Entrepreneurship’s first principles

I’ve started this Substack to work out and share some ideas that have been gradually developing over my two decades of teaching and studying entrepreneurship. I am driven to push to basic principles.

It’s been a little over 20 years since I taught my first entrepreneurship course at the Fuqua School of Business (Duke University’s business school). After 20+ years working with and in startups, I came to teaching thinking I knew something. Looking back, it’s surprising to me that, when I started teaching entrepreneurship, I wouldn’t have been able to articulate a single principle that now comprises my framing. Perhaps these ideas were inchoate—unformed vague intuitions in the back of my mind. But it has taken two decades of teaching several different courses at all levels from undergraduate to our most senior executive MBA cohorts and working with hundreds of startup teams to crystalize these ideas.

So, what are these ideas, and what does it mean to call them “first principles”? The principles rest on three concepts: empathy, value, and uncertainty. We can state them as:

· Develop empathy

· Create value

· Manage uncertainty

Now, you may ask, is there anything new here? While the concepts themselves are not novel, I hope that the overall organization as entrepreneurship’s first principles—as well as some of the nuances within that structure—will add something useful to how we think and practice.

Empathy

In the English language, “empathy” is barely 100 years old. Its sister concept, sympathy, has been around for longer. The early chapters of Adam Smith’s Theory of Moral Sentiments (Part. I, Section I, cc 1 & 2) offer a thoughtful discussion of sympathy as the foundation of our moral sentiments. Smith thinks that sympathy is the ability to put oneself in the shoes of another—feeling what the other is feeling. For my purpose, I would provisionally like to distinguish understanding another’s feelings from having those feelings oneself (i.e., when one sees another having the experience which engenders those feeling). Smith asks to imagine “our brother upon the rack” and feeling his pain because we can put ourselves in his shoes. In this scenario, it is difficult to imagine that we could truly understand the man’s pain without some concomitant feeling of pain ourselves. Perhaps then understanding and sympathetic feeling are inextricable here. But, in other situations, it may be easier to separate understanding from sympathetic feeling. In any case, it is the understanding that is relevant. I will use the term “empathy” to refer to this deep understanding of others. (This is not to say that caring is not relevant but more on that as I discuss value.)

Empathy as understanding has become the cornerstone of the design thinking movement—one of the few breakthrough ideas in our thinking about entrepreneurship. Entrepreneurship (and innovation generally) begins with an understanding of unmet needs. It requires us to understand not just the need itself, but the why behind it and the emotional context. Only in this way can we design a solution that truly meets the need.

This idea is fraught. With understanding comes the opportunity to manipulate or exploit. Many products have exploited addictive tendencies to induce greater consumption with harmful effects—for example, processed foods and beverages or social media platforms.

But this deep understanding, empathy, is part of the foundation of positive entrepreneurship: the power to help rather than exploit.

Value

Value is a term with many uses. Three distinct but possibly related meanings are important for its role in entrepreneurship: economic (or monetary) value, benefit (what is good for someone), and moral value. Taking these in reverse order, moral value is what underpins a moral principle. For example, we value truthfulness and integrity so we follow the principle that we should tell the truth and be honest. (Or vice versa: We value truthfulness because we believe that telling the truth is a rule we must follow—but this is a discussion for another time.) Similarly, kindness, justice, and respect are moral values.

Since Jeremy Bentham—the founder of utilitarianism—formulated the precept that what is right is what creates the greatest good for the greatest number, the question of what constitutes a benefit and how to measure them has been prominent in discussions of ethics. There is a degree of arrogance in thinking that we can decide or judge what is good for another. The economists’ substitution of utility for benefit is not helpful. Is benefit purely subjective or is there some objective standard? What do we make of the transitory nature of our own judgments? We should be wary of overconfidence in judging what is good for others, but we must make some judgment if we are to pursue good for others.

Finally, we have economic value. Entrepreneurs have taken on the responsibility of creating a return for all those who invested in the venture—employees, providers of capital, business partners, and others who contribute resources based on certain commitments from the entrepreneur. Having made these commitments, the entrepreneur is obligated to meet those commitments to the best of their ability.

Which of these three senses—economic, benefit, and moral— is involved in the principle of creating value? I suggest all three. An entrepreneurial venture should bring about a benefit for some constituency; its actions should realize moral principles; and it should create economic value.

Uncertainty

The economist Frank Knight was the first to recognize that entrepreneurs are willing to act in the face of uncertainty (Risk, Uncertainty, and Profit, particularly c. X). There have been many discussions and interpretations of this insight. I’ll make a few assertions of my own, which I believe are consistent with and in the spirit of Knight’s theory of entrepreneurship.

The first question is whether uncertainty is a state of mind or a state of the world. It is a state of mind—not knowing or lacking confidence. But it’s facts that are unknown. Entrepreneurs act in the face of unknown facts, presumably important ones. How do we make sense of this and why is one of entrepreneurship’s first principles bound up in this discussion?

To say that entrepreneurs operate in an environment of uncertainty is to say that their venture’s success depends on assumptions, not all of which are known to be true. As these unknowns become known, the entrepreneur will decide to continue, abandon, or change direction (“pivot”).

The discipline of managing uncertainty recognizes that entrepreneurs face severe resource constraints (time and money). Successful entrepreneurship requires wasting as little resource as possible on ventures that cannot succeed or on misguided strategies. The discipline of managing uncertainty has several dimensions. Assumptions—unknowns—need to be identified (harder than it sounds, especially for people deeply committed to their ideas). We can think of assumptions as what must be true for the venture to succeed—the necessary conditions for success. A testing strategy should aim to resolve the unknowns as efficiently as possible. This means designing tests or experiments, formulating clear criteria for evaluating outcomes of experiments, and determining the order or sequence of testing. This strategy will be guided by

1) What decisions depend on the outcomes of the experiments

2) Judgments of probabilities of the assumptions being tested

3) Design of informative experiments and estimates of how costly they will be

This discipline requires creativity and hard-nosed objective critical thinking.

First principles

In summary, entrepreneurship’s first principles are 1) develop empathy, 2) create value, and 3) manage uncertainty. I’ll conclude this short essay with some thoughts on the idea of first principles.

Euclid enumerated a set of definitions, postulates, and “common notions” from which he was able to deduce (i.e., provide rigorous proofs for) the results or theorems of geometry (Elements, Book 1)). Newton provided a few basic laws of motion from which he could derive the phenomena of nature, in particular, the motion of celestial bodies (Principia, see his comments in “The Author’s Preface to the Reader”). This is one sense in which we think of first principles—simple propositions from which we can deduce observable phenomena. The greater the scope of the principles and the simpler they are, the more satisfying they are to us.

To paraphrase slightly, Aristotle claimed that we understand something when we can reveal the first principles (Physics 184a12-13). It is in this spirit that I am exploring entrepreneurship’s first principles. But it is not primarily a positive theory. I am not claiming that all or even most entrepreneurs follow these principles—or even that they frame their actions in terms of these concepts. Rather, I am proposing a normative theory. I am proposing that entrepreneurs should follow these principles. I am suggesting that entrepreneurs will most likely achieve success if they build their ventures according to these principles.

Of course, “success” here means creating a worthwhile venture that brings benefit and good into being. Following these principles may not make the entrepreneur as wealthy as possible. But it will make them wealthy enough.