Professor Amar Bhide of Harvard Business School and the University of Chicago, speaking at the Second Cambridge Enterprise Conference last Saturday, exploded a number of common myths about how successful entrepreneurial companies start up.
Not what you might expect
He outlined some of the difficulties of transition from early stage to major growth and spelt out the absolutely essential issues that business founders must pay attention to, in order to weather the transition successfully.
Professor Bhide has studied successful enterpreneurial businesses for the past ten years and OUP will publish his new book entitled The Origin and Evolution of New Businesses later this year. Early on in this research, he discovered that most noteworthy businesses have unremarkable origins and suffer from a number of constraints at the time of start-up. Only about 5% succeeded in raising money from outside sources and they were generally forced to improvise and bootstrap their way into a niche market with the founder doing most of the work, recruiting cheap labour for tasks he could not himself perform. In most fields, the well-funded and carefully planned start-up was the exception.
Most of such businesses, characterised by a requirement for low investment, high uncertainty about the nature of the niche market (perhaps created by regulatory or social change) and a low likelihood of major profits, do not produce great paybacks for their founders but they thrive on uncertainty and resourcefulness with a small chance of achieving a large payoff. If they don't succeed, they have little to lose, he explained.
The personal qualities such entrepreneurs need in order to be really successful at the start-up stage are:
They also need to show a capacity to secure resources, a willingness to search widely for their customers and above all, a talent for face-to-face selling.
To overcome the reluctance of customers to deal with a small new enterprise with very small resources and an uncertain future ahead of it, in the early stages of establishing their businesses, the successful entrepreneurs studied by Professor Bhide adopted characteristic strategies.
They offered special deals to early customers and they adopted the outward manifestations of larger and more well-established businesses to 'frame' themselves in a reassuring way for the benefit of their customers and prospects. They also presented choices and trade-offs to their customers in ways that accentuated positive benefits and minimised the perception of risk. They had to search widely for their first customers and backers and were often more successful with customers whose needs were 'one-off' or sporadic than with frequent purchasers of that kind of product or service. They persuaded their customers to increase their commitment in incremental stages. Because it was so difficult to attract top tier customers, they had to make do with the second tier customers who often had problems paying their bills. Similarly, they had to recruit cheap labour. Both these latter problems would have to be solved when the company started into a phase of serious growth or indeed was to grow at all.
The transition of a fledgling business into a large, well-established successful company requires fundamental transformations rather than just a scaling-up, Professor Bhide commented. The small business derives its profits from few factors but a much larger and long-lived company requires a considerable broadening of the firm's assets to enable it to compete in major markets. The process of transformation will take many years and most firms will not survive it - an early demise or arrested development is the commonest outcome, with only a few going on to become large and long-lived companies.
The personal ambitions of the founder have a strong influence in determining which firms will grow successfully, he explained.
Professor Bhide outlined a series of critical tasks which the entrepreneur must undertake if the business is to be among the winners and emphasised that his role is crucial during the transition stage. He or she will have to replace an idiosyncratic personal vision with clear and audacious goals to provide impetus for search for markets, cooperation between employees and to help them to secure resources of all kinds. Long term strategies are needed to replace the opportunistic and improvised approach which helped the business get started.
'Strategy implementation is more like starting out with a map of Everest than the instructions on how to operate a Swiss bank account' he commented.
Entrepreneurs cannot hire other people to establish audacious goals - the ambition to build a successful and long-lived business and the willingness to take the risks required to survive the transition must spring from the entrepreneur. However, the limits to his or her ability to formulate an appropriate business strategy can be mitigated through partnership and its implementation can be achieved through delegation.
'To build a long-life business the entrepreneur needs to supply both inspiration and intimidation,' he commented. 'They are the kind of people who are both loved and feared'. Case by case judgements have to be made to reconcile long term strategies with immediate financial constraints - although transitional firms usually have access to more capital, they usually outstrip their available funds. The choices made will help to define the growing company's culture but if entrepreneurs do not 'lead by example' and monitor the behaviour of subordinates, opportunism will lead to deviations and a gap between the vision and norms aspired to and the actual.
The limited correlation between the qualities required to start up a business and to build it into a larger one largely explain why so few new ventures turn into large and long-lived businesses, he said. Only some of those successful at the start have both the ambition, the appropriate abilities for the transitional stage and the tolerance for the sacrifices and risks involved.
Professor Bhide can be contacted and his book downloaded from the Internet at this address: http://www.people.hbs.edu/abhide