Climbing the Entrepreneurial Decision Tree

Aloha mai kākou,

Up to now Tom and I have tried to tempt all you would-be entrepreneurs out there, hoping you’ll jump into the excitement of a new startup and share that great idea you have with the rest of the world. You can be brave, and know that we support you and want to encourage you. If you are not ready to take the plunge into self-employment, don’t wait to begin planning for the inevitable: There is still much you can do today, to create your future the way you want it to turn out.

Well, what about those of you who have made the jump? Have you been thinking you might not need Tom’s Startup Garden because you have already taken several first steps? The article that Tom has written for Talking Story today is for you — and I am in this canoe right along with you! Have you really answered all the questions that should hold up the fruiting branches of your entrepreneurial decision tree? Let’s see…
Tom writes more for us today.

—Rosa

Unlike Tolstoy’s families, happy startups are not all alike. There’s no one set path that ensures success for any venture, and in fact no two companies can make the same claim to fame. Which is a good thing.

Does that mean entrepreneurs should embrace randomness as a strategy and strive to do everything their own way? To sally forth impetuously and make decisions immediately so as to realize their dreams? No. This simply means that there’s an underlying framework, a general timetable and lifecycle that should inform the decisions of any company-builder.

As you grow your startup in an organic process, you must be willing to adapt to market conditions, customer feedback, and the various slings and arrows of entrepreneurial fortune. This calls for confidence, flexibility, and a forward-looking approach.

However, you must also realize that you will be presented with critical choices during the early stages of your startup. Some of these will be explicit, while others will quietly present themselves without tapping you on the shoulder to announce their import and consequence. You must be aware of these choices and their consequences, for while there is no right or wrong answer, you will garner immense control over the company of your choice by understanding these choices when they present themselves. And the key point here is that whether you make these decisions consciously or not, you will be making these choices nonetheless. And there are irrevocable consequences to each.

Starting a business is a process of execution that begins at the moment of conception—when you get that “aha” moment. At the same time, you are often building the groundwork for its success long before the specific enterprise emerges as a named, planned (planned), deliberate and structured set of activities.

There is a science metaphor called late and early binding choices. In some chemical formulas, elements bind together early and cannot be changed later in the process. The same principle applies to startups: once you’ve made a few critical decisions about the company that bind together, you may find it impossible to undo them.

And so dynamic startups must manage the quality of cognitive dissonance—the ability to hold two opposing ideas together, in harmony. Yes, great startups are adaptive, responsive, able to capitalize on opportunities immediately and without limits. Yet these qualities are mitigated and bounded by a set of rules. The founders must still build in financial, technical, and people skills that are aligned with the corporate goals; they must have given the company great flexibility by being extremely disciplined about what cannot change.

Learning in an entrepreneurial setting is a heuristic process. The situation itself teaches you what to do and how to learn. You can only learn how to play the game by being in the game, and you can only figure out how to make one specific decision after having made several others.

What do I mean, you ask. Well, here’s a rough framework to help you make the right decisions at the right time.

First choice: Are you suited to run a startup?

Do you have the temperament, the time, the skills, and the fortitude? Startups are not about risk. There are all kinds of ways to mitigate risk. But they do involve uncertainty. They lack a structure, and require that you change plans and adapt constantly. Are you comfortable with this type of existence? If not, stick to life in a structured setting. There’s nothing wrong with that. Also, do you have the time, the resources, to allow you to tend to your business appropriately? Do you have the right family support? Moreover, you must constantly revisit this question. You may be suited to start a startup—but not run one. You may be suited to run a growing company—but not a mature one.
When to ask the question: at the very outset.

Second decision: How big do you really want to be?

What will the structure of your company be like? Do you plan a high-growth startup whose growth will present continually changing demands, or are you seeking more of “lifestyle” business that will reach a state of equilibrium sooner, enabling you to focus more on maintaining its efficiency? N.B. to reach a state of equilibrium doesn’t mean you’ve stopped growing per se. It means that your business has come to a point where it can essentially sustain itself through its internally generated capital, has found a market “sweet spot” of health customers, and you can manage the entire business in a well-rounded and systematic manner.

Now here’s an important point: there’s nothing wrong with seeking to build a moderate company. The vast majority of ventures in this country are personal, manageable, and smaller scale. Less than a million dollars in annual revenues, and often with fewer than five employees. Many have just one person. Succeeding at this route can be immensely rewarding. The biggest risk of failure lies in not being honest with yourself about your choice of business. Ambition is good; but don’t pursue hyper-growth if your venture really can’t deliver.

Now, if you really believe you have an intimate understanding of an opportunity, then you proceed down the road of seeking investors and resources to match. You need to prepare for the stages of growth, and all the attendant demands on hiring (for growth), capital formation, product development, and the need to build in an infrastructure for growth.
            

Third question: How will you fund your launch and growth?

Properly aligning the amount and nature of your capital investment is probably the most binding and unchangeable early decision you’ll make. For this reason, you must carefully match the type of investment and investor for your business, weighing the non-financial support they bring with them. You must be realistic and pragmatic about the real needs of your business, which should be focused on providing something concrete to customers. Seek out veterans of the field you are in to learn the rules of thumb for how much it costs to roll out new products, to purchase the minimum of technology to compete, to participate in the appropriate trade gigs or to simply appear professional.

The consequences of having too much money are almost as severe as too little. Running out of cash certainly puts the kibosh on the company. But having active investors who demand quick returns and unrealistic revenues will force you to scurry to precisely the wrong activities for your venture. You must accept funds from individuals who have your ventures best goals in mind. 

Finally, what is your exit strategy?

Simply keep this goal in mind on the day you start the company. Use it as a benchmark to insure that you are always maximizing the value of your company, which should direct you to the most productive use of your resources. Use it as a factor when considering any long-term decisions on who you hire and how much control you share, trade, or sell. You may never want to sell your company. But you should always be prepared!

—Tom Ehrenfeld