Start-ups often follow the trajectory of a diver. There is a certain amount of preening on the plank before the entrepreneur discovers that he will have to finance the company himself. This chastening fact ends many a quest for independence. The true entrepreneur, however, will go on, spurred by a vision so compelling -- and a frustration so sore -- that he mortgages his house and borrows from his uncle. Then comes the entrepreneurial splash . . . or splat . . . followed by a terrible period of submergence, its silence broken only by appeals for money, as losses pile up.
During this stretch' which can easily last for years, established companies confidently declare that our entrepreneur has failed. That sound you heard, they all maintain, was a splat: The idea did not hold water. Venture capitalists, as is usual, had rejected it; experts, as always, laughed (did you say garbage?); banks nervously eyed the entrepreneur's dwelling. But the entrepreneur himself, desperate for funds, learned how to cut costs and bring a product to market.
It is a splendid product perhaps. It will change the world. But, alas, the unit cost is far above the price that the world will pay to be changed. The company loses money on each item sold, and the number of items is all too few. Losses mount and inventories grow. Finally the company cuts prices dramatically to clear the shop.
With that comes the first"surprise." Sales soar, personnel are hired, new equipment is purchased, and losses accelerate -- until there comes that magic moment on the learning curve when costs sink below the price, and profits come in.
For a few years the company goes on a runaway course of expansion. Then it suffers its crisis of growth. Although it is selling all it can produce, it cannot finance itself out of its own earnings. Inventory costs rise rapidly; borrowing soars; capital outlays increase; competition rears its head; and the world sours on change. Unless the entrepreneur can take decisive action at this point (Thomas Fatjo, for instance, replaced himself as chief executive officer), the company will struggle and possibly fail. The winners will enter a new trajectory of growth and possibly even go public, enriching all.
The pattern will vary drastically, of course, from company to company, from industry to industry. But almost nowhere can one discover a smooth parabola of growth and decay. The "big picture," elegantly modeled in dominant theories of macroeconomics, almost entirely misses this erratic dynamic of gains and losses, successes and failures, at the source of economic progress. Even microeconomic analysis or financial auditing can barely differentiate between a company on the verge of revolutionary growth and a company on the edge of bankruptcy. Examining balance sheets and P&Ls alone, an accountant can scarcely distinguish between a new bioengineering software company and a failing French restaurant.
The losses and "failures" of a start-up can most accurately be viewed as the costs of an experiment, the price of testing an entrepreneurial hypothesis. Karl Popper, the great philosopher of science, identified a valid scientific hypothesis chiefly by whether it is stated in a form in which it could possibly be disproven. If a theory -- such as that people born under the sign of Leo tend to be temperamental -- is so general and flexible that it cannot be proven wrong, then that theory is incapable of generating new knowledge, and is not scientific. It is a scientifically sterile proposition.
Failure plays the same role in economic progress that falsification does in the progress of scientific ideas. Every entrepreneurial venture is supremely specific and falsifiable and thus can contribute to economic advance, expanding the wealth of knowledge that fuels economic growth. Every new company or project embodies and tests a definite hypothesis about products or markets. Apple Computer Inc., for example, in early 1983 launched the Lisa computer at a price of nearly $10,000 (after an investment of almost $50 million), hypothesizing that sufficient numbers of people could be persuaded to pay that amount to acquire Lisa's integrated software and other features. This was an eminently falsifiable theory, and was soon proven false. The failure, however, yielded knowledge, and the knowledge another hypothesis: that enough people would pay onefourth the price of Lisa for the same technology, reembodied, with serious limitations, in a computer called Macintosh.
Meanwhile, at the same time that the Lisa hypothesis entered its testing ground, a proposition, utterly unentrepreneurial -- that is, with little chance to advance the course of human knowledge -- was making its way through Congress. This was a $3.6-billion jobs bill. Its terms ensured that jobs would be perceived as "created," regardless of their source, their long-term prospects, or what would have happened in the job market without the bill. Legislation like that, which is a typical outcome of bureaucratic thinking, is barren of experimental results. Called in philosophy a "performative utterance" -- for example, "Let there be jobs" -- it is a mere exercise of power. The analogy between science and business activity can be pushed even further. Take, for example, the vast number of economic acts that fall somewhere between the jobs bill and Steven Jobs's Lisa and Macintosh. Thomas S. Kuhn, author of The Structure of Scientific Revolutions, makes a useful distinction between "normal" science and "revolutionary" science. Most entrepreneurial ventures probably belong under the heading of "normal," because most such propositions -- to open a new fast-food franchise in a thriving shopping center, for example, or to plunge an oil well in a working field -- are unlikely to produce major gains in knowledge or financial power. In scientific terms, they merely add refinements to previously formulated working hypotheses.
