Why it's not the best idea to keep your business ideas secret
Game-changing innovation requires plenty of trial and error. Hence, modern concepts, such as the lean start-up method, stress that interaction and feedback are vitally important from the start. In reality, however, many entrepreneurs keep their business ideas secret for much too long. This has some devastating consequences - and surprising reasons.
When it comes to entrepreneurship and innovation, things often take unexpected turns. Instagram started out as a check-in application; YouTube was meant to be a dating website, and Intel, the world's leading manufacturer of microprocessors, was established to make memory chips. Photocopy machines did not take off until Xerox switched from selling to leasing them, and Apple originally intended to develop all apps for the iPhone in-house.
It is a well-known fact that the ideas and plans we initially come up with are not always the best. A product may lack important features but have others that are superfluous; key assumptions about clients and competitors may be wrong; enormous business opportunities may go unnoticed as a result of not being familiar with the market in question, and the right business model for turning a technical invention into a game-changing innovation may not yet have been found. Research suggests the following answers to these problems: open-mindedness, flexibility, market tests and as much communication as possible.
Entrepreneurs should discuss their ideas and plans with different people early on and regard critical feedback as a valuable asset when it comes to improving things. Those who shroud themselves in secrecy will get punished by the market.
There is evidence to suggest that entrepreneurs do not always follow this perfectly sound advice. A well-known investor, for instance, laments that “if we got a dollar every time someone told us to sign a non-disclosure agreement, we'd retire right now”. To gain further insights into this issue, a research project aiming to systematically investigate the real-world behavior of entrepreneurs was carried out by WU's Institute for Entrepreneurship and Innovation (Martin Finkenzeller, Nikolaus Franke, Ines Reith).
Out of 50,000 descriptions of start-up projects looking for co-founders, we selected 500 at random and presented them to 64 individuals who might be potentially interested in them. The examples were drawn from www.cofounderslab.com, a leading platform which provides entrepreneurs with a forum for finding co-founders. It goes without saying that, in order to succeed, the entrepreneurs must strive to disclose all the information that people need to form an informed opinion about their projects; otherwise, potentially interested individuals with complimentary skills will be unable to come forward.
However, our findings were devastating: In 71.2% of cases, the project descriptions were so general in nature that no evaluation whatsoever was possible. That is to say that even entrepreneurs seeking to find partners who complement their skills are, more often than not, reluctant to provide relevant information. One can easily imagine what this means with regard to entrepreneurs who prefer to go it alone.
To learn more about the reasons for the problematic fact that entrepreneurs tend to keep things secret, we carried out a large-scale experiment, collecting data on products, stages of development, clients, business models, etc. from a total of 754 entrepreneurs. To this end, and with a view to making our experiment more realistic, we enlisted the services of specially trained actors who convincingly pretended to be investors, clients, co-founders, and others.
The explanatory variables we used were motives we had established by means of carrying out a literature review as well as 23 in-depth interviews with entrepreneurs. Our findings are surprising: The entrepreneurs’ (un)willingness to readily explain their concepts was motivated neither by concerns about uncontrolled knowledge drain (i.e. theft of ideas) nor by a desire to get constructive feedback. Assuming entrepreneurs are rational, these should be the main drivers behind their behavior. After all, these two factors are, objectively speaking, the most important ones regarding potential opportunities and threats in the context of disclosing information.
By contrast, factors focusing on the quality of communication can, astonishingly, provide a lot of insight. Entrepreneurs who found the persons they talked to unpleasant and feared they might come in for disparaging negative criticism or “lose their face” in public were significantly more reserved than those who perceived the talks with their conversation partners as pleasant and appreciative.
It comes as no surprise that we are more inclined to interact with people we like than with somebody we do not like. But let us not forget one thing: There is a difference between getting a start-up off the ground and having a chat over a cup of coffee. What really matters during the early stages of a start-up is to develop it in a sensible manner and to gather information that can help achieve this goal. Personal feelings should take a backseat in this context.
However, many entrepreneurs seem to identify so strongly with their business ideas that they get offended when people criticize their “babies”. Hence, they prefer to avoid event constructive criticism.
Entrepreneurs who dream by themselves that they'll cause the “big bang” and, until then, stay far away from engaging in the necessary interaction with others seriously harm their prospects of achieving entrepreneurial success. This is a problem not just at the individual level. Collectively speaking, such behavior puts the breaks on entrepreneurship. Less interaction not only leads to a waste of resources, the constant reinvention of the wheel, more failures and fewer role models but also impedes the development of a self-reinforcing entrepreneurship community. As a result, the levels of innovation, progress, growth, well-being and employment will be much lower than they could otherwise be. Hence, this is a fundamental social problem.
The key to solving this problem is to nurture the right entrepreneurial culture. To this end, it is necessary to accept mistakes, deal with criticism in a professional, objective and proactive manner—and understand state-of-the-art concepts of entrepreneurship. Apart from the media, our education systems play a key role in this context. It is their job to inculcate in students a sense of what information entrepreneurs should share with whom, when and how. Entrepreneurs need to know when mum's not the word and silence isn't golden.