Three mistaken stereoptypes of an entrepreneur

Daniel Isenbergy, author of Worthless, Impossible and Stupid has listed down three interesting and wrong stereoptypes of an entrepreneurs.

1. Entrepreneur are not always innovative

The author has given a very nice and crisp definition of what entrepreneur does. He says that " An entrepreneur creates value. He creates a value that is recognised by the market." Sometimes, to create a value, he has to innovate. But, most of the time, he need not innovate.

I have been meeting entrepreneurs and coaching them from last 3-5 years. I was surprised to notice that most of the entrepreneurs i have met are not innovative. They sometimes start the venture with a very novel idea. But once that idea is established, they are just in the 'routine' of doing the same 'business' over and over. They forget that money was a side effect of their desire to do something novel. Instead of making money work for them, they start worrying about 'losing' the money. Once this happens, the zing in their life goes. And they become a business man ! You can see this people in entertainment field. There are very few like Aamir khan, or Abhay Deol, or Imtiaz Ali who never forget that 'Money is the side effect of business'.

2. Entrepreneurs are not always experts

With the advent of of VC industry, there are many entrepreneurs who start a venture because they can create value. We seem to have forgotten this. Steve Jobs was an entrepreneur who did not design his first computer, he was a person who could dare to create value where none could see. We have forgotten that this hugely daring and optimist breed, which Daniel Kahneman says are the lucky people we have in our society, is becoming extinct.

The author notes that  50% of the entrepreneurs started their ventures in an area they knew nothing about. He shares a very interesting insight about the 'expertise of entrepreneur'. He says that 'Knowing something too well can come in the way of being an entrepreneur'. And when you meet big experts who are researchers and professors you realise how true is the author ! So if you are an entrepreneur, do not pursue expertise in one area of focus !

3. Entrepreneurs need not be young

Today, with advent of VC and intrapreneurship in companies, you will find entrepreneurs starting their first venture even in late 30's.

But young entrepreneurs are more to be seen, because they have less to lose. Their ignorance of market reality paradoxically makes it easier for them to take the risk. On the other hand, their lack of market common sense can make them prone to failure.

For instance, i met a daring entrepreneur , Unmul, who at the age of 19 has started coaching classes for 12th science students. The classes ran well in a small town. So he decided to come to a large town and launched the same coaching class, not realising the customer differences between small place and big town, not understanding the difficulties of transferring the local reputation to the new town, and without understanding the changes required in business model. The new business naturally went into lot of trouble !

Actually, for young entrepreneurs like Unmul, there is a easy method to avoid this mistake. If they can find a mentor who can help him see these pitfalls, they can channelise their energies far more productively. But in the desire of not wanting to meet people who 'object' to them, they also miss the pearls of wisdom. 

Do strategic and execution audit of your business

In a family managed business ( family managed business can range from 10 crores to 500 crores), it is often very important to get an objective perspective of the business so that the right priorities are set.

As the processes and systems in these companies are not well set, these companies often lack the wherewithal to 'scale up' the business. More often that not, the 'weak chain in the link' is not the execution, but the strategy that has not been planned properly. And sometimes, the issue is not the strategy nor the execution, but the divergent directions of family representatives that often pull the company resources in different directions.

A strategic audit of such a business, competently and objectively done, often guides entrepreneurs in providing directions in four areas that can make a difference of success and failure for the business:

1. Is the strategy of the company right ?

Often the business, when it commences, has a set of competitors, regulations, substitutes and customer segment to deal with. But as the industry grows and matures, the strategy has to be modified radically, or just  tinkered a bit. This is true for all types of business, but value propositions in some businesses require more frequent reviews. For instance, businesses in service sector, retail sector, like software require frequent reviews because these businesses face lot more upheavals than the others.

Sometimes the strategy requires a review, because a company is caught in a business that is becoming less attractive every day. Here the company should quickly review its strategy and alter the direction, if necessary. Sometimes, the company also does this review to identify, what is called the sweet spots in the businesses that can multiply the company's results in geometric proportion. For example take this example of construction business. 

2. Is the business model of the company right?

Having a right strategy is not enough to run a business. One should also have the right business model to succeed. Business model, as we have discussed earlier, is the right combination of nine components ( 4 revenue, 4 inputs and one value proposition) that are appropriate for the company's size and ambitions. More often that not, entrepreneurs tinker only with one component which often does not produce any result because these nine components are correlated with each other.

3. Are the resources appropriately placed in the different sections of the business?

In a family managed business resource allocation - of money, key people, and time - is often a bone of contention as different owners in the family have different viewpoints of a business and therefore tend to direct companies in different direction, sometimes directly in conflict with each other. Understanding the strategy and business model enables family owners to align themselves with each other without interpersonal conflicts and egos. This alignment enables family managed business to unlock its true potential.

4. Is the company executing the strategy appropriately?

This review should naturally be done, only after one is certain that strategy is right for the organisation. Otherwise a company may support a wrong strategy, and despite executing it well, may still fail.

This execution review will point out the gaps in the organisation that are causing the organisation to produce less-than-desired results. The gap could be in processes or systems, or could be the professional capacity of key people, or in the 'alignment' of people with the 'direction' of the company. These gap identification enables the company to take appropriate actions.

Finding the right review consultant is a big bottleneck

A good strategic and execution audit of business can help a business quadruple its revenue and profits. I have also observed, that although the need of review is felt by the business , they cannot find the right consultng agency which is competent, cost-effective and reliable.

Finding the right "review" consultant for a small and large business is tough because of two factors. One, large consulting companies, who have the expertise, are very expensive to hire. Morever, these large consulting firms also are 'unaware' of the 'dynamics of small companies' because of which their recommendations are not practical and doable. On the other hand, finding small consulting firm is troublesome, because the small consulting firms lack the knowledge base although they may have the experience of dealing with small business.

Of course, with the right help and guidance, finding the right review  consultant is possible. 

Is your business model sustainable?

Here is a very good video of a business model of Nespresso, a subsidiary of Nestle, selling coffee at a premium rates. It is a very good 'real-life' example of how different component of business have to be 'tied' together to create a viable and profitable business model. Individual components such as - revenue stream, channels, or value proposition - do not matter much; what matters is how they are 'integrated' together in one piece.

Interestingly, the nine individual components are bifurcated into two separate streams:

• 4 Revenue side components that includes revenue stream, type of customer relationships( new or repeating), distribution channels and customer segments and another is 
• 4 Input Resources components ( or what we earlier called servicing side of business in an earlier blog) which includes key activities of the business, key resources to do those activities, key partners to help you do deliver the business promise and the resulting cost structure and 
• Component of Value Proposition which ties Revenue with Resource  ( i.e costs) components together and determines the profitability of the business 

In an earlier blog, we had seen how the clash of investment of time, money and resource between acquiring a customer and servicing the customer ( between the revenue and input components, in other language) can make a business model unsustainable. 

Advantage of a putting the business model on one page

Once you put your business model on one page like Nespresso, then you can see how individual components correlate, how the correlation is affecting both sides - revenues and resources - simultaneously, and what to do to increase the profits, or deepen the customer relationships. It is a like snap shot of the entire business that can help you find the best available leverage in your business.

Have you mapped the business model of your organisation on one page? If you have not, it is time you do it. 

Four skills that entrepreneurs lack

I recently saw a study of serial entrepreneurs. These entrepreneurs had started multiple businesses and experienced both success and failure. It is interesting because the survey also compared the characteristics of entrepreneurs with a control group.

The survey found that entrepreneurs possess five skill.They excel in five soft skills and fare in them much better than the control group of corporate professionals. These skills, by their nature, develop slowly over time. These are the five skills:

1. Persuasion: Persuasion for this study was defined as the ability to persuade others to join the mission. So the presence of this skill is not surprising.
2. Leadership: Leadership was defined as having a compelling vision for the future.
3. Personal Accountability: has been defined as willingness to take responsibility for personal actions.
4. Goal orientation: in this study was defined as focusing all the efforts on a goal or objective.
5. Interpersonal skills: They include communicating, building rapport, and relating well to people from different backgrounds and communication styles

But the surprising part of this survey is the lack of four skills that entrepreneurs do not possess. Here are the four skills that entrepreneurs lack.

1. Lack of Empathy: This is surprising because entrepreneurs typically solve problems of people when they come out with their new ideas. This suggests that entrepreneurs have empathy at an intellectual level. They expect returns from understanding others problems, which people with empathy typically do not expect.
2. Inability to manage themselves: This is not so surprising, because entrepreneurs are so busy managing their enterprises that they do not have time to manage themselves.
3. Inability to plan and organise:  Lack of this skill is also perhaps due to the above reason. They are unable to manage their calendar, organise their meetings, and keep their office neat and tidy.
4. Lack of capacity in Analytical Problem solving: Lack of this skill is surprising. But hindsight  suggests that this may be due to their 'action orientation' and wanting to 'get things done' yesterday. They constantly hear others who block their ideas and therefore they perhaps tend to dislike analytical problem solving that will slow down their decision-making

This survey also suggested that good entrepreneurs somehow find a way to negotiate the lack of above skills. For instance, entrepreneurs find someone to fill the gaps in second and third skill by having someone to take care of their time management and meetings. Similarly, good entrepreneurs find someone to manage their employees - either their friend or a loyal employee - who perhaps has more empathy than them so that they can retain their employees. To compensate for their inability to solve problems analytically, successful Entrepreneurs find partners who can execute their strategy well.

As an entrepreneur, do you lack any of this skill? And what are you doing to compensate for it?. 

Diagnostic thinking is critical for entrepreneurs

Please see this interesting video of Ranjay Gulati, Harvard Professor, on the importance of diagnostic thinking. He has given a brilliant example of how doctors can get misled by 'problem symptom' and rush to a 'solution', instead of taking a pause and 'diagnosing' what could be the problem. As entrepreneurs are highly action oriented people, they are also prone to this 'jumping' from problem to solution.

When entrepreneurs jump from problem to solution, they make three mistakes:

1. Do not observe all the 'variables' that are also causing the symptom. For instance, when an employee is not able to 'do the work as per the instruction', we simply assume that 'employee is tardy' or 'non committed' or simply ' avoiding work'. We do not wait and wonder if we gave incomplete instruction, or we forgot that the employee does not understand 'the technical word' which we used while giving the instruction.
2. Use the 'available' evidence, instead of using the 'right evidence' : Daniel Kahneman, the Noble Prize winning psychologist, calls it the effect of Type 1 fast and unconscious mind. For instance, if the employee has made a similar mistake in the past of not following the given instructions, we quickly use the 'available evidence' and label the employee as 'lazy', ignoring the evidence that 'he had been given too many actions to be taken without any guidance of prioritising them'
3. Hasty actions cause more unintended consequences, further confusing the 'problem symptom': Our past actions contribute to today's symptoms. But we forget this variable in the heat of the unfolding events. For instance, because we 'scolded the employee' infront of other employees for his past mistake, the employee felt 'victimised' for the mistake he tried to avoid. So now, he is already thinking, " If my best actions cannot help satisfy my boss, what is the use of putting your best'? You have unknowingly sown the seed of 'carelessness' in the employee and now expect him to 'overcome' the hurdle and do something different for you. 

Here are three ideas to avoid this natural tendency to jump from problem to solution, and instead do a diagnosis before taking up an action:

• Take care of the initial interactions with a new employee, vendor or customer: Because of 'unintended consequences of past events', initial interactions are critical in guiding our actions and solutions. Therefore, in the initial stages of a long relationship, use the pause button a lot more to collect evidence before jumping to any conclusion. This will enable you to avoid the mistakes of 'accumulated past'
• Always take a pause in an interaction where the other person has 'low unequal power': Subordinates, children, ( and even spouse) have low power in any event. In all such interactions, we tend to oversimplify the event, look at the available evidence, and swiftly jump to the conclusion. Push a pause button and do a diagnosis before coming to a solution in such unequal-power interactions.
• Become aware of your heuristics ( our thumb rules) while interacting with people: We all have heuristics like 'Labour wants more money for less work', or 'Customers want everything free', or 'Late employees are not committed' or 'People who cannot do a good job are not willing to take a responsibility' and so on. We use these heuristics to form a quick conclusion and become blind to notice other evidence that is contrary to the heuristics. 

What are you doing to ensure that you do not jump from problem to solution?

Partnering is toughest for entrepreneurs

 Vaitesh is a very good software programmer with more than 5 year experience. He worked with a friend for developing a software product in billing services, earned good money from selling it to a customer, and is trying to sell it to other customers. He met Unmukt, a 7 year experienced professional, who had started his company in services. Unmukt had some background in software programming. Unmukt and Vaitesh met. Their common friend suggested that they could work together and create a 'bigger product'. Vaitesh however rejected the idea saying that his product framework is 'very innovative' and requires a 'different approach' to selling. 

You will find many individuals like Vaitesh. On the surface, it seems that the root cause of not collaborating with a partner is only inside Vaitesh. But i have observed many entrepreneurs, like Vaitesh, refuse to partner with others primarily due to four reasons:

1. Fear of getting swindled by others: This fear is genuine, but when one reacts to this fear, one's emotion is using him. If one things objectively however, one can take several preventive and corrective actions to negotiate this fear. Preventive actions like knowing the person fully before committing to a partnership, increasing the stake in the partnership in a step-wise manner instead of one-shot, and other legal actions are possible. One can also take corrective precautions ( legal and otherwise) to reduce the damage that may happen when all the other possibilities fail.

2. Ignorance of Contribution of different experts to the success of a entrepreneurial unit: This requires understanding the value chain of a product, the business model of a product. Without understanding the value chain, Vaitesh cannot appreciate the importance of 'Sales or Marketing' in the business model. In 'developing a software product business', Vaitesh does not understanding the importance of sales function. This business model' ignorance causes many entrepreneurs to 'delay' their success, and in worst cases, also trigger their failure. Vaitesh is one example.

3. Misunderstanding of what one can learn through experience: This misunderstanding stems from the ignorance of how people develop knowledge and skills in any area. When they develop a technical product, they understand the value of 'technical expertise'. But when someone is selling a product, they think that 'selling' is just going to customers, suavely talking to them, and making them buy the product with promises and words that may or may not be fulfilled. Many entrepreneurs believe that 'selling skill' can be developed by anyone with some application of patience and practice. Sometimes, they themselves try to learn it.  Sometimes, they try to hire some smart people and expect that 'sales' will zoom, often ignoring the complexities of customer.

Misunderstanding the development of sales and marketing skill is perhaps one of the biggest reasons of entrepreneurial failures. Vaitesh is not alone in having this misunderstanding. I have seen experienced entrepreneurs who are novices in 'sales and marketing' skills'. Not only their progress is blocked due to this ignorance, but even their survival can get threatened sometimes !

4. Inability to talk and reason with strong willed people: When strong willed people work together, they naturally have differences. Individuals often find it very difficult to sort out these conflicts and therefore end avoiding each other. Instead of using the differences to surface the different underlying assumptions of the conflict, entrepreneurs tend to suppress them. Instead of benefiting from the complementary approaches two individuals bring, entrepreneurs seek consensus sacrificing the quality of decision making. Instead of using conflicts to learn different viewpoints, they seek individuals which have same viewpoints that decrease their chances of success. Entrepreneurs often do not learn this skill of using diversity and instead seek homogeneity which, although looks good on the surface, does not help in a deeper way.

Summary

Are you also avoiding partnering in your business because of the above four reasons? If you are, it is time to review your thoughts and do it differently. Remember, in every business that has produced stupendous results, it was the partnership that took it to different heights. It has been proved beyond doubt that partnerships have created more and better businesses than single-owner businesses. Be it a partnership of Steve Jobs and Steve Woznaik, or the partnerships in Infosys, or the partnership of Hewlett and Packard for HP, partnerships flourish better mainly because of last reason: the diversity function. 

Funding Help for entrepreneurs

Once you have a business model that is scalable, then it is time to find funders.Venture funds and angel funders typically help an entrepreneur in providing funds at this stage. This method of funding is very prevalent in western countries, and has come into vogue with the popularity of internet. However today, venture funds are also popular in more established sectors like Manufacturing and agriculture.

Unlike bankers, they do not require any security of land and assets, but they do a thorough review of proposal and promoters before funding. Bankers are useful when you have a good asset base, but these funders are useful when your asset base is not as strong, such as  in service companies. And more importantly, these funders also act as Mentors and give you access to their network and knowledge.

Why do they fund small units? They share the risk with you and therefore ask for a equity share in your company. They get their return when your unit becomes large and its market value has increased. Either they sell their equity stake to another investor, or wait for public issue to monetise their investment. Because they ask for equity stake, earlier you ask for funds, higher is the stake they ask. Conversely, later you ask, lower is the stake they will ask.

You will find two types of funders.One is a Fund Manager who has collected the money from the investors, and another are the investor members whom you have to approach directly.

1. Getting funds from Investor members directly

In this model, you have to give your proposal to a committee of one of these member networks. This committee short lists the proposal and then informs the members. Each member then takes an individual call on whether he or she wants to invest. Individual investment is about 50 lakhs, while total investment could be in the range of 2-3 crores. Because the cost of managing an investment is high, they will like to invest at least 2-3 crores. You will find it very difficult to interest them if your money requirement is lower than that. Three large networks of members are

• Indian Angel Network ( about 200 members) 
• Mumbai Angels ( about 150 members) 
• Harvard Angels , the India Chapater of Harvard Business School Alumni Angels ( 25 members) 

3. Getting funds from Fund managers

In this model, corpus is created by getting money for high network individuals. Many such funds are available. As each fund is created for funding specific type of companies, such as in agriculture or in internet, it is important to find if the fund you are talking to has the mandate to fund your type of products.

For instance, Nexus Venture Partners funds, funds technology and internet companies, while Matrix Partners India has been funding internet and mobile sectors.  Seedfund funds, the oldest fund, provides funds to different type of companies, with as low as 50 Lakh to an entrepreneur.Today, numerous funds are available for funding in education, health sector, and agriculture. So if your unit belongs to one of these sectors, you will have many options to search money. Google for the sector, and you will get a list. After that, talk with someone who has used that fund, and you will get real information.

On the other hand, if you need help, write to me on my gmail id. I shall be able to guide you to the right consultants who work in this field.