The Dark Side of Entrepreneurship (Part 2)

Legal but Illegitimate: Gambling, Prostitution, and Tobacco Use

When we talk about entrepreneurs, we usually think of the likes of Elon Musk, Steve Jobs, and Jeff Bezos, whose innovative minds have created progress, wealth, and jobs. But there are also innovators who successfully operate outside the bounds of legality and existing conventions, exploiting new business opportunities with a great deal of creativity and energy. Around the world, more and more researchers explore in which ways people engage in so-called dark entrepreneurship, the lessons to be learned from them, and the conditions that allow to turn such borderline endeavors into something that benefits society; in other words: the light that comes with the dark.

In this second part, Nikolaus Franke, Academic Director of the Professional MBA Entrepreneurship & Innovation at the WU Executive Academy, closely scrutinizes legal yet illegitimate kinds of entrepreneurship. Following the “informal entrepreneurs” of part one, this part will be about “controversial entrepreneurs.”

There have always been segments in society for which the respective legislation is at odds with what the average citizen considers ethical. In medieval Europe, the so-called “dishonorable professions” of street sweepers, charcoal burners, and executioners, as well as “travelling people” such as rag pickers, travelling musicians, and tinkers were all doing legal work. Yet their families were ostracized because these lines of work were considered immoral. Also today, there are many jobs which are legal but perceived as unethical by wide swaths of society.

Legal But Illegitimate: Controversial Entrepreneurship

Gambling is a textbook example for controversial entrepreneurship. As with many things, the demand creates the offer. People have always gotten a kick out of pushing their luck – the oldest dices preserved date back 5,000 years. And the worries about potential negative consequences of gambling are as old as the game itself: addiction, loss of one’s fortune, and crime. Despite extensive legislation regulating the field, even the legal part of this business segment is viewed as controversial by society.

The same applies to areas such as the so-called "red light milieu", harmful products such as tobacco and the list goes on. If a sizeable proportion of society is suspicious about an industry, this can have a significant effect on the offer, which will then shrink. Many people and companies won’t even consider getting active in these fields. But if there is (high) demand, such segments exude an overwhelming appeal and attract business-minded entrepreneurs. Las Vegas and Monte Carlo/Monaco bear proof to this principle – these cities’ growth was fueled by the entrepreneurial spirit associated with gambling. Today, novel types of online gambling, which seem to grow in number by the day, are a form of controversial entrepreneurship. What’s interesting is that gambling also lures scientific entrepreneurs. The most important tenets of probability theory and statistics were discovered thanks to mathematician Blaise Pascal's work with dice games.

Entrepreneurs Break the Rules

Leaving their mark, creating something new, and having their contributions acknowledged are important motifs for entrepreneurs. Against this backdrop, it’s not surprising that most of them care about the moral value society attaches to certain activities. In fact, the rapidly increasing segments of social and sustainable entrepreneurship show how strongly many company founders are driven by purpose. Innovation is at the core of any start-up, and innovation is by definition a deviation from the existing way of doing things. In other words: entrepreneurs break the rules; they think outside of the box; they often go against the grain.

The faux pas and provocations entertained by entrepreneurs such as Richard Branson or Elon Musk are legendary. And there is even scientific proof of what’s called the red sneakers’ effect, according to which people infer status and competence from signals of nonconformity such as an unconventional choice of outfit. Some entrepreneurs apply this approach to existing moral standards. For example Beate Uhse (who opened the world’s first sex shop in Germany in 1962), Hugh Hefner (Playboy) or Larry Flynt (Hustler) did not give a hoot about public opinion and society’s moral values when they founded their enterprises.

Three Lessons to Learn from Controversial Entrepreneurship

1. Spotting Trends before They Happen – and Shaping Them

One important reason why the three entrepreneurs mentioned above were so successful is that societal norms are not as rigid as one might think. Not only do they constantly change, they can also be actively influenced. These three major players in the adult entertainment industry predicted the enormous market potential the sexual revolution would create before anyone else did. What was considered taboo in the 1950s has become mainstream today, and the many lines crossed and the scandals staged by these three controversial entrepreneurs surely played their part in this development. A trend spotted way before it takes off can turn a little investment into gigantic profit. This is why the highest-grossing film of all times with a yield that was 2.4 million percent of its production costs is not “Titanic” or “Avatar” but a cheap porn movie shot in 1972.

2. Handling Headwinds

Joseph Schumpeter defines Innovation as a “creative destruction.” This is why any entrepreneur will meet resistance by those benefiting from the status quo. Controversial entrepreneurs have societal headwinds to deal with on top of that. So there’s a thing or two we can learn from them with regard to being persistent and unswerving. We can also follow their lead when it comes to dealing with the economic and organizational repercussions of their role as outsiders. Businesses perceived as illegitimate by society have to work much harder when it comes to marketing, sales, external cooperation partners, and recruiting than “normal” enterprises.

3. Enabling Identification

For a company to be successful, its employees must be able to identify with it as well as its products and services. This is usually an easy feat for social enterprises and organizations with humanitarian goals. Their aspirations don’t clash with society’s moral beliefs. Social recognition for such business endeavors is a safe bet. This is not the case for controversial companies, which are viewed with suspicion and at times even stigmatized. But, as mentioned before, we can learn much from such extreme cases. How do they still manage to create a feeling of legitimacy within the organization and with close cooperation partners? Is there a joint mission all these players can unite around? Their measures and framing methods can be eye-openers for entrepreneurs in legal and legitimate fields.

Lessons Controversial Entrepreneurs Should Learn

No legal system in the world can cover all eventualities. There must be societal norms to close the gaps. Society simply could not flourish without values such as decency, politeness, compassion, solidarity, and many more.
“Whatever is not forbidden is permitted” (Schiller) is thus a short-sighted perspective.
When a highly successful entrepreneur was asked what he considered the most important rule, he had to think about it for a long time. Then he answered: “Sometimes you have to say no to an entrepreneurial opportunity.” None of us can do without a moral compass.

That’s even more the case when we look beyond controversial to criminal entrepreneurship, the delineations of which are sometimes blurred. The third installment of this series on the dark side of entrepreneurship will deal with this segment.