Why Are Entrepreneurs That Way?

How does an entrepreneur think and what is that unscratchable itch that drives them? From time to time I ask myself these very questions and when I need a little perspective, I turn to the wisdom of Thoreau. These two paragraphs come from the final chapter of his book Walden:

I left the woods for as good a reason as I went there. Perhaps it seemed to me that I had several more lives to live, and could not spare any more time for that one. It is remarkable how easily and insensibly we fall into a particular route, and make a beaten track for ourselves. I had not lived there a week before my feet wore a path from my door to the pond-side; and though it is five or six years since I trod it, it is still quite distinct. It is true, I fear, that others may have fallen into it, and so helped to keep it open. The surface of the earth is soft and impressible by the feet of men; and so with the paths which the mind travels. How worn and dusty, then, must be the highways of the world, how deep the ruts of tradition and conformity! I did not wish to take a cabin passage, but rather to go before the mast and on the deck of the world, for there I could best see the moonlight amid the mountains. I do not wish to go below now.

I learned this, at least, by my experiment: that if one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours. He will put some things behind, will pass an invisible boundary; new, universal, and more liberal laws will begin to establish themselves around and within him; or the old laws be expanded, and interpreted in his favor in a more liberal sense, and he will live with the license of a higher order of beings. In proportion as he simplifies his life, the laws of the universe will appear less complex, and solitude will not be solitude, nor poverty poverty, nor weakness weakness. If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them.

Why Start a Company When You Could...

There's a lot of opportunity out there and I've been hearing some interesting insights from several entrepreneurs recently who've been very much against the idea of someone starting their own company. The argument is that there is so much risk in a pre-revenue venture (after all, creating something from nothing is the hardest part). So then, they ask, why wouldn't you:

1. Join a revenue generating start-up? A huge part of the risk has been taken away and the question isn't as much 'whether this will ever work ' but how we can now tweak the business to grow revenues. You won't get anywhere near the same amount of stock but a lot of people have made good money this way (and built their networks through venture backed companies).
   
2. Buy an existing business that's stagnant. Again, the hard part has been done. There are businesses out there that are profitable but stagnant making between $100k-5mm a year. So rather than trying to start a business why not raise some private money and flip the company around?
   

The moral is that there are a lot of undervalued assets out there that can use an individual's talents just as well as any bright new business idea.

The Consulting Question or the Entrepreneurial Question?

Over the past few weeks I'd been working on a business problem with someone who had decades of experience in the consulting industry. Our approaches towards solving the problem seemed to be notably different for the first part of the discussion, but at the end of the day the data uncovered by each ended up being the ying to each other's yang. From this experience came two conclusions: 1) That the consulting and entrepreneurial mindset were different and that 2) neither necessarily proved superior to the other. This made me wonder what it was that made our approaches so different, how our experiences played into it and whether a start-up or consulting practice could possibly survive without having both mindsets in the game. These were some observations:

1. Consultants are problem driven while entrepreneurs are opportunity driven. Consultants are ready to delve into mountains of data until they start finding some kind of pattern and go from there. It's guaranteed to work every time but risks missing out on the big picture. Think tuning an engine (figuring out the fuel to air mix, timing of each stroke, etc) instead of asking whether it's the right engine for the car, whether it's the right car for the user and what an alternate engine might be. The entrepreneur is much more opportunity and customer driven and is eager to go out and start talking to customers, understanding the potential of the product and then looking at the numbers to see if their findings make sense. Think of a multi-function product like compressed air; sales to existing clients may be stagnant due to a price point issue but what else can you do with it?! The downside: it can be hit or miss and might fail to consider small changes that can have big impacts (ie: changing the price would be so much easier/cheaper than chasing a new market.)
2. At the end of the day a winning solution is an innovative idea that is supported by evidence (or perhaps evidence that is supported by innovative ideas). It is unclear to me which way of thinking is more likely to succeed but I did learn something very useful last week: That the creative tension that results from having both on a team can not only be highly productive but essential.
   

Angry Employees (Updated)

“A happy worker is a productive worker”; every company with a half decent HR department knows that’s true. An unhappy employee can be dangerous, not only because his productivity stalls but also because he can diffuse his dissatisfaction into the work environment and turn others against the company as well. Yet there is another area of your business in which an unhappy employee is even more dangerous; word of mouth marketing. People tend to put twice as much trust in the word-of-mouth of an employee that trashes the business than a peer who recounts a bad experience. This is because of two reasons; firstly, we always consider the possibility that our peers’ bad experience is a one in a hundred occurrence, whereas the employee gives us a survey of the history of the company’s service quality. Secondly, we assume that a company has to be pretty bad if its employees are putting their livelihood at risk by scaring away potential clients.

I was reminded of this fact last week when I was on a boat trip on the Aegean. The anchor broke and our captain, unable to get the proper guy to fix it since the owner of the business told him to go cheap, made us stay in the same spot for an entire day. The cook took the opportunity to trash the captain and the owner of the business, telling us about ‘the great boat’s he’s worked on before’. Suffice it to say, this really gave us a strong bias throughout the rest of our trip to everything that went wrong, and we were already talking about using one of the boats the cook was talking about next year. If this happens to every tour group that gets on board, I can’t imagine the business prospering. So what’s the bottom line: keep your employees happy, there’s more at stake than productivity!

UPDATE: A friend of mine who was on the boat with me shared some interesting information ysterday; apparently the cook did not stop at trashing the tour company but went so far as to give the contact numbers to other tour companies later that evening (I, of course, was asleep when this happened). FYI

Venture Capital in the Emerging Markets

I attended a conference called Venture Capital in the Emerging Markets today in Istanbul, hosted by a local VC named Golden Horn Ventures. I was really looking forward to hearing what everyone had to say about the state of VC/innovation in emerging markets outside the BRIC countries. The panels were arranged such that they addressed three viewpoints- Funds of VC Funds, VC funds and entrepreneurs. These were my key takeaways:

• Plenty of opportunity to grow/capture the market for goods and services as emerging economies develop and household incomes rise.
• Legal barriers are still a pressing concern for investors and entrepreneurs. I had no idea how long the list of grievances was before today. VCs were concerned with matters like enforceability of contracts (the IFC rep noted that they had a whole portfolio in Russia because of this) and the infrastructure in place to facilitate investing/exiting. Entrepreneurs complained about the inability to create different classes of stock and create stock options within some emerging markets’ legal systems.
• Exits are difficult. The normal exits come through either IPO or M&A, yet these are much more difficult in emerging markets. In fact, a Turkish PE fund manager noted that a preferred exit for their company was to sell the shares back to the entrepreneurs! However, the possibility of exit through M&A is increasing as a result of multinational firms seeking to expand into emerging markets.
• Private Equity will need to become established before Venture Capital. A panelist noted that the lucrative deals being sourced by Private Equity funds have roughly the same IRR as those of VC deals in some emerging markets. Hence PE is a much more preferable option for investors.
• There is a lack of relevant VC/Entrepreneur experience. One of the panelists referred to this as a ‘chicken and egg’ problem. Nobody wants to invest in regions where VCs/entrepreneurs don’t have prior experience, and yet these regions have a lot of first time entrepreneurs who can’t gain experience without acquiring funding.

• It may take time for a new generation of entrepreneurs to out of these markets. Many attendants noted that cultural norms make it very difficult for entrepreneurs to come out of emerging economies. For example, not all cultures are as accepting of failure as much as the Americans and there is a huge amount of social pressure to stay away from high-risk business ventures.

Overall I was very surprised to see how new the concept of early stage investing was to the local VCs. It was very easy to tell who had worked previously in Europe and America and some investors openly admitted that they were unable to fund the kinds of companies that American companies did since they did not know what risks to take… which makes me wonder what the BRIC countries are doing right, that is facilitating so much VC/PE activity. I’ll give an update here when I find the answer.