Entrepreneurs: Hares versus Tortoises

Stephen DeAngelis

August 22, 2011

British entrepreneur Luke Johnson writes, “I used to think Mark Zuckerberg’s achievement with Facebook was a fabulous inspiration to entrepreneurs everywhere. Now I’m not so sure.” [“Zuckerberg wannabes squander careers,” Financial Times, 26 July 2011] With all of the negative press that Zuckerberg has received following the release the movie The Social Network and continued lawsuits concerning Facebook’s founding, you might think that Johnson is disappointed with Zuckerberg’s ethical failings. He assures us that he is not. Instead, he writes that he is concerned that Zuckerberg “sets an example of meteoric success that virtually no one else will ever be able to repeat.” You might be asking yourself, “What’s wrong with aspiring to great success?” It’s not the dreams of success about which Johnson is concerned. He just wants to inject a bit of reality into those dreams. He continues:

“Wannabes are trying to copy him, and consequently squandering their careers on false hopes. I have lost count of the number of business plans I’ve seen from ‘digital pioneers’ who want to build the next Facebook or suchlike. They are full of extraordinary upward projections of income, mind-boggling growth assumptions, spectacular valuations and heroic demands from backers. I put them all in the shredder. As Samuel Johnson put it: Almost every man wastes part of his life in attempts to display qualities which he does not possess, and to gain applause which he cannot keep.'”

There have been other “mind-boggling” successes, like Microsoft, Google, and Amazon, but they grew at a slower (if still amazing pace). But even adding in companies that have sparked new industries and anchored new fortunes, the numbers are still relatively small. Johnson is basically saying, “Get real.” If meteoric success comes it comes; but, don’t base your business plan on it. He continues:

“The truth is that no other company has ever expanded like Facebook. The vast majority of start-ups do not raise formal venture capital – they fund their operations via family and friends, bank debt, savings, angel investors and supplier credit. This is the real world of new business,?rather?than?the?near-fantasy land of Silicon Valley. Moreover, every VC portfolio is littered with dozens of flops and write-offs – the clones of Twitter, LinkedIn and Zynga that no one talks about. Besides, while I encourage youngsters to become their own boss, most winners are actually in their 30s or 40s by the time they make it. Experience counts when it comes to management – even VCs know this. To expect to hit the big time just out of university is to court disappointment.”

That’s the real point that Johnson is trying to make — don’t dream so big that your disappointment sours  your entrepreneurial ambitions. He wants entrepreneurs to succeed. The world needs entrepreneurs, but it needs them to succeed. Losing hope because big dreams fail to materialize would be a great waste of creativity and enthusiasm. Johnson continues:

“This illusion of instant technology wealth is relatively new. Thomas Edison and other inventors took years to establish fortunes – and many, like John Logie Baird and Charles Goodyear, never did. But for virtually the first time in the history of capitalism, the internet bubble permitted early-stage companies with no tangible assets to raise significant capital based on a plan – but without property, franchises, revenues, patents and certainly no profits. Astonishing winners such as Google and Amazon distorted the financial world, by demonstrating that enormous amounts of money could be made even though there appeared to be no proven business model. But they did not really change the rules: they were the exceptions.”

There’s nothing wrong with dreaming big if those dreams are accompanied by hard work, a sound business plan, and a lot of patience. Johnson explains:

“My experience is that companies generally take from five to 10 years to break through. Those enterprises that are doomed will fall by the wayside in this period – only the viable ones remain. These are the enduring undertakings that are self-sustaining and have potential. They are led by determined founders who are persistent and who have invariably matured over the life of their creation. The best businesses are not built to sell in a hurry. I am innately suspicious of proprietors who focus from the beginning on an indecently swift exit. I like projects that will last, that can generate cash to pay dividends as a form of financial return, and where the owners are not obsessed exclusively about making a quick capital gain for the financiers. I prefer managers who concentrate on customers, competitors and beating this year’s budget. These are the underpinnings of a genuine commercial venture.”

Business is business. Get the business fundamentals correct and your chances of succeeding go way up. Get them wrong and your aspirations will end up in the trash bin of broken dreams. Johnson concludes:

“The romantic mythology of a student starting a business on a laptop needs adjusting. Most companies service mundane requirements, quite possibly business applications rather than sexy consumer projects like Facebook. And many companies will be lifestyle businesses, while hardly any will be record-busters. But that doesn’t make them any less valid or worthwhile to the founder. Warp speed businesses that rise in vertiginous fashion usually decline in a similar manner. The web encourages many entrants, but also seemingly unassailable monopolies – until they are not. For online users are fickle: look at the collapse of social networks MySpace and Bebo.”

Hugo Greenhalgh agrees completely with Johnson’s arguments. “Entrepreneurs forging ahead with expansion plans,” he writes, “might want to scale back their ambitions in favour of slower but more sustainable growth if they want their companies to survive long term.” [“Slow growth is key, says research,” Financial Times, 1 August 2011] Greenhalgh reports that “SAP UK & Ireland and Delta Economics found that just 47 per cent of the Fast Track 100 list of fast-growing enterprises from 2000-01 are still in business today.” So much for the hares. Greenhalgh continues:

“The fast Track 100, published each December in the Sunday Times, focuses specifically on small and medium-sized enterprises with high rates of growth. Software group SAP, which commissioned the study from Delta, noted that, overall, one in five companies to have appeared in the Fast Track list is no longer in business. Just under half (44 per cent) of these went into administration, with a third having been acquired. John Antunes, director of SME at SAP UK & Ireland, described the high-growth companies on the list as ‘vitamin shots for the economy’. He added: ‘In our experience of working with high-growth small and medium-sized companies, many of them hit a wall where they need a more grown-up approach to how they manage their businesses. Often it’s not just about selling more or having an amazing idea that flies, but also about running your business better, more consistently and more transparently.'”

By now I’m hoping that you understand that entrepreneurship requires both good ideas and sound business practices. Dreamers and visionaries (if they don’t possess the skills themselves) need to find business-savvy partners if they want to see their dreams sustained. Microsoft founders Paul Allen and Bill Gates come to mind as the kind of partnership needed in the beginning. Greenhalgh continues:

“Rebecca Harding, chief executive of Delta Economics, which specialises in studies of entrepreneurial behaviour, said one of the most common pitfalls for a growing business was taking on too much debt too quickly. She said: ‘If you are a company that has experienced very rapid growth, there is a chance that you will look at overleveraging and taking financial risks to scale up very quickly. It is about not growing too fast too quickly, but making that growth sustainable.’ Guy Rigby, head of entrepreneurs at Smith & Williamson, the accountancy and investment management group, said good management was needed as high-growth companies can experience ‘painful stresses and strains’. He added: ‘Fast-growth businesses create excitement and euphoria, but they often succumb to unseen risks and events. Don’t let your business run away from you by expanding too fast.'”

Succeeding ethically in the business world requires self-constraint, clear-headedness, and a basic understanding of finances. It is understandable how unjustified exuberance can lead an entrepreneur into making poor business decisions; however, it is unforgiveable when such decisions prove fatal for the company. Greenhalgh believes that most entrepreneurs understand that “Zuckerberg stories” are rare (even if they harbor dreams of becoming like him). He concludes:

“Entrepreneurs themselves said they favoured slow growth over rapid expansion. Chris Arnold, creative partner at Creative Orchestra, an Anglo-Spanish ad agency, said: ‘Slow growth is better for quality-based businesses. It allows you to hire the right people, maintain the ethos and tune the business as you progress.’ His comments were echoed by Andrew Skipwith, founder and chief executive of Ratedpeople.com, an online directory of tradesmen and -women. He said: ‘Of course high growth is what we all aim for, but it’s a question of striking the right balance. We have a focus on the quality of growth, not just the headline numbers.'”

I’m glad that Greenhalgh stressed the importance of hiring the right people “for quality-based businesses.” Fast growth often leads to desperation as deadlines near and projects fall behind. Acting out of desperation seldom brings desired results. Aesop had it right millennia ago, “Slow and steady wins the race.”