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Top Entrepreneurship Prof on Key Start-up Choices
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The undergraduate entrepreneurship program at Babson College, where I teach, was just selected as tops in the U.S. by U.S. News and World Report for the fifteenth year in a row. One of Babson’s leading entrepreneurship teachers is Les Charm who has spent the last 30 years working with start-ups.
His thoughts on how entrepreneurs make key strategic decisions are valuable and interesting. Among the choice nuggets from my September 19th interview are that first-time start-up CEOs often decide what to work on based on what their peers advise them to do. He also thinks that start-ups should adapt their business models to fit the amount of capital they can raise.
Here are the highlights of his comments on six strategic choices that start-up CEOs make:
Setting goals. Charm has observed that many entrepreneurs start companies to do what they already know how to do. But what I found most surprising is that he has found that start-up CEOs get advice on their next goals from incubators or friends who have started companies. If those advisors suggest that they need to raise money or get customers, the entrepreneurs will often take that advice. But if a start-up CEO already is working on his or her second company, their previous experience will often determine how they set goals. If she thinks she was successful before, she will do the same thing in the second one. If not, he may be gun shy and often take advice from a mentor.
Picking markets. Charm notes that most entrepreneurs pick markets that they know already. One interesting point is that a venture does not necessarily need to target a billion dollar market to succeed. If an entrepreneur can only raise, say, $250,000 in capital, then he or she can build a business that generates an attractive return on that capital by targeting a smaller market or by outsourcing a critical activity — like sales. Instead of hiring a sales force, the start-up could form a distribution partnership which would use up less capital. And even though the start-up would get a smaller percentage of the sales, the lower cost would make the partnership more profitable.
Raising capital. While there are no hard and fast rules about raising start-up capital, Charm agreed with an approach I mentioned of a three stage process. First, bootstrap the company until you can build a working prototype that customers like. Second, raise capital from friends, family and angels to take that prototype and turn it into a product that generates sales from many customers. And finally, raise venture capital to add new products and/or expand to new markets. Charm also suggested that entrepreneurs should be open at any time to the chance that capital will become available thanks to a winning pitch to a potential investor.
Building teams. Charm points out that most entrepreneurs hire their friends and people like them. In their minds, this lowers the risk of hiring a stranger. But it can be bad for the start-up if the team does not have the skills — say in sales or product development — that it needs to build a sizable business. Charm also believes that start-ups often need a combination of a leader — who sets the vision for a company and brings people along — and a manager — who can set specific goals, measure performance, promote the performers and cull those who can’t cut it. Many start-ups fail because they lack those skills.
Gaining market share. Charm points out that start-ups need to convince companies and individuals to try their products in a way that is not too risky for the customers. For example, it is usually easier to convince a company to try for free a piece of software that solves a big problem for the company. By contrast, it is often impossible for a start-up to convince a company to try any kind of software, the failure of which would shut down that customer’s operations. Charm thinks that the best way to frame a start-up’s effort to gain market share is to talk about how to get the next 10 customers rather than to set a goal of gaining 5% market share. The more down-to-earth market growth goal is easier to communicate and achieve.
Adapting to change. Finally, Charm thinks that start-up CEOs are usually too engaged in the day-to-day of building a product, thinking about getting office space, raising capital, hiring and so on to think about longer-term trends. Charm believes that start-ups should have board members who can filter out all the market noise to focus the CEO on the most important market signals to which the start-up should adapt. For adapting to change, a leader as CEO is more likely to develop an effective approach than a manager.
Charm’s experience working with start-ups makes his advice ring true. If you’re an entrepreneur, tape this one on your office wall. |
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