American Document/The Indispensable Entrepreneur
Forstmann, Theodore J.
AMERICAN DOCUMENT THE INDISPENSABLE ENTREPRENEUR Lease a man a garden and in time he will leave you a patch of sand. Make a man full owner of a patch of sand and in time he will grow there a...
...I was such a person, and that embarrassing fact led me twelve years ago to found Forstmann Little, which has now grown to a multi-billion-dollar industry...
...Although their 26 THE AMERICAN SPECTATOR FEBRUARY 1991 rhetoric was seductively entrepreneurial, these people were fundamentally anti-capitalist...
...ven the ancients understood the different results achieved through leasing from an all-powerful state and working with full rights to property and profit, and most of the Western world now sees the benefits of free markets and free societies...
...Economic policies must not hinder entrepreneurs from launching companies based on new concepts and technologies...
...The macroeconomic context included high marginal tax rates, permissive monetary policies, and ever-increasing federal regulation...
...Such a world is dominated by denial, rejection, difficulty, and doubt...
...Think of the root system as entrepreneurial America...
...It was our task to avoid risk by keeping appropriate businesses and selling those that were inappropriate...
...It was management's task to make the right operational decisions...
...Incentives are necessary to allow individuals to risk energy and capital on new investments, and innovation must be encouraged by all means possible...
...George Gilder remarks: The typical entrepreneur is not a respondent to existing demand, but an innovator who evokes demand...
...The best that large companies can do is make more and better copies of a good thing that already exists...
...Make a man full owner of a patch of sand and in time he will grow there a garden on the land...
...The economist Joseph Schumpeter, Theodore Forstmann is senior partner of Forstmann Little & Ca This article is adapted from a speech delivered at the Venturer of the Year Awanis in London last falL writing in the 1930s, correctly spoke of capitalism as "a process of creative destruction...
...The lowering of marginal individual tax rates throughout the 1980s allowed the person of enterprise to keep a significantly higher proportion of the fruits of his labor,-and created tens of millions of new jobs and the longest uninterrupted expansion in this country's history...
...At that time, many of the most productive citizens of both countries fled abroad, proving the adage that highly progressive tax rates do not redistribute incomes—they redistribute taxpayers...
...Jude Wanniski, economist and author of The Way the World Works, has compared the capitalist economy to a tree: A tree has a vast underground root system in order to collect nutrients and moisture and provide it foundation...
...Societal values, too, can stifle entrepreneurial spirit...
...Forstmann Little's response to the calamity was thought revolutionary at the time...
...It should be pointed out that the perception of increased leverage was largely illusory, as we employed our own subordinated debt at rates 50 percent or more under the market, but with real equity ownership attached...
...We learned the hard way that a culture dominated by materialism actually suppresses the spirit of enterprise...
...All participants wereto have a significant equity in the business, which they had bought and paid for...
...Conversely, high individual income tax rates in both the United States and the United Kingdom in the 1970s stifled individual initiative...
...But mysteriously, societal values were not, and what had begun as a worthwhile entrepreneurial exercise became a free-for-all that disintegrated in its own excesses...
...In the United States, the significant lowering of the capital-gains tax rate by the Steiger Amendment in the late 1970s created massive investment in technological ventures, securing America's continuing lead in computer and microprocessing industries...
...Imitators appeared by the hundreds, of course...
...To quote Churchill once more, "Success is often nothing more than moving from one failure to the next with undiminished enthusiasm...
...Such people are always found disturbing, even irritating...
...What we were after was unanimity of purpose, with all partners seeing risk and reward in precisely the same way...
...For these, a lawyer or a bureaucrat will do nicely...
...In the financial sector of the United States in the 1980s, a culture of cynicism grew, as unbridled ego and greed created a generation adept only at inventing and shuffling basically bogus securities, and equally inept at envisioning or participating in anything real or lasting...
...He realized that, while conventional wisdom holds that capitalism can best be understood by how it administers existing structures, the truly relevant issue is how it creates and destroys them: In capitalist reality, as distinguished from its textbook picture, it is not static competition which counts, but the competition from the new commodity, the new technology, the new source of supply or the new type of organization...
...One could even say that free-market capitalism is fundamentally dependent on the entrepreneur...
...Such characteristics of capitalism as interest, credit, profit, and business cycles arise from innovation, making the entrepreneur the central figure in distinguishing capitalism from other systems...
...Since there can be no capitalism without capitalists, governments must cease shifting taxes and inby Theodore J. Forstmann terest burdens from large enterprises to individuals...
...Our managers, and many like them elsewhere, thought more like owners, and were compensated as such...
...Failure is the entrepreneur's strength as well as his sadness...
...Yet, to deny failure is to deny knowledge...
...he is not a user of technology, but a producer of it...
...The result, as we know, was "stagflation": high inflation and low real growth...
...THE AMERICAN SPECTATOR FEBRUARY 1991 27...
...If we appreciate the difficulties with which such unique and misunderstood people have to cope, yet recognize their indispensability to the capitalist system, we should take heed of which conditions cause them to flourish and which to flounder...
...Thirdly, and of signal importance, we envisioned senior managers as full partners...
...The leaves and blossoms that crown the tree are small in number compared to myriad fingers of the root system...
...If it is overtaxed, it dies...
...Our conception was based on a novel form of corporate evaluation and reorganization...
...If there is no moisture or nutrients to collect, the tree dies...
...ailure is the constant companion of the entrepreneur...
...and by providing a capital structure that would decrease real risk and increase real reward...
...If Adam Smith himself could not see the entrepreneur clearly, think of how enterprise has suffered at the all too visible hands of his liberal successors this century, those who call such work and sacrifice an expression of greed, such dreams nostalgia, such profits unearned, such rewards pure luck...
...Think of this crown as mature corporate America...
...We know empirically that most new jobs come into existence not in large enterprises but in small, growing ones...
...Virtually the entire spectrum of democratic politicians and economists have, in varying degree, seen capitalism as the centerpiece of Western democracy, yet most have been not only uninterested in the entrepreneurial dimension of capitalism, but actually ignorant of it...
...despite junk-bond-driven excesses over the last ten years, the macroeconomic climate for entrepreneurship was favorable...
...As Churchill said, "Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few see it as a sturdy horse pulling the wagon...
...This, of necessity, makes the entrepreneur a belligerent person...
...Their focus was on the short rather than the long term, on consuming rather than producing, on taking rather than giving...
...Indeed, they are completely unemployable...
...he is not an optimizer of resources, but an inventor of them...
...For small changes entrepreneurs are unnecessary...
...But, contrary to preconception, his is an internal belligerence: his zeal to prove himself superior comes from a desire to attain not merely the results of success but success itself...
...Examples abound of how government policy can increase or decrease entrepreneurial activity...
...ur experiences at Forstmann Little have been typical of the entrepreneurial experience...
...And although innovators are, when successful, unceasingly imitated, they are always outsiders to the "establishment...
...We know that most new products, and indeed new industries, are created by individuals and small businesses...
...Even Adam Smith, in The Wealth of Nations, misunderstood the entrepreneur's role: In spite of [rich men's] natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they proposed from the labours of all the thousands they employ, be the gratification of their own vain and insatiable desires . . . they are led by an invisible hand . . . and without extending it, without knowing it, advance the interest of society...
...Those of us who have dreamed or created, who have started a new business or managed one through change, can appreciate large-scale changes...
...Secondly, we wanted to impose the "right capital structure," one which entailed usingwhat looked like a lot more debt than had previously been thought viable...
...The entrepreneur, as a creator of the new and a destroyer of the old, is constantly in conflict with convention...
...He inhabits a world where belief precedes results, and where the best possibilities are almost surely invisible to others...
...First, we sought to acquire companies with a predictable cash flow, as evaluated by their applicability to the business and financial criteria we had developed...
...In corporate America in the 1970s, management was well entrenched and shareholders virtually disenfranchised...
...There was no credit available for takeovers and very little for friendly mergers and acquisitions...
Vol. 24 • February 1991 • No. 2
