The Anatomy of an Entrepreneur

The Kauffman Foundation recently published an interesting report on the anatomy of an entrepreneur. Here is a list of its key findings:

  • Company founders tend to be middle-aged and well-educated, and did better in high school than in college
  • These entrepreneurs tend to come from middle-class or upper-lower-class backgrounds, and were better educated and more entrepreneurial than their parents
  • Most entrepreneurs are married and have children
  • There is an early interest and propensity to start companies: 52 percent of respondents had some interest in
    becoming an entrepreneur when they were in college, but 34.7 percent didn’t even think about it, and 13.3 percent had little or no interest. Those from lower-upper-class backgrounds were more likely to have been extremely interested in starting a business than the average (25 percent vs. 18.5 percent).
  • Motivations for becoming entrepreneurs include building wealth, owning a company, startup culture, and capitalizing on a business idea
  • Not important or less-important factors: inability to obtain employment or encouragement from others
  • Most had significant industry experience when starting their companies
  • Early entrepreneurs and those with an early interest in entrepreneurship are different
  • 60.3 percent said that working for others did not appeal to them. Responses to this question were relatively evenly distributed in a rough bell curve, with 16 percent of respondents citing this as an extremely important factor and 16.8 percent of respondents citing it as not at all a factor.
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Are You Cut Out for Entrepreneurship?

Okay, I get the hint. A few people have already emailed me this WSJ article today so I thought I should mention it. Kelly Spors, staff reporter for WSJ, asked 10 poignant questions that effectively challenges one of my recent blog posts where I argued that now is a good time to be an entrepreneur. First, I think her argument is right on the money. Entrepreneurs should definitely ask themselves the following questions before taking the plunge:

1. Are you willing and able to bear great financial risk?
2. Are you willing to sacrifice your lifestyle for potentially many years?
3. Is your significant other on board?
4. Do you like all aspects of running a business?
5. Are you comfortable making decisions on the fly with no playbook?
6. What’s your track record of executing your ideas?
7. How persuasive and well-spoken are you?
8. Do you have a concept you’re passionate about?
9. Are you a self-starter?
10. Do you have a business partner?

Yes, Kelly’s questions relate to the personality and perseverance of an entrepreneur, but I think she overlooked an important question: Do you have a viable exit strategy and the skills to execute it? Too often, entrepreneurs dive into the proverbial swimming pool not knowing how they’re going to get out. They may know what dive to use. They may know how to execute it. They may even know how to avoid landing on other swimmers. But how long should they stay in the pool? Why and what strategy should be used to get out? Okay, that’s enough metaphor talk. You get the point.

Despite the obvious challenges with being an entrepreneur in today’s economy I’m still convinced they represent advantages entrepreneurs can take advantage of, such as cheaper resources or less competition. Still, Kelly makes a good point. It doesn’t matter if resources are cheap or there is less competition because you’ll still struggle or fail when [gasp!] you aren’t cut out for entrepreneurship.

Check it out: http://online.wsj.com/article/SB123498006564714189.html

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Board Meeting Etiquette Part 7 (General Etiquette)

The effectiveness of Board meetings has a significant impact on the ultimate performance of an organization. And they require a certain etiquette in order to be most effective. But how exactly should they be treated? Why should we have them? What should be discussed? Who should attend? Answering such questions can be difficult for first-time entrepreneurs who find Board meetings to be a foreign experience. Even veteran entrepreneurs should be reminded of proper Board meeting etiquette. So I’ve asked some experienced entrepreneurs and investors to offer their opinions about Board meeting etiquette in the context of small, private businesses. Their responses have been compiled into a series of seven separate blog entries.

Please share any general thoughts you have about Board meeting etiquette.

“There should be an outline and opportunity for each member to have a time to express whatever they want, but overall, it should be at the direction of the Chairman. The Chairman needs to call for a vote. The Secretary needs to be assigned to take meeting minutes or find a 3rd party meeting “stenographer” or the meeting can be recorded for future reference. The Chairman needs to call for a specific vote on matters that Board members or management bring up for a decision.” –Jaime Villagomez

“Keep it simple.” –Allan Young

“Prepare a board meeting packet and distribute to board members at least one week in advance of the meeting.  Include items that require board vote and approval so board members can consider them ahead of the meeting instead of trying to process them in the meeting.  Detail in the board packet will depend on what your board members like – some like lots of detail and some don’t.  For the meeting itself, prepare a crisp, short presentation for the company overview, but keep a lot of data and detail close at hand. Take notes.  Be formal with items requiring a vote – introduce voting items by motion, seconded by another board member and voted upon by all board members.” –Gregg Rosann

“Since the CEO tends to stuff the board with trusted allies, some boards provide only a rubber-stamp function. This is a total waste of time. A good CEO is one who encourages honest discussion and toleratesdissention on major issues. Likewise, it is not good to have cross-directorships, where the CEO serves on the board of another company whose CEO serves on his.” –Robert Rieger

“As is the case in general, Boards have experienced various levels of legal liability and cooresponding challenges. As a result it is critical that Boards’ and their members consider seriously and manage accordingly their responsibilities and follow due process and legal procedure at all times. All topics and discussions should be held in greatest confidence and recorded.” –Tricia McGarry

“There can (and should) be issues discussed regarding the (always) pending threats to the business. Disagreements better happen in a board meeting. If it is a year of “feel good” meetings then the board is dangerously blind.” –Scott Spurgiez

“The Board employs the CEO, who is responsible for maximizing shareholder wealth. It is common for the Board to also employ other chief executives.” –Jacob Webb

Previous questions:

Pt. 1: What is the purpose of a Board meeting? Why should we have them?

Pt. 2: How long should a Board meeting be?

Pt. 3: Who should do the speaking in a Board meeting and why?

Pt. 4: When is it appropriate, if ever, for someone other than a board member to attend a Board meeting?

Pt. 5: How often should a Board meeting take place?

Pt. 6: What is the most important topic a Board of Directors should address during Board meetings?

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Board Meeting Etiquette Part 6 (Agenda)

The effectiveness of Board meetings has a significant impact on the ultimate performance of an organization. And they require a certain etiquette in order to be most effective. But how exactly should they be treated? Why should we have them? What should be discussed? Who should attend? Answering such questions can be difficult for first-time entrepreneurs who find Board meetings to be a foreign experience. Even veteran entrepreneurs should be reminded of proper Board meeting etiquette. So I’ve asked some experienced entrepreneurs and investors to offer their opinions about Board meeting etiquette in the context of small, private businesses. Their responses will be compiled into a series of seven separate blog entries.

What is the most important topic a Board of Directors should address during Board meetings?

“Vision, strategy, budget, performance, capital, strategic needs and opportunities, company health and items that may compromise the goals set during the yearly planning meeting.” –Jaime Villagomez

“It depends on the state of the company.  Leadership issues are constant.” –Allan Young

“There is a fairly standard agenda for board meetings; it includes a company overview (sales/marketing, operations, financials) and various corporate governance topics, such as compensation, audit, financing and legal.” –Gregg Rosann

“The board should consider the financial position, revolver balances, ethical concerns and violations, environmental matters, bank covenant status, tax issues, audit issues, etc. Note the main point here concerns the overview of proper management controls. It does not involve whether to purchase a new copy machine for the office.” –Robert Rieger

“Economic or financial conditional factors, oversight of general management and leadership and other operational issues are those areas that a Board is most equipped and typically tasked to manage. Boards generally assume some level of liability for an organization’s management and leadership oversight, sustainability and financial health and should focus accordingly. Boards are typically the forum for managing any structural adjustments to an organization such as mergers or acquisitions or major financing events including stock structure and distributions.” –Tricia McGarry

“Varies.” –Scott Spurgiez

“Corporate strategy–financial, sales and marketing, organizational, and managerial. It should also address past performance.” –Jacob Webb

Next question:

Please share any other thoughts you have about Board meeting etiquette.

Previous questions:

Pt. 1: What is the purpose of a Board meeting? Why should we have them?

Pt. 2: How long should a Board meeting be?

Pt. 3: Who should do the speaking in a Board meeting and why?

Pt. 4: When is it appropriate, if ever, for someone other than a board member to attend a Board meeting?

Pt. 5: How often should a Board meeting take place?

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It’s a Good Time to be an Entrepreneur

Doom and Gloom?

Let’s get the doom and gloom out of the way first. There are a million reasons to be concerned about starting a business given the state of the economy. Perhaps the biggest fear is driven by the fact that banks and VCs are cutting back on their investments. While this is true, low interest rates are compelling people to find alternative investment opportunities with decent returns. And there are still many angel investors looking for great opportunities.

Entrepreneurs need to remember that access to external sources of capital is not the only success driver of a new business. In fact, 99% of businesses are bootstrapped. Granted, not all start-ups are successful; but if you have a solid business plan then you have a better chance of success.

Less Competition

It’s a good time to be an entrepreneur because the economic crisis is killing off competition. Companies that were unprepared to go lean or that didn’t properly hedge their risk are dying off. Less competition means more opportunity. This is a great thing for entrepreneurs if they can find a niche or opportunity in industries that are struggling. The entrepreneurs that do launch in the face of such “adversity” will have an easier time finding customers.

Agility is the Best Defense

Being a small company can also be a good defense against the downturn. Many of the big firms that can’t survive the economy are unable to do so because they are too bureaucratic. It takes them too long to execute. But smaller, more agile start-ups are able to adapt to trends and defend against crises much faster than their corporate counterparts.

Cheaper Resources

At times like these, resources are less expensive. Entrepreneurs can find great deals on equipment during a financial famine. And there are a lot of people who have been laid off that might be willing to work for less. Companies that are starving for business, such as commercial real estate firms, are more inclined to negotiate a deal or a discount on property leases. This will contribute to lower start-up costs.

Focus on Your Core

If you can stave off the crisis your company will be positioned for stronger growth when the economy rebounds. One of the best ways to survive is to cut back on the frivolities, such as unnecessary operations, and focus on your core competency. If innovation is your bread and butter then invest in new product development. If legendary customer service is your founding principle, remind your customers using a revamped marketing campaign. Or if streamlined operations are what set you apart, cut out the marketing pork and invest resources in faster production. By focusing on your core your organization will be well-positioned to capture more of your market once the economy turns around.

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How to Manage the Ambiguity of Entrepreneurship

The Question

I once interviewed for a consulting opportunity at a VC-backed portfolio company. Of all the questions asked by its Director of Human Capital I can recall only one, “How do you deal with the ambiguity of entrepreneurship?” I’m sure I fumbled my way through the question. But I’ve since thought a lot about it and have come to realize how profound it really was.

How exactly do we navigate the ambiguity of entrepreneurship? What’s the secret?

The Answer

The answer? Risk tolerance. Our ability to take risks and make executive decisions based on extremely limited information is the best way to manage the uncertainty of entrepreneurship. After all, entrepreneurship is inherently risky. We may have a revolutionary product. We may even have the early adopters (innovators) waiting in line to buy it. But sometimes, that’s about all we have. Yet despite our lack of experience and limited resources we still have to select the most appropriate distribution channel, the most effective marketing strategy, and the best pricing schedule. Like I said, risk.

The Algebraic Analogy

Making these decisions blind is like having to conclude the answer to an algebraic equation with more than one missing variable. For example, if I told you 2X + 3Y = Z could you tell me what Z equals? Probably not exactly unless you know X = 2 and find that Y = 3; then you can solve for Z = 13. But what if you didn’t know X or Y? Say you didn’t know how your customers will respond to a premium price (X) and how your competitors will react (Y). What if you had to guess? That’s entrepreneurship. And when you combine the decision with the fact that investors’ money is on the line, it makes for a very risky (and tense) situation.  But it must be done. The decision must be made. And there are a things we can do to hedge our bets, such as thorough market research.

Even market research can yield wacky results or no results at all. Perhaps the sample used isn’t representative of the target market. Or maybe our sample is biased. While the results may be flawed, it’s still better to find that X = 1.9 and Y = 3.1 than to simply guess X = 0.0003 and Y = 32. Yikes!

Let’s put this  into a business context. Say we’ve launched a gourmet soda pop shop and want to adjust the corporate strategy to reflect the national health trend. We need to know who our new customer is, how to access them, what their taste preferences are and their sensitivity to premium pricing. Yet our market research yields only that, for a minority of the local population, soda is a substitute for beer. That’s it. The rest is speculation. So how do we navigate the ambiguity of the situation? It’s an incredibly risky proposition, albeit unrealistic that an entrepreneur would launch a new strategy under ambiguous circumstances. I digress.

Entrepreneurs with spizrintum will still take the plunge and make some educated assumptions based on the limited information available. Hypothetically speaking, they’ll price the sodas at a 40% margin. They’ll invest in non-traditional advertising that targets men ages 18 – 35. And they’ll position the brand as a healthier, premium alternative to alcohol. This is risky because the decisions are based solely on assumptions gathered from limited market research. But that’s entrepreneurship!

Were I to go back a few years and interview again with the same Director of Human Capital, I would have answered the question saying, “It’s my tolerance to risk that enables me to deal with the ambiguity of entrepreneurship.”

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5 Biggest Mistakes Entrepreneurs Make

1. Having unclear goals and an unclear mission
2. Trying to prove that they are smart
3. Greed – doing it for money
4. Hiring people that they like rather than people that they need
5. Not knowing when to let go

Jerry Kaplan, a serial entrepreneur from Stanford, taught these principles on October 01, 2003. His video is posted in my videos column and you can access the original manuscript of the speech at http://ecorner.stanford.edu/. My favorite line from the speech is, “Equity is like s**t. If you pile it up, it just smells bad. But if you spread it around, lots of wonderful things start to grow.” Classic!