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6 Things Entrepreneurs Need to Know

2011 July 20
by Greg
Lemonade-Stand

Entrepreneurs are a special breed.  They’re fearless, full of ideas and energy, fun and inspiring to work with.

Unfortunately, they often self destruct and most have trouble making the transition from start-up to serious enterprise. Investors and employees are alienated, companies falter and nobody ends up happy.
 
Some people think that it’s just the nature of the beast, that at some point a company founder should step down and let “adult supervision” take over.  I disagree.  Entrepreneurs represent the heart and soul of the companies that they create and when they leave, something important is forever lost.  There are, however, some things they need to know.

1. The True Value of Financial Planning

Start-ups are long on hopes and dreams and short on process, but as the company grows financial planning becomes unavoidable.

Entrepreneurs usually take one of two paths, both of which are dangerous.  Either they get blinded by science and put excessive faith in budgeting (and take excessive action when things go awry) or don’t take the process seriously at all.

Financial planning is as much a learning process as it is an exercise in prognostication. The true value of building five-year financial models is not that you actually expect them to be accurate, but that it forces you to see how the numbers flow through the model given different assumptions.

How will a 10% shortfall in sales affect your cash a year from now?  How will a 5% increase in salaries affect gross margins?  What would be the effect of a 3-month delay in a product launch?  Internalizing basic relationships like these is essential to being able to make decisions on the fly.

2. The Dunbar Effect

In 1992, British anthropologist Robin Dunbar estimated the maximum size for cohesive communities to be 150, now known as the Dunbar number.

Successful companies, of course, grow far larger than that, which creates a very serious problem.  The family-type atmosphere of an early stage company can quickly take on an institutional feel.  Even worse, early hires often resent late comers who “don’t get the culture,” while newer hires see old timers as lazy, obstructive and stuck in the past.

Managing large numbers of people is inherently different than leading a small team, just as presenting to a group is different than having a one-on-one conversation.  Your visibility is diminished.  Subtle cues are lost.  There are more distractions and you don’t command the same level of attention.

However, there are some steps you can take to avoid the pitfalls.  In-house training programs help build a group dynamic among new arrivals and help the older generation get invested in up-and-comers.  Best practices programs and workshops improve connectivity and information flow as do intranet wikis, slideshares and knowledge bases.

Like anything else, a culture is something you have to continually build. You can’t just assume it will always be there because it once was.

3. The Role of Luck

In his book, How the Mighty Fall, uber-consultant Jim Collins points out that entrepreneurs fail to properly account for luck.  They tend to attribute their early success wholly to their positive attributes and their failures to bad luck.

Luck and chance play their role in any enterprise.  The truth is, sometimes you’re lucky and sometimes you’re not.  Just like even the best plans can go awry, even the dumbest ideas can stumble to greatness.  Get a hundred monkeys flipping coins, some will be vastly more successful than others, at least for a while.

The key is not to depend on luck.  When you find yourself lucky, you’ll be better of putting something in the bank – both money and good will – rather than doubling down.  When your luck turns bad, play defense.  If you can survive, eventually you’ll thrive again.

4. Intuition is Internalized Experience

One of the most frustrating things about entrepreneurs, especially those who had great success early on, is their faith in their own intuition.  They come to believe they have a “nose” for business, a “feel” for the market.  They can always point to evidence, a time where they defied the odds and the predictions of observers to prevail.

However, make no mistake, constantly going with your gut inevitably means that you’ll be making choices based on what you had for lunch.  Moreover, it’s been my experience, when their intuition fails them, entrepreneurs become excessively pessimistic.  They feel that they’ve “lost the magic” and fear that they will never get it back, leading them to become excessively risk averse.

As I explained in an earlier post about how to make better decisions, intuitions is, in essence, internalized experience.  It works great in areas where we have deep knowledge, but will fail us when the context changes.  That’s a key distinction that needs to be made: Go with what you know – think about what you don’t.

5. What’s Over The Next Hill

Any young company skates on thin ice.  You lack money, customer loyalty and clout with suppliers.  Start-ups often look with envy at established competitors who seem to have everything so easy.  They naturally assume that just over the next hill lies a new day of market dominance.

Those who think so should remember the cautionary tale of Sony’s Betamax.   A market leader with a superior product lost out to a weaker competitor with inferior technology. How?  They thought they were big enough to go it alone, while JVC built a consortium. In a few years, Betamax became obsolete while the VHS standard dominated.

The truth is, competition never ends.  The goal marker is always moving.  As I explained in an earlier post about game theory, markets have ways of working around even the most dominant player.  

Competitors work to undermine you.  Substitute goods appear.  Technology shifts. Customers and suppliers become wary of becoming dependent on you. The easy life will always be “just over the next hill” and there it will always remain.

6. Eventually You Become Full of Shit

Start-ups have cred.  They’re young, hungry, full of hopes and dreams.  They’re out to change the world (or at least an industry).  They’re all guts and verve.  What’s not to like?

What happens when they succeed?  They become big companies, with employees to pay, investors to keep happy, public relations machines and sycophants.  In other words, they become full of shit just like other big companies.  As Henry Mintzberg wrote, “to be superficial is an occupational hazard of managerial work.”

That’s probably the hardest thing for true entrepreneurs to take.  Many of them never get over it.  They yearn to go back to when it all was “real.”  Some leave by choice, recognizing that corporate life is not for them, while others get pushed out and remain bitter for years or even lifetimes.

However, there’s no reason that entrepreneurs can’t become successful executives, just like denizens of the corporate world can launch successful start-ups.  The key lies in recognizing that the two are very different things.

– Greg

One Response leave one →
  1. Patrick Brooks permalink
    July 20, 2011

    I’m absolutely certain of that. Brevity is the soul of wit:-)

    [Reply]

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