Filthy Stinking Profits: Entrepreneurs have a nose for potential by DANIEL J. SMITH, ZAC THOMPSON

Imagine a product that leaves your home covered in soot. Worse, imagine it makes your entire neighborhood smell like rotten eggs. The stuff discovered in Lima, Ohio, did just that. “Even touching this oil,” writes historian Burton Folsom, “meant a long, soapy bath or social ostracism.”

Why even bother to pump such “skunk oil” out of the ground?

When John, an entrepreneur, brought a new “investment opportunity” to the board of his company, suggesting that it spend millions of dollars to buy and store the stinking Lima crude, they must have thought it was the dumbest idea they’d ever been asked to risk money on.

But John was confident that a technology could be found to make the rejected oil usable. Many successful entrepreneurs can sympathize with how he must have felt. They likely have been in similar situations, where no one else saw the hidden potential they did in an idea or innovation.

In fact, Sam Altman, the president of the famous Silicon Valley business accelerator, Y Combinator, revealed that to make profits, his firm specifically searches for companies in which other investors don’t see the hidden potential. “We don’t want ideas that are whatever the current fashionable thing is,” says Altman. “So by the time everyone is already starting something in some category, it’s too late.”

Altman goes on to explain that to make a profit, you have to find ideas that look like bad ideas to most people, but have the potential to actually be good ideas. That investment strategy resulted in the creation of successful companies such as Dropbox, Airbnb, and Reddit.

The most assured way to become rich in a market society is to discover a new idea that can enhance the lives of millions of consumers and be the first to invest in it. As soon as the pathbreaking entrepreneur demonstrates an idea’s potential by earning profits, other investors will quickly enter the market. The increased competition will quickly spur innovation, quality improvements, and lower prices, benefiting millions of consumers in the process. In fact, William Nordhaus estimates that, while initial innovators do earn handsome returns, consumers are overwhelmingly the primary beneficiaries of innovations; innovators receive only about 2.2 percent of the total value to society generated by their innovations.

Even computers and televisions, goods and services that, with perfect hindsight, should have been seen as obvious profit opportunities, demonstrate the skepticism that often surrounds new innovations. Ken Olsen, the founder of Digital Equipment Corporation, famously predicted in 1977 that “There is no reason anyone would want a computer in their home.” Darryl Zanuck of 20th Century Fox figured people would “soon get tired of staring at a plywood box every night” and predicted household television would never take off.

The path to enhancing the lives of millions of consumers isn’t always obvious or easy. It is often fraught with great personal risk and financial peril, and met with great skepticism.

Perhaps no one exemplifies taking the risky and difficult path to improving others’ lives more than our skunk-oil entrepreneur: the world’s first billionaire, John D. Rockefeller.

While some have heard of Rockefeller’s humble background and the hard work he devoted to building his fortune, few people know the incredible foresight he exhibited in pursuing ventures that nearly every other investor believed to be bad investments, allowing him unexpectedly to improve the lives of ordinary people.

When it came to skunk oil, Rockefeller saw an opportunity to employ resources that no one else saw a use for. He was convinced that he could purchase up the dirt-cheap crude oil and then invest in discovering a technological innovation that would make it usable. When Standard Oil’s board initially refused to finance the risky project, Rockefeller declared that he would stake some of his own personal fortune, some two to three million dollars, eventually causing the board to grant Rockefeller permission. The investment proved lucrative, as Rockefeller found a technology that would refine the oil while neutralizing the horrid smell. The discovery brought the price of kerosene down to record lows, benefiting millions of consumers (not to mention helping save the whales in the process!).

Rockefeller had a knack for seeing the hidden potential in opportunities that no one else saw. When the Mesabi iron mine was discovered in Minnesota in the late 1800s, investors avoided what they considered to be a risky venture because Mesabi’s ore was notorious for clogging drilling machines. Even iron and steel experts such as Andrew Carnegie saw the ore as worthless; he, too, chose not to invest in the mine. Only Rockefeller made the bold move of investing in the mines. As with skunk oil, he was certain that this ore could be refined and made useable with, at that time, nonexistent technology.

Rockefeller was, once again, proved right when he was later able to provide cheap and useable ore to steel manufacturers after a technology was discovered that made the ore usable. His ability to see a profit opportunity where no one else saw one substantially reduced the costs of steel manufacturing. Cities such as Pittsburgh and Birmingham exploded in economic growth as new factories were opened to utilize the new source of ore. A reduction in steel manufacturing costs allowed for the construction of new railways, bridges, the first skyscrapers in Chicago and New York, and an overall greater infrastructure. Carnegie came to regret his initial judgment and eventually bought the mine’s entire output from Rockefeller.

Not just hardworking and thrifty, Rockefeller also had a natural inclination to see profit where other investors and entrepreneurs saw nothing. Just as importantly, Rockefeller was willing to take great risks investing in projects that no one else dared to invest in. He recognized, as entrepreneurs do today, that substantial profits can only be made by discovering the hidden potential in opportunities that others did not see. Once the first pathbreaking entrepreneur realizes profits, additional investors enter the field, quickly driving down costs and dissipating profits for new investors, all to the benefit of consumers.

Entrepreneurship, when left unfettered, is a continuous process that encourages the creation of seemingly impossible products and services that enrich the lives of billions.