Why accepting shortage is enticing for funding
Originally written by Matthew Cushen about Small Business
My favorite definition of entrepreneurship comes from Professor Howard Stevenson of Harvard Business School – “the pursuit of opportunities beyond controlled resources.”
It captures an entrepreneur’s noble struggle to make something big out of the small, harnessing his innovation, cunning, and agility to overcome the inherent advantages of size, expertise, and trust in large companies.
Conventional economies of scale theory would suggest that large companies are not vulnerable. However, over the past few decades we have increasingly found that this is not the case. Numerous examples of paralysis that lead to paralysis and new companies are the drivers for innovation and new business models.
I have an unusual perspective on the business world, having worked in large corporations, then (and still) as an innovation consultant to the executives of large corporations (like IKEA & AB InBev) and investing in and helping startups for years. I believe that an entrepreneur’s greatest asset comes from scarcity. Entrepreneurs have …
These constraints give rise to the need and freedom to experiment, learn, and iterate quickly and cheaply – with the main effort focused on the customer. Large companies are fixated on the risk – spending too much, talking endlessly about saving time (ironic indeed), navigating their stakeholders, and thinking about the risk to their brand. Summarized in a managing director’s regular reply to an idea: “That sounds interesting, why don’t you put together a business plan?” If ever there was a phrase to steal the energy from creativity.
That is why the envy of big business, as I call it, is the “magic dust of entrepreneurship”. But in general they are missing the point. They think they need to bring a cultural elixir into their organization, but they should take things out – resources, time, people, risk.
For smaller businesses, this is about accepting what you don’t have. Bootstrapping before getting funding is the time of the greatest creativity and freedom – coming up with ways to learn more about your customer, getting your offer (or elements of it) in front of them, for insights, and just enough to do Build trust in your customer’s idea.
It means getting thought about how much money you are aiming for. We get frustrated when we see business plans that require large funds quickly. The entrepreneur will give up more equity than necessary and the investor will take more risk than necessary. We prefer a step-by-step financing of a company in which the entrepreneur benefits from a higher valuation, as more confidence is created in the market adjustment and the scarcity and thus the mentality of experimentation is maintained. This does not mean hand in mouth, but it prevents the “Silicon Valley culture” from being pumped into large sums of money into small start-ups, which then develop the structures and inertia of large companies.
It also means that an entrepreneur escaping a large company should be very aware of their mentality. Many years ago I left a big job at John Lewis to start a new retail business. Filled with the hubris of multi-million pound budgets, I built my retail business with a proposition, processes, and systems suitable for the 100+ chain stores I was expecting. In hindsight, a lot of my investment was wasted. I should have experimented quickly and cheaply, got a deep understanding of the customer, and quickly repeated the suggestion.
So as an investor, I have a keen eye for the mentality of an entrepreneur who comes from a large company. Industry knowledge is extremely helpful, as is structured thinking, prioritizing, and planning of skills that are promoted in large companies. In addition, however, an entrepreneur has to prove his experimental mentality and his ability to accept the scarcity.
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Why accepting scarcity is attractive for investment