What It Takes to Be an Entrepreneur
February 09, 2010
Yesterday, I began a series of posts about entrepreneurship with one entitled Want to Be an Entrepreneur? Take A Test to See If You Have the Right Stuff. In that post, I indicated that I would devote a post to the thoughts of Dr. Quy Huy, an associate professor of strategy and management at INSEAD, in Fontainebleau, France and Dr. Christoph Zott, a professor of entrepreneurship at IESE, in Barcelona, Spain, which were contained in a op-ed piece published in the Wall Street Journal [“Trust Me,” 30 November 2009]. In that article, they focused on how new entrepreneurs can gain credibility with investors and customers when they have no track record. They focused on four critical areas: personal credibility, the company’s professionalism, the track record, and emphasizing and building ties. They begin with personal credibility.
“First and foremost, it’s vital to reassure people that you are personally capable and credible. For entrepreneurs, the issue is: Are you the kind of person able to build a company? In an existing company, it’s more: Are you the kind of person who can manage a complex project competently? How personally committed are you to the idea that you are proposing?”
They assert that there are several things you can do to boost your personal credibility. They continue:
“Reveal yourself. Many businesspeople are reluctant to be specific about their personal history or interests in meetings. They may think it’s irrelevant or inappropriate, for instance, or they may simply feel pressed for time. But the entrepreneurs who are successful know how to deploy personal details that will strike a chord with listeners. How? They do homework before big meetings—such as researching a potential investor’s history on a social-networking site—and during the meeting they’re very attentive to body language and verbal signals. For instance, background research might show that you and a potential investor have a common interest in college football. During the meeting, you might refer to a recent big game to underscore a point—and if the investor responds well to the reference, you might use more sports analogies when talking about your business. This also applies to personal history. Disclosing critical details can make all the difference, such as a shared school affiliation or hometown, as well as a personal achievement. In our sample of entrepreneurs, for instance, all were graduates from the same top business school. But the ones who actually told potential investors proved most successful at attracting capital.”
I’m not so sure that what they describe is actually “revealing yourself” as much as it is finding ways to connect. Most entrepreneurs are naturally curious and observant. These traits help them see opportunities when others don’t. They can use these traits to pick up on the signs discussed by Huy and Zott that allow them to connect with investors and clients in a meaningful and productive way.
“Put your money where your mouth is. Some entrepreneurs take only token wages or forgo a salary altogether. This serves two purposes. On a concrete level, it keeps costs to a minimum or cuts them out completely, which is vital when money is tight. On a symbolic level, it shows a full commitment to a business and sends a compelling signal to potential investors. Consider this comment by one investor in our sample: ‘Anyone can make a good business plan, but it’s got to be the people behind the business plan. It’s got to be their commitment—that is what helps you make hard decisions about investing. It tells you that when the chips are down, these people are not going to jump ship. They’re going to stay fighting.'”
Taking token wages or forgoing a salary is fine if you’re wealthy. But for young entrepreneurs such symbolic gestures aren’t really in the cards. Even if you’re wealthy, Huy and Zott report, taking a symbolic wage may not be a good idea. It could be seen as public relations gimmick or it could send “another negative message—the executive is wealthy and can take or leave the money.” There are certainly other ways of showing commitment, however, such as, taking out personal loans to raise capital for the business and seeking investments from friends and family members. If an entrepreneur has any moral character at all, he or she will be loath to lose investments made by those closer to him or her. Other investors are bound to take notice of that. Huy and Zott next turn to the importance of a company’s professionalism. They claim that businesspeople “need to sell the idea that their project or company is professional. But how do you do that with few resources?” They assert that perception is as important as reality.
“Keep up appearances. A professional look helps reassure investors that a company’s structure and processes are stable. Businesspeople should make sure that everything they show investors—from presentations to business cards to Web pages—is thoughtfully prepared. As obvious as it seems, personal appearance counts, too. Executives would do well to invest in a professional wardrobe, and take some coaching in presentation skills. (Recalling his team’s sloppy appearance at a failed meeting, one red-faced entrepreneur admitted, ‘We were just a bunch of clowns wandering around with PowerPoint presentations.’)”
Every time an entrepreneur seeks capital or goes after a client he or she should think of that activity as a job interview. You often only have one shot to get what you want (i.e., capital or a contract). A sloppy appearance, bad breath or body odor, or poorly prepared marketing materials can seriously undermine the seriousness of your efforts. Huy and Zott also claim that entrepreneurs can learn from real estate market. They continue:
“Location, location, location. The old adage also holds true here: Executives should secure the most desirable spot possible for their offices. Of course, not everyone can afford this, but there are ways to save. For instance, some entrepreneurs in our study arranged to meet in impressive surroundings—such as fancy hotels—or they rented shared offices in tony neighborhoods. Again, this serves a twofold purpose. Practically speaking, it’s cheaper than getting very expensive digs. It also has valuable symbolic meaning. As one entrepreneur explained, ‘When we asked [our investors] why they had given us this chance, rather than some of our perhaps better-established competitors, they told us that they were so impressed that we were obviously a business of substance, because we had such a large, well-appointed office. They didn’t know that we had a very, very small office, just in a large building.’ Obviously, we’re not advising a display of fake luxury—executives should not lie to potential investors, or go way beyond their means to make a better impression. What’s more, before plunging into a deal for upscale offices, managers should be sure that their potential investors actually place a high value on this kind of display. For instance, they should ask other clients about the investors’ preferences—as well as what their offices look like.”
Clearly such efforts can also backfire. One of the reasons that the dot.com bubble burst was that start-ups spent lavishly on things that weren’t essential for making money — which, after all, is what investors are really after. Investors should be wary of any business housed in opulent offices and yet still seeking working capital. I agree with Huy and Zott that running a company out of your garage is not likely to attract many investors; but being sensible about your location is just as important as making a good appearance. Right now commercial office space can be found at cut-rate prices, but analysts predict that prices have bottomed out and should start rising as the recession wanes. That means this is a good time to get the right location at a reasonable price. Huy and Zott next turn to the challenge of “the track record.” They write:
“A common complaint among entrepreneurs in our study is that investors demand proof of some past accomplishment before they commit resources. But there’s no way to get a track record without resources to develop an idea. The most successful entrepreneurs found ways to address this Catch-22 situation. For example, rather than merely describing their product on paper, some entrepreneurs developed a prototype, or used controlled product demonstrations, to convey how the product might work. One investor who was won over this way told us: ‘This win happened when the business founder gave what I’ll call a controlled demonstration. The demo looked really great.’ Another company hadn’t produced a single commercially viable product, but it had won industry awards for its technology development. So, it conspicuously displayed its awards on its home page as evidence of external recognition. … For managers at an established company, a good strategy is to try to establish a series of modest wins and publicize these as symbols of achievement in a clear—but not conceited—way. A manager might try to win plaudits from customers by delivering top-notch customer service, for instance, and then place those testimonials prominently on the company Web site or in promotional material.”
I’m a big fan of prototypes and demonstrations. Even having a non-working model of a device can be an important prop (see my post entitled Where is My Replicator?). One of the reasons that prototypes, models, and demos are so important is that they can help keep conversations focused on the business instead of wandering off onto other subjects that ultimately undermine getting capital or a contract. You want people focused more on the product or service you are offering than on extraneous topics like your family, your alma mater, or your political affiliation. The final topic discussed by Huy and Zott is “emphasizing and building ties.” They write:
“Being associated with prestigious stakeholders can help elevate one’s standing. One business founder explained how having two international companies partner with his travel venture gave him tremendous credibility, which was ‘absolutely critical’ for obtaining funding. Later, he secured the backing of other high-profile investors and industry experts who joined the company’s board—and they, too, became important symbols of prestige. The founder mentioned these ties during presentations, and believed they helped him land sizable contracts. ‘The reason they think we can do it is they look at our board and they see some very big names on there now,’ he said. Finally, it’s critical to use symbolic gestures to build and strengthen relationships with stakeholders. Even seemingly small actions can make a difference. For instance, successful entrepreneurs often send flowers or inexpensive gifts with their corporate logo to serve as reminders of the company’s reliability—and, even more fundamentally, the fact that the company is still in business. … To be effective, each of these actions must be underpinned by authenticity. In other words, only promise what you can deliver.”
I wish they would have spent more time on the value of connecting with others. I spend an enormous amount of time meeting with people. Those contacts are important for me and my company. I’m always looking for companies with which to team on future projects. Such future engagements wouldn’t emerge if I didn’t know about the capabilities of other companies and they didn’t know about the capabilities of Enterra Solutions. I encourage my employees to maintain their contacts as well. You never know when a mutually beneficial opportunity will arise. Clearly there are a lot of things that new entrepreneurs need to learn. Too often they are left to their own devices and, as a result, they stumble badly. Some entrepreneurs are lucky enough to have graduated from universities that can offer help. That is the focus of another article I referenced in my previous post on entrepreneurism [“With Scant Jobs, Grads Make Their Own,” by Toddi Gutner, Wall Street Journal, 22 December 2009]. Before starting her own business, Gutner was an associate editor at BusinessWeek magazine for 11 years and before that she wrote for Forbes magazine for five years. She agrees that new entrepreneurs are generally ill-equipped to face the challenges of starting a new business and suggests that they get help before they make the plunge. She writes:
“It’s important for young entrepreneurs to seek the necessary help to get started. For current students or recent graduates, it might be easiest to reach out for assistance on campus. Many schools have campus incubators or offer start-up competitions, like Babson College’s annual Entrepreneurship Forum, which offers cash, consulting, legal and Web services to winning business plans. Other schools have business incubators that help students—and sometimes outsiders—hone business ideas and, in some cases, support them financially or with other resources.”
She also discusses a program called Launch Pad at the University of Miami, which is “an entrepreneurship-support program based out of the campus career center.” Gutner also reports that there are commercially-offered programs for entrepreneurs that don’t have access to alumni programs. She continues:
“A boot-camp training program or organized group for aspiring business owners also can help. The Kauffman Foundation’s FastTrac, a 10-week boot camp offered throughout the country, trains aspiring entrepreneurs. And Y Combinator of Mountain View, Calif., and TechStars in Boulder, Colo., offer cash and mentoring to young founders. Many of these programs provide advice for newbie businesspeople—from whether an idea can support a business, to how to write a business plan, to understanding your market. They also provide an opportunity to meet other entrepreneurs who are further along in the start-up process.”
Gutner also addresses the topic tackled by Huy and Zott, — trying to convince “investors and customers that a young 20-something has the experience needed to deliver on a plan.” She recommends that young entrepreneurs would do well to hire strong advisers who can provide good advice and who will let you use their name when talking to potential investors and customers. “Experts in the business, entrepreneurs with a number of successful ventures under their belts, and well-respected professionals can help open doors for fledgling start-ups and lend an air of legitimacy and trust.”
Although Gutner’s focus is on new graduates starting businesses because of the dismal job picture, there are also a number of so-called “corporate refugees” who could benefit from the insights offered by Huy, Zott, and Gutner [“On to Plan B: Starting a Business,” by Mickey Meece, New York Times, 22 August 2009]. Meece calls these individuals “accidental entrepreneurs.” Meece reported:
“The most recent Index of Entrepreneurial Activity by the Kauffman Foundation showed a slight uptick of new businesses in 2008 — a full recessionary year — over 2007. An average of 320 Americans out of 100,000 formed a business each month, Kauffman said. What’s more, it found, the patterns ‘provide some early evidence that “necessity” entrepreneurship is increasing and “opportunity” entrepreneurship is decreasing.’ Accidental or by design, entrepreneurship is on the rise again this year. LegalZoom.com, the online legal document service, says the number of new businesses it helped to form was up 10 percent in the first half of the year , compared with the period a year earlier.”
Of course it would be better if people became entrepreneurs because they saw real opportunities rather than out of necessity. But regardless of the reasons that people become entrepreneurs, they can only help the economy if they succeed. That is why it is so important that they go into any venture with their eyes wide open, their feet firmly planted on the ground, and have viable plan for success. Careful preparation is a step in the right direction.