More and more, I am coming to the conclusion that the ability to see the big picture - to understand the venture process systematically - is one of those critical factors in the entrepreneurial manager's toolkit.
This has led me to thinking about the difference between experts and others. How does one person become an expert? And what characteristics of experts are present that might be discerned by an investor considering a business plan?
One of my colleagues at Babson College, Jeff Timmons, often talks of the "50,000 chunks" of knowledge entrepreneurs need to acquire to become experts in entrepreneurship. What he's hearkening back to is a 1960s study by Simon and Chase at Carnegie Mellon who were studying expert theory by using chess grandmasters.
Their conclusion was that these chess masters have learned pattern recognition through their extensive experience and this has led to their success. These chess experts could recall 50,000 to 100,000 chunks of pattern data about chess, and that they had assembled a series of events into one "chunk."
Jeff is implying that experience in entrepreneurship imparts pattern recognition skills that make subsequent decision making faster and more accurate.
So, an entrepreneur who is an expert sees particular business issues as systems and subsystems, according to this idea of chunking theory.
What does that really mean?
Look at valuation and all of the impact it has on ventures as just a single example.
At a base level, a person unacquainted with the idea of valuation will have to learn each individual component in the chain. What is the meaning of EBIT? How is it calculated? Why is it important? It is a long, tedious journey starting from this point.
At the next level, our person may begin to grasp the mechanical calculations that make up valuations (of various kinds - more complexity!) and may begin to grasp simple computations. However, this rudimentary knowledge will not be adequate to envision the effect of valuation on a new venture.
Way at the other end of the spectrum, an expert understands the absolute interaction between the components of valuation. The whole process - from comparing a company's proposed performance to market values for achieving it, to seeing the future prospects of the company opening up or being restricted by the proposed valuation in relation to the market, the risk the venture's leadership is taking in retaining their positions relative to the valuation value (because of the impact of missing on the growth that drives valuation, for instance), as well as the likelihood of attracting future investors - all are instantly apparent to the expert.
As another example, consider the process of understanding market competition.
An expert will not only be able to map the market and understand each competitor's particular characteristics, she will be able to describe the importance of the competitive process, and the likely competitive reactions and outcomes that will result when each competitive company has a particular set of resources, customers, and products. A classic example of this kind of expert system is Porter's Five Forces analysis.
It takes endless hours of experience to become an expert, usually amassed over years. At least that's my bias. And putting in the time doesn't promise results. You have to be willing to work at learning in every situation you find yourself. Remember Bill the golfer?
The old saw about having one year of experience repeated twenty times - as opposed to twenty years of experience - is a comment about our willingness to work to see new patterns.
When Esther Dyson says "always make new mistakes," this process of learning is what she is talking about.
So, when investors talk to entrepreneurs about their business, they are often testing as well as learning. Are they experts in the product? In managing market strategy? Where has their experience come from? What have they likely learned? Where are the gaps? Are they aware of them?
How many chunks have they mastered?