Photo by Diana Walker
Few days back, I read about Harvard Business School’s (Working Knowledge) articles that address a number of nagging founder-issues — ownership and change of control, resource management and getting to profitability, common legal sand traps — via FoundRead’s article on Sharpening Your Startup Skills.
I understand that the art of successfully staying alive in a startup, moving ahead with achievement of one’s goal have varied ways, methodologies and beliefs depending on how and what one is involved with, nonetheless, the handy kit should be a good framework for anybody to learn from. The articles answer few very common questions that one might need to ask to “sharpen business skills”.
Should I keep control of my company?
As a an entrepreneur, how would you decide between the two options — become rich or be the boss — it is very difficult to have both. Professor Noam Wasserman discusses his research into the motivations of entrepreneurs and the people who invest in them.
Key concepts include;
- Entrepreneurs are often motivated by the potential of money and control, but very few ever achieve both.
- A fundamental tension between “rich and regal” starts to develop as entrepreneurs look to attract resources to grow their ventures.
- Investors need to understand the motivations of the entrepreneurs they back to make sure their goals are aligned.
Most of the founders started off wanting to become both Rich and King — “Rich and Regal.” This desire is reinforced when they see such prominent Rich and Regal entrepreneurs as Larry Ellison of Oracle Corporation, Marc Benioff of SalesForce.com, and Phil Knight of Nike. What’s ignored is that these people are so well known precisely because they are the exceptions, the rare founders who are able to achieve both. Many others who tried to achieve both have ended up making some decisions consistent with Rich motivations and others consistent with King motivations, and in the process of mixing the two, ended up with neither.
Professor Noam Wasserman further states that, “A more successful approach seems to be that the entrepreneur step back to really understand what his or her true motivation is, Rich or King, and then to recurringly make decisions consistent with that motivation. This may reduce the chances of becoming Rich and Regal, but it may dramatically increase the chances of achieving what really motivated you to become an entrepreneur to begin with.”
From a VC or any investor’s perspective, there is a straight line to look at — VCs invest in a company in order to maximize their financial returns from the company — i.e., to become Rich themselves. They are driven by the profit motive. If an entrepreneur wants to become Rich, then VCs see that entrepreneur’s interests as being aligned with theirs, for they both want to maximize financial returns.
However, if an entrepreneur wants to become King, that entrepreneur is more driven by the control motive and is willing to sacrifice financial gains in order to keep control. The interests of such an entrepreneur are not aligned with those of the VCs, and in fact may be in direct conflict with them. Thus, from the beginning, many investors want to find out whether an entrepreneur is motivated by Rich or by King, and then only want to invest in the “I want to be Rich” subset.
At the same time, savvy entrepreneurs know that this is what VCs are looking for, and are able to “talk the Rich talk” convincingly. For many VCs, seeing through to a founder’s real motivations is critical, but can be very tough.
How do I turn potential into profit?
Professor Joseph Lassiter research explores entrepreneurial marketing in high-potential ventures. He describes entrepreneurial marketing as a mindset and a process, one that involves gathering specific evidence that convinces a specific group of individuals to act and react, exploiting breakthroughs, and overcoming setbacks.
People who have deep knowledge about the world they’re going after do a better job at picking fertile places and understanding which markets can be successfully attacked. Sometimes the entrepreneur can conceive of a compelling market, but in fact can’t get there. So there is an iterative process of determining if the opportunity is going to be worth it, and can I get there? Somebody who has worked in a space gets a sense that the future is going to be moving in a particular way and understands how technology, customers, money, and marketplace dynamics will come together to create a compelling reason to buy.
The key lesson is you need to have enough awareness of product alternatives that come from the technology, and of customer needs that come from pressures in the marketplace, to see where opportunity will emerge. Turning high-potential ventures into high-performance ventures is always an elegant combination of know what, know-how, and know who!
How can a resource-challenged start-up grow?
This is perhaps one of the most primary hiccup that an entrepreneur has to deal with. Every entrepreneur know for fact that 90% of the new ventures fail. Startups often lack vital resources, must compete against established companies, and have little or no track record with which to woo customers and investors.
Assistant professor Mukti Khaire believes that small companies can grow by developing intangible social resources such as legitimacy, status, and reputation.
Key concepts include:
- Small companies can grow by developing intangible social resources such as legitimacy, status, and reputation.
- In some cases the location of a new venture is a critical facilitator of success because of the symbolic benefits offered by an office address that is legitimate in the minds of stakeholders.
- Firms have to work at maintaining their status in the hierarchy, while legitimacy is a critical issue only in the early stages of firms’ lives.
- For new firms in established industries, there is value to doing some nontechnical, symbolic things in the manner that is widely accepted and to adhering to industry norms and culture.
What legal mistakes should I watch out for in starting a new company?
The life of a startup can be precarious, a wrong turn disastrous. Harvard Business School professor Constance Bagley discusses the most frequent legal flops made by entrepreneurs, everything from hiring the wrong lawyer to puffing up the business plan.
- Thinking any legal problems can be solved later.
- Starting a business while employed by a potential competitor, or hiring employees without first checking their agreements with the current employer and their knowledge of trade secrets.
- Disclosing inventions without a nondisclosure agreement, or before the patent application is filed.
- Negotiating venture capital financing based solely on the valuation.
- Issuing founder shares without vesting.
- Hiring a lawyer not experienced in dealing with entrepreneurs and venture capitalists.
- Failing to incorporate early enough.