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 Entrepreneurship Insights

January 2015

Welcome to the latest bulletin offering entrepreneurial insights from the Startup Owl. Enjoy and learn. This issue is mostly about the hazards of too much growth.
New Ecology of Business: Growth Comes in Many Forms
Do Startups Have to Scale?

The myth of business with which I grew up was that to simply survive, the business had to grow, in order to be able to replace dwindling assets. Ed Hess of the Darden Business School talks (in the Ivey Business Journal) about 'smart growth', suggesting that growth per se is neither good not bad. It can both create and destroy value. Incidentally, I recommend you read Ed's book, So, You Want to Start a Business?.

 

The 'grow or die' philosophy of business was the one with which I started my first business in 1982. This 'grow or die' culture had already been around for many years and had seeped deep in given business wisdom.

Hess describes how growth can destroy the original entrepreneurial soul of a business. What I learned was that ecology would put growth into context. The word's original meaning describes the branch of biology that deals with the relations of organisms to one another and to their physical surroundings. It is now more frequently associated with the political movement that seeks to protect the environment, especially from pollution. 

Growth & Risk: In his article, Ed Hess published his Growth Risks Assessment Tool that sets out fourteen questions that entrepreneurs should ask themselves, starting with, "Why should we grow," a question that I never asked myself, assuming that growth went with the territory. When he's down to question ten, he then asks, "How will we mitigate those risks." When I teach my strategy students about growth I ask them to consider risk mitigation as much as thinking about the opportunities for growth. I heartily suggest that you take a look at Ed Hess's Growth Risks Assessment Tool. The 14 questions he poses will have you take a much healthier route in the post startup phase of your business.

Stress Test of Scalability: A considerable number of venture capitalists will use a stress test of scalability when considering whether or not to invest. But then they are looking for very big returns on investment because they have many dogs in their portfolio. For those of us not carrying the burden of making the returns our investor needs, working without or with limited, external capital, we can assess the both the benefits and risks associated with growth. If entrepreneurs were to look more to biology than economics, they would know that growth cannot go on forever, as the VCs imply by their exigencies of the firms in which they invest.

Sustainable Does Not Imply No Growth: If you seek sustainability, it will come from avoiding stagnation and creating innovative growth. In other words, no business can stand still and hope to survive. I certainly believe that every startup has to achieve the scale necessary scale to avoid going bust too easily. In my own case, our business had a near-death experience in month 3. We only had three clients at the time and new sales were proving slow in coming. Our own resources were slender and the bank loan looked like imploding. We had no cash reserves and had one of the three clients not generously paid his latest invoice 15 days early, the bank would have shut us down one miserable Monday morning. By the time we had 20 clients, there was enough cash on hand to survive sales hiccups.

Growth in Quality Rather Than Volume: "Too much capital is toxic," Nils Bunger, a serial entrepreneur, says in a Fortune article. "Too much capital early in a company's life can hamstring a company and its options. When you raise a lot of capital, you're effectively saying you've found your business model, and it's time to scale it.  But if you do that before you've truly figured it out, you'll run into a lot of problems, because your board expects you to scale the business while you're still working out what your business actually is."

Growth can be determined in so many other ways, as in growth in effectiveness, or growth in ecological performance, The wise entrepreneur will determine what growth means and not blindly follow a financial growth path. It really comes down to what the company is 'about'. Why did the founders start it in the first place. I have seldom heard an entrepreneur say that his motivation was to get rich. Most want to change the world.

This is one of 10 New Conditions of Business. If you want to read about the other nine, take a look here.

Expansion or Extension?
Stretch a Bit, Strengthen a Lot
Management 'specialists' talk about stretch goals, or even Big, Hairy, Audacious Goals, or BHHAGs. Listen skeptically, for while stretching is good, overdoing it leads to being overstretched.

So, once the startup has reached a sustainable velocity and gained traction, the goal should be to extend more than expand. Extending will involve going wider and deeper-adding more value and strengthening the business.

The chart below from the BLS Entrepreneurship and the US Economy (November 2014), shows just how fast startups fail. Half have closed before five years are out. Of course, the reasons for failure are many, but over expansion is near the top of the list.
Your chances of making the curve flatter in the case of your own startup are considerably increased if you extend better than you expand. You will strengthen your people and you will strengthen your relationships with customers.

Inside and Out!
Many entrepreneurs are tempted to jack up revenues by leaps and bounds, because it is a challenge. It's the best way I know to run out of cash and hit the wall.

The reason why cash management is so important in the early stages of a business is to avoid that very thing and prevent overheating. Market share and sales growth may be irrelevant to survival. 

In the same way, employees need nurturing so that they can strengthen their ability to deliver on the value proposition. Beating them over the head to get the product out of the door, or cutting costs to the bone, may appear to be sound business, but both have a tendency to destroy, rather than create value.

Ten Items for Your Extension Agenda
  1. No Surprises! Keep Your Startup On Track*. Watch the critical numbers like a hawk.
  2. Be a first-class 'noticer' of everything that changes-or stays the same.
  3. Keep an open dialog with customers, developing relationships, so users are 'hooked'.
  4. Add features to products or services-and support, don't cut them back.
  5. Check that all components of the business models are continually coherent.
  6. Build skills of everyone in the business-and that includes the founders. Learn from mistakes-often. Cherish the beginner's mind.
  7. Mitigate risk and keep checking the downside; it trumps exponential growth: .
  8. Be prepared to pivot; too much sticking to the knitting may stifle you.
  9. Persevere.
  10. Laugh.
* this is the title of an eBook I am writing; if you'd like to see what it will cover, write and ask me: will@startupowl.com. Maybe you could help, too.

 

Thanks for reading this issue of Entrepreneurship Insights. If you have any comments or would like help with your startup, do write to me: will@startupowl.com

Sincerely,
 
Will Keyser
a.k.a. The Startup Owl

In This Issue
 
 
 
 
 
 
 
 
 
 
Telling Startup Stories: Keep the End in Mind
by William Keyser
Kindle ebook Edition
Make your startup pitch the most persuasive by learning how to tell your best story.

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Look Into the Crystal Ball
Take a look at these ten slides for some of the reasons why.

The Art of Social Media

The Art of Social Media: Power Tips for Power Users, by Guy Kawasaki and Peg Fitzpatrick

 

Entrepreneurs-this book should be high on your list.

 

What entrepreneur can live without social media? The answer is none. If you are in business, wise up and read this book. Guy (now with Peg) is a very fluent writer and this crisp short book is fully up to his standard. You'll know I am a fan, when I tell you that Guy's book, The Art of the Start, is a set book for my students on the Marlboro College MBA New Venture Creation course that I teach.

 

The second question is, which entrepreneur has the time and ability to 'do' social media as Guy and Peg do? The answer is not many. Following the advice and using the tools fully might have the fledgeling business founder having less time for more direct tasks. However, I would recommend that all entrepreneurs should at least read the book. It is thoroughly worth the two hours or so of investment.

 

What will you get from the investment? The answer is important concepts and useful tools, like:

  • understanding the difference between content (that you generate) and curation (summarizing and sharing good stuff from others);

  • why planning and calendaring social media work makes sense and the apps available to do it;

  • introducing the importance of the visual as well as the verbal;

  • how it's advantageous to integrate blogging and social media;

  • getting familiar with Google Hangouts on Air (HOA) and advice on the equipment needed;

  • seeing the advantages and pitfalls of using someone else to do you social media work;

  • learning about social media that you might not have considered, like Slideshare and Goodreads.

 

Some of these will prove transformative: I fully expect that to be the case when I master HOAs! At the same time you will want to figure out just what priority you should or can afford to give social media work in the development of your business. 

 

Some of my social media habits have already changed after reading the book. I have also noted several topics I need to go back to and tools/apps I should consider. For instance, when they talk about Slideshare, which I use quite a lot, 

 

I was reminded of the importance using slides with minimal text, something I accomplish by using haikudeck.com to make mine. And I follow Guy's demand only to use 10 slides. For Slideshare, he also stresses the importance of a compelling title page and including a call-to-action-the latter is something I have to improve!

 

One neat reference tool that comes with the book is the appendix listing apps and services. I was surprised, though that they did not include canva.com (one of Guy's activities), a simple graphic design tool that has similarities with haikudeck. Here's one piece of advice whether you buy the book or not: go the book's website; you'll learn a lot right there and then.

 

Another is, once you have read the book, go to the Social Networking Websites Review to compare all the features of the top ten. If like me, you're an entrepreneur, then focus, focus, focus on those sites which are directly relevant to you and don't have high levels of 'waste'. These will include linkedin, maybe efactor, and not forgetting facebook, google+ and twitter, or sites relevant to your sector. 

 

Don't forget the equity crowdfunding sites, which are a form of social networking: gust, angelist, onevest, fundable, crowdfunder, equitynet and startupvalley. Though not for equity, you should not rule out kickstarter and indiegogo.

 

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