by 9 people |
The Truth About Business Startups
This lens is about putting to rest some of the most common preconceptions about starting a business in the hopes that it will inspire more people to explore entrepreneurship and to enjoy greater success along the path.
Contents at a Glance
- Misconception #1: Entrepreneurs Are Born, Not Made
- Misconception #2: You Have to be Willing to Take Big Risks to Be a Successful Entrepreneur
- Misconception #3: The Key to Success is Getting Funded
Misconception #1: Entrepreneurs Are Born, Not Made
Who really has the "right stuff?"
Part of the mystique of entrepreneurship is the idea that people who found successful businesses are a breed apart from the rest of us. While it's undeniable that some individuals have a knack for business, it's also clear that entrepreneurship is a set of skills that can be learned by most people.
What cannot be taught is the desire to start and run a business, but beyond that attempts to identify a distinct personality profile of entrepreneurs have failed. The traits that lead to entrepreneurial success are essentially the same as those of high performers in other disciplines. Persistence, hard work, intelligence, and creativity are important in whatever field you work in.
The Entrepreneurial Mindset: Strategies for Continuously Creating Opportunity in an Age of Uncertainty
Amazon Price: $26.40 (as of 11/27/2009)
Primarily oriented towards managers in larger organizations, The Entrepreneurial Mindset nevertheless has many sections relevant to budding entrepreneurs. The discussions on product redesign and opportunity recognition are powerful.
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Misconception #2: You Have to be Willing to Take Big Risks to Be a Successful Entrepreneur
Does it take brass cojones to reach the brass ring?
Our culture celebrates entrepreneurs as freewheeling, larger-than-life characters who are heedless of risk. They dream big and always swing for the fences, or so the story goes.The reality is that most entrepreneurs, particularly successful ones, excel at taking calculated risks where "heads I win, tails I don't lose much" applies. They go to great lengths to mitigate risk whenever possible before making a commitment and find ways to shift the odds in their favor.
Amar Bhide points out that entrepreneurs who start promising—but uncertain—ventures are not necessarily risk seekers, but rather are willing to act in the face of the unknown. Experiments indicate that aversion to risk and aversion to ambiguity (uncertainty) are distinct psychological traits. Moreover:
Attitudes toward risk and attitudes toward ambiguity are uncorrelated; risk-taking individuals who are prepared to bet heavily on structured gambles may be highly averse to ambiguity, and an ambiguity-tolerant individual may be exceptionally risk-averse.
The Origin and Evolution of New Businesses
Amazon Price: $21.37 (as of 11/27/2009)
Based on extensive empirical research, Bhide unveils the recipes behind successful startups. Entrepreneurs don't need unique ideas and venture funding. Rather, they must be able to adapt quickly to changing business conditions. One of the few really useful academic studies of entrepreneurship in print.
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Misconception #3: The Key to Success is Getting Funded
For many entrepreneurs, venture backing is either a fool's errand or a fool's paradise.
A lot of wannabe entrepreneurs are inspired by headlines like, "Startup Receives $15MM Investment." Let's face it: getting obscene amounts of cash in exchange for a mere idea sounds a lot sexier to most of us than trying to bootstrap on a steady diet of ramen noodles and six-packs of Red Bull. In any case, we're conditioned to believe that new ventures require large amounts of startup capital, so securing funding from institutional investors seems like the way to go.There are some problems with this approach, however. First, only a tiny fraction of early-stage companies (fewer than 1 in 10,000 by some estimates) is able to raise equity from sources outside the founders' immediate social network before going to market. Unless you have a killer idea and a team that has successfully led other venture-backed startups, you can probably take this option off the table right now.
Second, even if you do get funded, much of the capital may be held back until you reach milestones outlined in the term sheet. Not only will you have to give up a significant chunk of equity, you will also put your company's destiny in the hands of others. By the time the business becomes cash flow positive, your equity position may be heavily diluted, if you haven't already been forced out.
I'm not suggesting that VCs are evil; I'm just pointing out that they are understandably protective of their own interests and are likely to be more adept at negotiating term sheets than you are! Remember, they do this for a living and have investors of their own to answer to. Don't expect them to be forgiving if results fall short of your confident early projections.
Finally, it turns out that most promising businesses can be bootstrapped without the help of institutional investors. A survey of "Inc. 500" companies (some of the fastest-growing in the nation) found that most had only modest initial capital requirements, and the overwhelming majority of these successful businesses were either self funded or reached profitability through assistance from informal channels (i.e., family and friends).
The definition of entrepreneurship I subscribe to is "the relentless pursuit of opportunity without regard to the resources currently controlled." Instead of raising a pile of cash, rethink the business model to lower your capital needs. Greg Gianforte's essay on bootstrapping is a classic and offers a similar perspective on why getting VC funding is not always good for your business.
A Good Hard Kick in the Ass: Basic Training for Entrepreneurs
Amazon Price: $18.94 (as of 11/27/2009)
Rob Adams knows his stuff. (He was one of my professors at b-school.) His no-nonsense approach to starting a business will help you avoid many common startup mistakes. His book is particularly good at helping entrepreneurs with customer selection.
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Misconception #4: A Detailed Business Plan is a Necessary Prerequisite to Starting Business
I have always found that plans are useless but planning is indispensable. -- Dwight D. Eisenhower
There are literally thousands of book and software titles on the subject, business plan competitions have become an annual rite of passage for MBA students, and an entire industry has emerged to peddle business plan consulting to startup teams and even mom and pop operations. It's become conventional wisdom that a glossy, full-color document with lots of charts and tables is a prerequisite to starting a business.So what's wrong with formal business plans? Well, nothing per se. It's just that assembling a business plan can take a significant amount of time (100-200 hours), time that might be better spent working on the business itself. It also turns out that most startups don't require such detailed planning to begin operations. Would it surprise you to learn that large, successful companies like Apple, Microsoft, and Dell were founded without written business plans? To be sure, these companies eventually developed formal planning documents, but it was not a priority until they became more substantial enterprises.
A 2005 study by researchers at Babson College found that the presence of a written business plan before launch had no correlation with the subsequent performance of a group of 117 early-stage ventures. As David Gumpert observes in Burn Your Business Plan!, "The business plan as it is conceived and used by many entrepreneurs is passé. It has been corrupted to the point that it is over-emphasized by entrepreneurs, and under-utilized by investors."
This is not to say that pre-start planning isn't helpful, but rather that entrepreneurs should do "just enough" planning and not invest too much time or money aiming for perfection. Your initial roadmap is based on a set of untested assumptions that will likely become obsolete the moment you start to engage real customers, so be prepared to make substantial revisions to the business model.
An iterative approach to planning that emphasizes nimbleness and adaptability is the key to shepherding your new venture beyond the survival stage. The Entrepreneurial Mindset describes this method as "discovery-driven planning." It is particularly well suited to startup companies facing high levels of uncertainty, where there is no track record on which to base projections.
Of course, there are times when having a formal business plan is essential to your company. You'll know you need one if any of the following apply:
- You need to secure financing from outside investors or lenders.
- You are unable to stage financing, because your business idea requires making a large, irretrievable investment before you can assess its market potential.
- The undertaking is technically or logistically complex and demands precise coordination among stakeholders.
Don't Take My Word for It!
Burn Your Business Plan!: What Investors Really Want from Entrepreneurs
Amazon Price: $19.95 (as of 11/27/2009)
Gumpert captures the new paradigm in the way startup ventures are being launched, one in which the traditional business plan is a minor character. The days of attracting investors with unsolicited plans are over, and Gumpert shows that entrepreneurs are often better off focusing their limited resources on improving their businesses.
Misconception #5: If I Build It, They Will Come
"Build [it] and they will come" is not a strategy, it's a prayer. -- Steven Blank
This is one of the most pernicious misconceptions people have about business, and it has destroyed billions in capital over the past few decades alone. It's easy to fall into the "build it and they will come" trap, because we have a natural tendency to get excited about pursuing our own dreams and to project our attitudes and feelings on other people. In short, we proceed from the assumption that we know what customers are looking for, when all too often we don't have a clue.You might think this only happens to first-time entrepreneurs, but it can strike even the largest and most experienced organizations when they focus on the product and ignore the customer. One of the most spectacular debacles in recent memory was the ill-fated Iridium project.
Motorola spun off the Iridium division in the 1990s to create a global satellite phone system. While the technology was a success, the size and weight of the handsets (literally the size of a brick), the high cost of the service, and reception problems (the phones only worked outdoors) resulted in disappointing subscriber growth.
It turned out that the people who genuinely needed a global satellite phone (like a geologist working in a remote area) were far too few to justify the enormous investment required to develop the product, and Iridium's target market of jet-setting business travelers remained unconvinced of the benefits. The result: nearly $5 billion down the drain.
Had Motorola started by trying to understand the customer need, they would have realized that portability and ease of use were far more important to most business travelers than world-wide coverage. Don't forget Peter Drucker's famous maxim: business is not about creating products, it's about creating customers.
The Four Steps to the Epiphany
Amazon Price: $39.99 (as of 11/27/2009)
This is one of the best resources on bootstrap entrepreneurship available. It describes a systematic, iterative process for finding and cultivating paying customers. Following the Customer Development model will lead you to make smarter choices in the first critical months of your startup. You'll learn how to test and validate your target market while conserving precious seed capital. Most importantly, you'll avoid the "ready, fire, aim" trap that is among the leading causes of new business failures.
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Misconception #6: Running my Own Business Will Be Glamorous or Easy
Sleep is for the weak!
There are lots of reasons for wanting to become an entrepreneur, and starting your own business can be very satisfying and rewarding. However, you shouldn't kid yourself about the effort involved or your chances of success. Many businesses are outright failures, and most of the survivors offer little more than self employment for their owners (frequently for less pay and longer hours than their previous jobs). Don't get into entrepreneurship because you think that it will be easy money or that you'll enjoy shorter hours as your own boss. 
The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By
Amazon Price: $14.54 (as of 11/27/2009)
This book shows that the reality of entrepreneurship is decidedly different from the myths that have come to surround it. The author draws on the data from extensive research to provide accurate, useful information about who becomes an entrepreneur and why, how businesses are started, which factors lead to success, and which predict a likely failure. The Illusions of Entrepreneurship is an essential resource for everyone who has dreamed of starting a new business, for investors in start-ups, for policy makers attempting to facilitate the formation and survival of new businesses, and for researchers interested in the economic impact of entrepreneurial activity.
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Misconception #7: Add Your Own Thoughts
Add your ideas here...
My Product Sells Itself
Sorry...You really will have to hustle to sell or market your product to customers.1 point
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Share Your Thoughts
I love to get your feedback...
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- Ramkitten Ramkitten Feb 14, 2009 @ 10:50 pm
- I'm in the process of starting my own small business. I have all of my ducks in order as far as creating an entity, getting the required tax licenses for my state and city, opening a business account, etc. The one thing that's been tougher than I expected was getting manufacturers and distributors to sell to me. I'm like, but I want to spend MONEY here. I was starting to get quite frustrated when, suddenly, my polite persistence started to pay off. Now I have the dealer accounts I need to get the inventory for my pre-equipped backpacks, but it sure wasn't easy!
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- Tara Tara Jan 22, 2009 @ 6:09 pm
- This article is great for anyone who is thinking about starting a new business. I especially agree with #2. Calculated, well thought out risks are the way to go.
As far as #4 goes, I can agree that an extremely detailed business plan may not be necessary. But thinking every part of a business through can definitely make it easier in the long run. I've written an article that covers the misconceptions about business plans. It might be helpful.
http://www.bizcovering.com/Business/Business-Plan-Misconceptions.471283
Thanks!
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- a_willow a_willow Jul 21, 2008 @ 5:37 am
- I completely agree with ShannonC. Most people think that, when you have your own business, you don't have to work at all. Oh boy, are they wrong!!!
That's why I like articles like yours - speaks truthfully that it's neither easy or fun all the time!
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- ShannonC ShannonC Jul 5, 2008 @ 12:21 am
- #6 is the one I come across most..people will say "oh it must be nice to work whenever you want" it's hard work going it alone and you have to be at it every day...Emyth is next on my reading list..great lens, thanks:)
by Gimmesome
I'm an MBA and former I-banker, currently involved in entrepreneurship education at a top MBA program.
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