A future with entrepreneurship

Asian society has always revered both teaching and healing as perhaps the most noble of occupations. I want to leave you with the thought that pursuing an entrepreneurial opportunity that you are passionate about is an equally noble career choice that could, as an almost irrelevant by-product, make you personally wealthy as well.

From society’s perspective, creating new institutions (India’s Infosys), bringing about dramatic change in an industry (China’s Alibaba or Malaysia’s Air Asia) and creating tens of thousands of jobs, is above all, a noble endeavour. The fact that the passionate and driven entrepreneurs who founded these innovative companies — Narayana Murthy, Jack Ma and Tony Fernandes — became fabulously wealthy in the process was (probably) just the icing on the cake from their personal perspectives.

Despite the ‘feel good’ success stories like the ones above, entrepreneurship is a risky proposition. For example, one rigorous academic study on entrepreneurial success in the US shows that only about a third of folks trying to launch a new venture succeed in creating an operating entity with revenues and only about a tenth of such new entities survive five years out. Part of the reason for these low success rates is because entrepreneurship involves pursuing novel ideas and activities and is therefore rife with uncertainty. Note that more novel venture ideas usually have higher growth potential although they also face greater uncertainty. Thus start-ups can be arranged on a continuum ranging from low-growth potential ventures (e.g. the next corner store) which usually have less novelty to high-growth potential start-ups (e.g. the next Google) which typically have more novelty.

So, what might you do to improve your odds of success in this noble pursuit of building high-growth potential ventures? The short answer is straightforward: spot good opportunities and execute them really well! The deeper question then is to figure out how to spot good opportunities and what might executing well mean; what follows is one way to answer this deeper question.

Contrary to the myth of the solitary genius, great venture ideas seldom come from brainstorming alone in a closed room. Rather, they arise when the entrepreneur interacts with a diverse group of knowledgeable people, and recombines ideas from different sources. While there is no magic formula to generate creative insight, it is possible to position yourself so you continually encounter a stream of interesting venture ideas.

The key is to have an appropriately configured professional network (your current stock of professional relationships) and stay alert to the problems and possible solutions that your network contacts grapple with as users of products and services. Our natural tendency is to hang out with people who are like us — much like how birds of a feather flock together. When your professional network consists predominantly of people like yourself, you tend to hear the same stories, the same information keeps re-circulating and you fool yourself into believing that what you are learning about the external environment is consistent when actually, it only appears that way because you are reaching out to a narrow range of information sources.

So, difficult as it is, building relationships with people who aren’t like you makes it more likely that you spot problems that can be solved profitably in novel ways. Look for people who are different in terms of age, expertise in terms of industries and functional areas, social communities, geographic location, different positions in the supply chain such as vendors, partners and customers.

Great venture ideas typically have three ingredients in common: the opportunity stems from recognising unsolved problems or unmet needs that can be addressed in an innovative way; the innovative idea involves creating a new market niche that is large, provides multiple revenue streams and supports scalable operations and finally the founder is passionate about the idea and has at least some relevant skills.

Having zeroed in on what you believe is a great venture opportunity, the next step is execution. It is useful to think of execution in terms of two transitions: first moving from an idea to a nascent business with some revenues; second growing from a nascent business to an established, viable one.

The critical point about the first transition is the following: An opportunity is the entrepreneur’s conjecture about an unsolved customer problem or unmet customer need. The only way to test that conjecture is in the marketplace with users. When you do so, your ‘great idea’ evolves; as you learn more about the environment and adapt, you usually end up with something quite different from your original business concept. Sometimes, this adaptation process might suggest that your great idea does in fact constitute a viable business; sometimes it might suggest the exact opposite.

The key therefore is to go through this adaptation process cheaply (with little capital at risk) and quickly. In other words, failing quickly and cheaply is better than soldiering on and burning through a lot of capital before deciding your idea was not a viable one in the first place. Bootstrapping is a time-tested technique to validate a business idea with minimal capital at risk. The essential logic of bootstrapping is to have very little fixed costs, engage a few committed customers/partners, adjust to their needs and thereby learn the value of your offering and take advantage of unexpected market surprises to grow.

Once your venture starts generating steady revenues in the novel market niche that it helps establish is when you need to worry about the second transition. The critical point here is the following: Typically, once the potential of the new market niche pioneered by your venture is established, your venture will face fierce competition — from copy-cat imitators as well as incumbents in adjacent market niches. Managing profitable growth in such an intensely competitive context is a difficult challenge. Success in this early growth stage requires market focus, building adequate management control systems, raising enough capital to fund the growth and most importantly, building a capable top management team.

Often, it may also involve the founder acknowledging his/her limitations and stepping aside to let a professional CEO take his/her baby to the next level. These are not easy tasks, which is one reason why many ventures fail at this crucial stage. Successfully navigating this difficult transition would typically pave the way for an exit opportunity for the initial investors and the founders — either in the form of a trade sale or listing in public markets through an IPO.

To sum up, entrepreneurship is as noble an occupation as teaching the young or healing the sick! Yet, it is also a riskier proposition than teaching or healing — manage the risks by picking an idea that is a great opportunity for you and execute it well to reap the rewards of your hard work.

Bala Vissa is Associate Professor of Entrepreneurship, INSEAD.