The Rationalist: The Death of Gut Instinct

It's not as if Larry Broderick flatly ignored what his heart was telling him about the kind of start-up he should try. Not at all. There just happened to be a few factors -- OK, so there were 34 -- that came before "gut feel" on the list of criteria he had devised to help him evaluate his options.

But Broderick will be the first to point out that even though you had to read almost the entire 37-item list before you got to it, he had scratched two tiny stars next to #35, signaling its elevated importance in his mind. About half a dozen other criteria merited one star apiece, among them "location of business," "price stability of products," and "exit-ability."

Furthermore, Broderick insists that he wouldn't have gone through with any deal that he didn't intuitively feel right about. Well, probably not. "If I had come across a business that was really attractive and my gut feel was not to feel right or to feel nervous, I don't know if I could have done it," says Broderick, now CEO of the SteelWorks Corp., based in Denver.

That said, Broderick didn't invent such a list for himself because he was worried that the left side of his brain would get the better of him during his 18-month hunt for a business to start or acquire. He was just trying to guard against a certain overpowering emotion. "I think it's a huge mistake to love a business," he says. "When a business gets to be like one of your children, you can't be objective and you make a lot of bad decisions."

Yes, he's serious. And he's not the only company builder who rejects the let's-do-hunch mentality. "I think this whole idea of 'I have a gut about this, and it's going to work' is a bunch of hocus-pocus," declares M. Frances Sponer, a Las Vegas-based entrepreneur who has founded 16 companies. "But that's what people do when they are starting companies. They just keep talking about it, and pretty soon they fall in love with it."

But wait. Isn't that, as the song says, the way you've always heard it should be? Budding entrepreneur falls in love with idea and naïvely embraces misguided assumptions about the cost, the time, and the customers needed to turn said idea into a viable enterprise. Entrepreneur then unearths the fortitude to repeatedly change those assumptions until aforementioned entity thrives. It's the proverbial roller-coaster trip, with only one force that's powerful enough to keep the rider strapped in for those 90-mile-an-hour drops: passion.

"I think it's a huge mistake to love a business. When a business gets to be like one of your children, you can't be objective and you make a lot of bad decisions."

In fact, nobody's disputing that someone needs to have more than lukewarm feelings to risk a mortgage or spend down a savings account for the honor of possibly losing a house or a nest egg in the ensuing endeavor. But especially now, when unparalleled technologies and unprecedented sums of money have converged to create the opportunity for more and more people to follow their passion (hey, who says it's too late to start the best Web site devoted to selling baby gear?), there's a case to be made that such passion needs tempering. Badly. "When there's a ton and a half of money around, you can be passionate and charge off, and you'll have investors who will follow you," says Jack Derby, president of Derby Management, a Boston coaching and consulting firm. "But now that the air is out of the balloon and the market has corrected itself, passion alone doesn't get you there. There has to be a baseline amount of excitement, but then you need to build on that."

The tool for doing so? A comprehensive (read exhaustive) list of criteria that fledgling entrepreneurs can use to analyze start-up opportunities as they present themselves. The method, which takes various forms, may sound a bit detached. But those who've come to use it are absolutely unequivocal in their enthusiasm for the results it produces. If starting a business is like choosing a lifetime partner, they argue, then the risk is that you'll end up marrying for love -- and nobody can afford to do that more than once (well, nobody besides Larry King). "If your goal is to be profitable and grow, then you need to give up your allegiances," says Joel Nichols, CEO of Apollo Design Technology Inc., a maker of specialized lighting products for the entertainment industry, which he founded after following his own list of 12 criteria. "You've got to filter out your biases. Absolutely."

No self-respecting entrepreneur ever aspires to be the guy. In the parlance of venture capitalists, that's the disciplined person who comes into a young company and, unencumbered by any of the entrepreneur's emotional baggage, makes the necessary but hard moves. (The label, needless to say, is genderless -- one of the foremost examples of the breed is Meg Whitman, who succeeded eBay's founder as president and CEO in 1998.)

Typically, it's that person who -- far removed from the passion of the entrepreneur -- instinctively reduces a business to a series of checklists, sometimes for its own good. But in the current environment, in which investors are bringing their own newly rigorous criteria to bear, it makes more sense than ever for a nascent company builder to take at least some of the fun out of starting a business -- before someone else does. For entrepreneurs "it comes down to channeling their passion," says Derby. "They've got to start thinking about management focus and team-building focus and investment focus. They've got to want to get it right."

Not surprisingly, the impulse to get it right comes from the experience of having gotten it wrong. "You can make a spreadsheet say anything you want it to," admits Sponer, who, at 53, is president and CEO of Ascentra, a $16-million family of health-care companies she either founded or cofounded. One of her earliest efforts, a company that set out to provide health care for prison inmates, never broke out of the start-up phase because its prospective customers weren't actually interested in its central proposition: saving them money. "I fell in love with it, and I talked myself into it," Sponer says. "I wasn't being analytical."

Not long after that, in 1990, she opened a sleep-disorder clinic that turned into a small nightmare. Even when the four-room center was fully operational, she discovered, after-tax profits amounted to an unacceptable 8%. Sponer says she got "bad information" from equipment vendors about the level of reimbursement. "We were so early in the market, the insurance companies hadn't determined what they were going to pay," she says. "I was naïve."