START-UPS HAVE BECOME A QUESTIONABLE FASHION – HOW DO WE FIX IT? (PART 2 OF 2)
In part one, I addressed the problem of the ‘start-up fashion’ and why things can go quite wrong.
How do we fix it? Here is my five-point plan: to 1st inform, 2nd encourage, 3rd educate, 4th support and 5th mentor young entrepreneurs in the right way! Their natural key-disadvantage is lack of experience, full stop! This is why most successful entrepreneurs, especially high-growth entrepreneurs, have prior industry experience. This is reflected in data, which shows the peak age for entrepreneurship is around 40 years old.
First the right information: It all starts with misguided expectations. Today’s information variety creates an ambivalent, opposing and distorted picture of entrepreneurship.
Young people, the potential entrepreneurs, by following the stories of some unicorns – TV series like Dragon’s Den – some great success stories of start-ups and investors, are exposed to the idea that it is easy and cool to become an entrepreneur by turning any idea into business by setting up a start-up company. If one is bold enough, they will soon be able to acquire an investor associated with a high evaluation of their young company and becoming rich in a jiffy (on paper) and thus dreaming of achieving in near-term a sky-rocketing exit, making them at least a millionaire overnight.
But let’s examine the facts: the vast majority of fast-growing companies never take any angel or venture funding. OPM (other people’s money) is quite often deceptive, a popular misconception about funding. Don’t get me wrong, there are some very supportive investors, with strong skills and backgrounds in entrepreneurship and not just from investment banking by looking to any source for making money with money, especially in times of low interest rates. But the genuinely helpful ones are in the minority, and one should be aware that venture capitalists bury their dead very quietly – they emphasise the successes but they don't talk about their failures at all.
John Mullins, bestselling author and Professor of Entrepreneurship at London Business School, says that automatically going down the venture capital route is risky and needless. “Sadly, VCs and the rest of the entrepreneurial ecosystem hijacked the financing limelight mostly everywhere. They convinced entrepreneurs that writing business plans and raising start-up funding were the only ways to start a business. Dead wrong.”
Mullins says that almost all fledgling business should be looking to another source of funding first: their customers. His research has found numerous businesses – young and old alike – that have found inventive ways to get their customers to pay for their earliest stages of development.
Nevertheless, there is still the fear of failure dominating – notably in continental Europe, where there is little advice, serious education and role models on how to handle such a painful event successfully.
As the saying of one of my RMK-principles goes: to be successful isn’t the problem, but to achieve enduring success is! To be sustainably successful is a great art, a perpetual challenge which follows its own rules and realities. Memento mori!
Even Apple founder Steve Jobs bequeathed a very important statement as his legacy in this regard within his official biography: “I hate it when people call themselves “entrepreneurs” when what they’re really trying to do is launch a start-up and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be.”
So what is needed is more professional information about the truth and challenges of entrepreneurship. It’s hard work – you have to love it and be sure that you really want to become an entrepreneur and know what it takes. Hence, you must first answer some key-questions very honestly, including your capabilities to start a business. And you’ve got to be sure that you have a single frontline: to drive and develop your start-up business, nothing else! Entrepreneur is not a job title, it is the state of mind of people who want to alter the future, as Guy Kawasaki, an American marketing and technology evangelist from Silicon Valley, calls it.
And one should bear in mind, as Steve Jobs quoted perfectly, “I'm convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance... Unless you have a lot of passion for this, you're not going to survive. You're going to give it up. So you've got to have an idea, or a problem or a wrong that you want to right that you're passionate about; otherwise, you're not going to have the perseverance to stick it through.”
Second, the right encouragement: Neither fear nor fantasy are good advisors. The best way is to lead by example. That’s why I believe that mature, down-to-earth entrepreneurs – successful ones and others who experienced failure or even recovered successfully from bankruptcy – should as ‘case-studies’ enlighten and encourage young people already in schools and universities about the beauty, challenges and adventure of entrepreneurship. Even the best of all theorists or investors wouldn’t be able to hold a candle to them.
Third, the right education: Today, entrepreneurship education does not work, to quote Andrew Yang, founder and CEO of Venture for America named a Champion of Change and Presidential Ambassador of Global Entrepreneurship by the White House. He wrote in a Forbes article: ‘Entrepreneurship classes and programs in colleges around the US have quadrupled in the past 25 years. Meanwhile, rates of private business ownership for households under 30 have declined over 60 per cent during the same period. So, the more we teach entrepreneurship, the fewer young people actually start businesses. This has profound implications.’
Andrew Yang is right. Entrepreneurship education has become a big business, inside and outside of universities, but the results are not convincing at all. Because it’s not just the strongly declining rate of newly founded businesses but also their survival rate which has deteriorated. What we need is a holistic entrepreneurship education. Why? In my belief it’s quite simple – as education programs mostly provide just the necessary theory and how to sail in sunshine, mainly taught by lecturers who never built, managed or took responsibility for a sustainable business or company themselves.
But this provides young folks with only 180° of the necessary knowledge to succeed. You also need some apprenticeship in the real world, as well as to educate and prepare them intensively for failure, dealing with serious risks and surviving severe turmoil – not just technically but also personally, with a 360° perspective. This includes survival training on how to protect themselves from failure as well as, in the event of failure, how to deal successfully with all the consequences, including their personal life and future. Only this will help them to get the right correctives for decisions and behaviour early on. To do this, one needs to involve specifically and highly experienced people from the forefront, from entrepreneurs to lawyers, not just welcomed theorists.
The next thing is a business plan. The idea that a business plan is only intelligible by a few people who have studied a lot and made it in the leading hierarchies, C-levels, is just nonsense! A business plan is well done if your tailor, shoe maker, local banker at your village branch and the charwoman understands and are convinced that it all makes sense and pays off, thus they would like to invest even their own money in your adventure. And, don’t forget, you always need a Plan-B – for everything!
Fourth, the right support: This is key and in the public interest, and should therefore be high on the agenda of governments, as it’s about the future and growth of their economies. First of all, as entrepreneurship is by its nature unthinkable without taking any risks, one should be grateful to decent entrepreneurs by all means, as primarily they generate prosperity for a country’s ecosystem. But, nobody is perfect, and taking risks implicates failure, doesn’t it? To achieve success often depends on a fine line where luck tips the scales.
But failure – for whatever reason and whether by own-fault or external causes – is also an indispensable lesson and learning-curve in the entire span of our lives. It creates self-awareness, progress, human capital and causes us to try even harder. Even in nature, evolution wouldn’t be possible without failure.
What life taught me is: “One learns very little or even nothing from winning. The act of losing or failing, however, can lead to great wisdom. It's inevitable to lose now and then. The trick is not to make a habit of it. There are always failed attempts, as you have to break an egg to make an omelette. The most important thing is not to lose your track, learn and stay tuned. An unsuccessful attempt is just a reason for somebody to stop who anyhow didn’t want to continue.”
Having said that and as we’ve learned about the shortening lifespans of companies, it’s just a logical step that you’d need an open and welcoming culture of tolerance regarding entrepreneurial failure and second chances. This should be reflected in insolvency and bankruptcy laws and procedures with a focus on a fast fresh start, like in the US or UK. As insolvency laws and regulations are so far not harmonised within the EU, most of continental European countries still have very different and quite medieval attitudes and regulations in this regard, which are highly counterproductive to overcoming the fear of failure and stigmatisation. The funny thing is that although everyone was forced to ‘accept and agree’ to save lot of banks with tax-payers money, it’s not quite so regarding normal businesses, and often the financial industry is lobbying and opposing more liberal bankruptcy laws.
The next important requirement is to provide a fast-track and lean legal environment with a minimum of red tape to set-up and wind down start-ups without obstacles and complicated, time- or money-consuming procedures, to grant young entrepreneurs low entry barriers and focus on developing their business.
Another important building block is to support start-ups with capital. Having said that, it’s not just about investors’ money, as this would ‘force’ start-up entrepreneurs to sell shares of their company and to lose consequently some or, depending on how much money and how many rounds of finance they need, a significant or even the majority control, often having to agree to harsh terms. This could break their motivation and complicate managing, developing and running the business. Therefore, serious alternatives are key and essential, either provided by banks (with reasonable risk premiums) or in combination with state guarantees, public early-stage investment capital and subsidies. Several countries are already providing such smart funding schemes as well as support and professional infrastructures in many varieties (including service platforms, business incubation centres, providing temporary low-fee services and office space as well as mentoring platforms).
The latest impressive launch in Europe with an extensive programme of measures was announced by Austria’s government, hailed by TechCrunch as: ‘Austria is beginning to position itself as one of the most attractive bases in the world to launch a new company.’
Fifth, the right mentoring: To dodge the trap of inexperience, young entrepreneurs should be mentored by highly experienced, mature senior entrepreneurs, managers or expats. It doesn’t matter whether they are still active or retired. Young entrepreneurs would benefit from knowledge and capabilities imparted by senior ‘colleagues’ such as business acumen, promising strategies, protocol, decision-making and negotiation skills that often come with time and experience. But to achieve the optimum, I strongly recommend following a new model, not practicing the usual top-down structure from senior to junior. These days it’s much more effective to follow an agile, bi-directional and hence also reverse mentoring.
As our world is changing so fast, especially as the digital environment and technologies become ubiquitous, Millennials often possess more dexterity and knowledge required for digital business and new technologies. And the younger generations, especially those up to approx. 35+ years have, according to my multinational experience, an exceptional attribute, possibly owing to a much better education, free and open communication as well as a vast volume of global information underpinned by the internet, social media and digital connections. They are not as narrow-minded or even grid-locked with legacy in their views, ideas and opinions, but willing to listen, watch, learn from both inspiring examples and failures (even of previous generations) and always welcome flexibility, change and improvements – also astonishingly for the common good, environment and sustainability.
This combination of mentoring and reverse mentoring with young and mature entrepreneurial skills creates an invincible team, and would widely help to avoid chasing phantom business opportunities, repeating the same mistakes and allowing the transfer of knowledge for mutual benefit. These mature mentors could also take on the role of the devil’s advocate and help to support business development with their connections.
A global brand: Whichever country masters this in this highly competitive economy will benefit, could lead the scene and build a global brand.
Want to know how to build a global brand? (There are loads of ideas…)
Reinhold Karner (aka RMK, Reinhold M. Karner)