimir Dzhuvinov said...

It's interesting how you speak of collective concepts (the company, the Western civilisation) granting greater freedom to the individual. As if they were a higher power separate from people :)

What kind of twisted reasoning is this? ;)

It is the individual who gives more freedom and autonomy to himself! Not his concept of God, the company, or the civilisation (Western or whatever...)

Ron Davison said...

Vladimir - you make a serious point in a teasing way. I very much agree that the individual will have to change his notion of normal in order for employees to become more entrepreneurial.

I would also argue that Bill Gates could not have been successful in Medieval Europe or, for that matter, current day Sudan. The group does very much determine what the individual can do because the individual can't create businesses, nations, etc., without the group.