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8.27.98  
What Successful Entrepreneurs Sometimes Need: A Reality Check
Too much optimism leaves them open to being blindsided when times turn tough

Entrepreneurs are a self-confident lot, as a rule. But as the economic weather report turns from bright to cloudy, that may become a fatal flaw, says a new study of 187 businesses, which suggests a little tempered pessimism might be beneficial once in a while.

Small-business owners who do well give genererous credit to No. 1, with barely a nod to good economic times and luck. Those who've flopped, by the same token, blame everything but themselves, contend the study's authors, Larry W. Cox of Florida International University and Steven M. Sommer of University of Nebraska.

The implication: "Such biases undoubtedly lead to faulty reasoning, and eventually, to inappropriate entrepreneurial behaviors," says their study, the ponderously named "Causal Dimensions Underlying the Entrepreneur's Explanation for Success or Failure."

So, a rude shock may be in store for some entrepreneurs when the halcyon days of low interest rates, strong consumer demand, and a rollicking stock market turn awry -- in fact, the market is already sending out warning signals. "In good economic times, businesses can expand in spite of bad business practices," says Patty L. DeDominic, chief executive officer of PDQ Personnel Services Inc. in Los Angeles and an entrepreneur. "Sometimes entrepreneurs and executives confuse their skill with other business circumstances."

Cox and Sommer say their study shows that entrepreneurs need a reality check to keep them from leaping into an ill-timed venture in the conviction they can do no wrong or that what went wrong before had nothing to do with them. The professors' counsel: Find a knowledgeable person to advise you -- a banker, lawyer, venture capitalist, or expert from a business association.

That idea gets a rousing endorsement from the people who bet real money on entrepreneurs' judgment -- venture capitalists. Owners are consumed by the minutiae of daily management, says Richard Kroon, managing partner at Sprout Group, an affiliate of Donaldson, Lufkin & Jenrette based in New York. "An outsider, or a board of directors, or an adviser who doesn't have to be as concerned with the details of the business sometimes is in a better position to be sensitized to the great big global issues that can blindside the business operator."

Alex Stanton, chief executive of Stanton-Crenshaw Communications, a New York public relations firm he founded four years ago, says he saw exactly that happen to peers who ignored the warning signs as the 1980s' boom fizzled. "There was a sort of 'this-too-shall-pass' mentality" on the part of some owners, Stanton says. Others simply threw up their hands when they realized that their old tactics weren't working any more. "They ended up being downsized at an accelerated pace," he says.

What struck him at the time was that they all lacked good, objective advisers or a way to find them. "People went into a cocoon," he says. Stanton survived the downturn more or less intact, thanks to the advice he got in monthly meetings of the Young President's Organization, which he still uses as a sounding board. There, a small group of executives who are under 49 and run their own companies trade views candidly. "You could get this from a lawyer or an accountant, but that all comes with an agenda," Stanton says. "Here, you are in a position to share problems and get unvarnished advice."

With so many things working well now, entrepreneurs may find it hard to accept critical advice. But now's the time to find that trusted voice, when you still have time to think. There's already a babble of conflicting opinion on the economy, and if things get really bad, it's likely to become a deafening roar. Don't let it catch you unprepared.

By Jeremy Quittner in New York
jeremy_quittner@businessweek.com

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