Malcolm Gladwell’s business blindspot

If you want to understand and write about entrepreneurs, then there is no substitute for working with them. I have spent more than 25 years partnering entrepreneurs, and indeed practising as one, and the past nine years writing about them every week for national newspapers. Unfortunately, best-selling author Malcolm Gladwell has not – and it shows.

A recent issue of The New Yorker magazine includes an essay entitled “The sure thing: How entrepreneurs really succeed”. This is a classic Mr Gladwell piece, suggesting that our preconception of business legends as risk-takers is wrong. He asserts that “successful entrepreneurs are seen as bold gamblers; in reality they’re highly risk-averse”. His speciality is a counter-intuitive revelation about human behaviour that demonstrates that our preconceived ideas are wrong. If this article is anything to go by, I think his journalism is shoddy.

The only sources he cites are biographies of tycoons such as Ted Turner and John Paulson, a slim book I wrote about a while ago called The Illusions of Entrepreneurship and similarly derivative material. Seemingly this grand new concept about how riches are accumulated is not founded on original interviews with entrepreneurs, or indeed direct experience with them. Therefore, at best, Mr Gladwell’s theory could be described as a hunch based on a few carefully selected examples, rather than a representative study.

I have participated in dozens, and observed in detail hundreds, of business moves by entrepreneurs. These include takeovers, product launches, start-ups and disposals. In hindsight the really profitable ones all appear one-way gambles and risk-free. But at the time, generally speaking, they were neither.

The launch of BSkyB, perhaps the most lucrative media project of our time, was fraught with danger and almost bankrupted News Corp. Similarly, the launches of the iPod and iPhone by Apple were both high-risk strategies and might have flopped.

We remember the winners but forget the hundreds of losers – they all appeared to be “sure things” at the time. That is why venture capital investing is hard to do well. Genuine innovation is a perilous game.

But I have another, perhaps more serious dispute, with the article’s assertion that “entrepreneurs only back sure things”. Much of the piece is given over to a discussion of Mr Paulson, the massively successful hedge fund manager who in essence shorted US housing mortgages. He is seen as the archetypal entrepreneur who bets big only when he knows he cannot lose. But Mr Paulson is not an entrepreneur: he is a Wall Street financier who takes short-term speculations, mainly, it seems, using derivatives – gambling with paper on paper.

Entrepreneurs, on the other hand, build real companies that employ people and generate value for an economy. They do not amass riches through the misery of others; they create wealth and jobs, and make the capitalist system work.

This is not simply a matter of semantics. It is a moral and philosophical issue. To me, Mr Paulson and others like him are the opposite of heroic – they are in essence parasitical. And his story should never serve as a case study in how to become a billionaire. The idea that he could be a model for anyone wanting to find a sure thing is odious. It is asserted that his fund made $20bn punting that the value of subprime mortgages would fall. He has become very rich thanks to a housing disaster and the near collapse of the US financial system. Millions of homes are likely to be foreclosed, and the US taxpayer was obliged to invest billions in near-bankrupt businesses such as AIG. Mr Paulson did not cause this mess, but characters like him are a catastrophic advert for capitalism. He may be rich, but is what he does to enrich himself productive in the slightest degree?

By highlighting such figures, Mr Gladwell is naively trumpeting bad capitalism and doing a disservice to real entrepreneurs. He reminds me of the “useful idiot”, the sort of sympathiser who acted as a cheerleader for Soviet communism, while the system was oppressing and imprisoning its citizens.

lukej@riskcapitalpartners.co.uk
The writer is chairman of the Royal Society of Arts and runs Risk Capital Partners, a private equity firm