entrepreneurship definition

The Benjamin Button Startup

baby startup

Guest post by Suhail Kassim

A new startup is like a baby

A startup needs to be cradled and nourished. Even so, there is no certainty that the baby will grow up to be a lean mean fighting machine. In this post, I begin to investigate the phenomenon of some exciting startups which then refuse to grow up — the “Benjamin Button” startups.

Introducing the Benjamin Button startup

A very small minority of entrepreneurs seem to be amazing at finding the right sort of help in their early days. They join rock-solid incubators, find top-notch mentors, maneuver their way into active university forums, win famed business plan contests, know where the hungry angel investors sit. These entrepreneurs are obviously off to an awesome start. Destined for greatness, right?

Not necessarily. Many (if not most) of these startups struggle to fulfil their potential. They stubbornly refuse to scale-up, linger on until they lose relevance, then meet a slow yet inevitable demise. The internet is littered with outdated websites of nascent ventures that never monetized. The chrysalis never transforms into a butterfly. 

I call such ventures “Benjamin Button Startups”, named after Benjamin Button children who refuse to show signs of growing up.

Startups fail all the time, what’s the big deal?

In my personal experience, there is a growing trend of highly promising startups running into the ground. This trend is disturbing for at least two reasons. 

Firstly, this sends a hugely discouraging signal to all other startups: if these poster children fail, despite everything going in their favor, what hope is there for the rest of us?

Secondly, outside startup hotbeds like the Valley, the early stage ecosystem is typically not vibrant. It often has limited resources that can only support a few chosen entrepreneurs at a time. Hence their imperative to succeed — and thereby to return more to the ecosystem than they took out of it — is higher. When they do not, it causes a small ripple. Just a few such ripples could shake up the already fragile ecosystem. The already wary seed investor will turn away, LP funding will ruthlessly re-route to greener pastures, incubators will be left with tarnished reputations, the Fortune 500 executive will politely decline to mentor the university business plan winner. 

What makes a startup a Benjamin Button?

Sometimes it seems to me such startups are victims of their own early success. The founder confuses the “first big win” with the ultimate destination. He/she gets caught up in all the attention, the award ceremonies, the media buzz, the blogosphere hype. Some entrepreneurs succumb to the heady temptation to become celebrities today instead of business moguls tomorrow. They end up doing a ton of calorie-burning activities like giving guest lectures, mentoring other startups, speaking at jazzy forums. As a result, they stay stuck in the “successful-student-startup” mode instead of growing up. And if the founder does not grow up, the startup won’t either.

There is also an element of hubris. Entrepreneurs sometimes think the same skills needed for early wins will carry them through scale-up. This is almost invariably not the case. Early stage success can happen through blue sky thinking, strong personal and professional networks, hyperactive multitasking, good mentors, and a couple of passionate co-founders. There is adrenaline rush after adrenaline rush. Scaling up, on the other hand, needs grit, patience and the ability to fight boredom. It needs long nights out working on a particularly stubborn piece of code while dining on ramen noodles. It needs the founder to hyper-delegate and decentralize or risk falling into the “Founder’s Trap”. It needs a different kind of mentor and adviser — not someone who can ideate but someone who has actually implemented. 

Also, for VC-stage companies, the VC is always more demanding — and less polite — than the angel investor. Unlike a basement startup with three high school friends who are bootstrapping off their pocket money savings, here the money runs out quicker: the VC-stage venture needs to pay its “employees” (it’s no longer just the co-founders) market-pegged salaries (and, gosh, benefits!) — and I’m not even including joining bonuses and annual bonuses and small stock options to the first 100 employees… . In some ways, starting a venture is akin to a part-time Masters program, while scaling up is like a full-time PhD program. Not every MBA gold medalist is suited to do a doctorate in business administration.

Finally, there is the culture of failure. Some ecosystems reward failure — the Valley places a premium on “fail fast, fail early, fail often” — which reduces the tolerance level needed to slowly but surely cultivate a fledgling startup, leading to premature demise of ventures that should have succeeded. Other cultures punish failure — and in such places, the founder is tempted to grab whatever minor victories he/she can — whether it be to speak at a forum or give a newspaper interview — at the cost of focusing on the core business itself.

See also Time To Start a Business – or Not. Illustration: covenant-harvest.org

Have you witnessed instances of Benjamin Button startups? If yes, do you agree with the reasoning above? What are the other explanations as to why this happens? Leave us a comment and let us know your thoughts!

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Not All Angel Investors Are From Heaven

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On Angel Investors

As entrepreneurs, in the initial stages of the startup, we often think that the answers to our problems will come in the form of an angel investor. By definition, angels are high-net-worth individuals who get involved early in the company’s life, bringing capital, sector knowledge and network, and relevant expertise.

Angel investors usually invest anywhere between $20k-$300k and take on 10-30% ownership. They spend some of their time coaching entrepreneurs, opening doors, helping the company build the team and product, participating in strategic decisions.

Not all angel investors are the same

However, not all angel investors are the same. Reality has “expanded” the definition of an angel and many times what we see is well-off folks with no particular value-add (beyond the dough) playing the angel role almost as hobby. This is particularly true in less developed markets, such as Brazil (which I know from experience) and the rest of LatAm. Being rich and successful doesn’t necessarily make someone a good angel.

As an example, a retired C-level executive from a large pharmaceutical company may easily have a couple of hundred thousand dollars to spare and decide to invest in a startup. Why not help a couple of smart kids with a brilliant idea for a new technology or web business? What better way to stay busy and motivated!

The problem is that often these investors often have no idea what they are getting into. They just don’t know the real challenges and risks of starting a company. As time goes by, the product doesn’t launch as planned, the bank account gets thinner, and the investor gets nervous.

Entrepreneurs also get frustrated because they had expected miracles from this angel. After all, he is the older, successful mentor, who’s been there, done it all.

But it turns out the guy you looked up to actually doesn’t know much more than you when it comes to building a tech company from the ground. His rolodex only has contacts of retired people from irrelevant sectors. And as he sees his investment going down the drain, he doesn’t think you’re that cute and inspiring anymore.

Of course, I’m painting a pretty extreme scenario here. But the point is that you shouldn’t necessarily accept the first person who’s willing to invest in you. If the angel investor is not a good fit, it’s better to hold your horses, bootstrap the business a bit further, until you find someone who can actually add value to the company.

Originally posted on the Entrepreneur Academy (NEN). Image: nenonline.tv. See also Time To Start a Company – or Not.

What’s your experience with angel investors? Leave us a comment!

Entrepreneurship, Innovation and Prosperity

entrepreneurship innovation prosperity economic growth

Entrepreneurship and economic development

What is the common ground between the economic prosperity of the Netherlands in the XVII-XVIII centuries, nineteenth century England, twentieth century U.S. and, more recently, countries such as South Korea, Singapore and Israel? Although the question could be answered from different angles, fundamentally it can be inferred: in their own time, these countries promoted economic systems where resources were efficiently channeled to the most competent entrepreneurs and endeavors.

Canadian economist Reuven Brenner summed it up perfectly: “Prosperity is the result of matching talent with capital and holding both sides accountable”. The “capital” can come from one or more sources: capital markets, government, savings or inheritance. The “talent” may be fostered internally – through education, incentives for innovation and entrepreneurship, development of a risk-taking culture – and/or imported, with the opening of borders to skilled and entrepreneurial immigrants. Finally, “accountability” is constructed through solid institutions (political, economic, regulatory, legal, social) that promote a stable business environment, where contracts are honored and a long-term perspective is installed.

Back in time, on entrepreneurship and prosperity

In the XVII-XVIII centuries, the Netherlands had the most developed capital market in the world. It operated the forefront of financial instruments, both debt and equity, which enabled people and companies with good business ideas to grow their ventures. Therefore, at a time when most societies were divided essentially into castes – with royalty, nobility and aristocracy keeping their wealth generation after generation – the Dutch popularized the access to capital and implemented a socioeconomic system that was (by the time’s standards) more democratic and meritocratic. Moreover, in addition to having effective institutions, it opened its doors to immigrants from diverse backgrounds, welcoming for example Spanish Jews and French Huguenots, who brought innovations from their countries and who, by definition, were mostly entrepreneurs (what is more enterprising than venturing oneself into a new country?)

A century later, England became the engine of the Industrial Revolution within the same logic: capital-talent-institutions. Innovations, both technological (e.g., steam engines) and of process (e.g., revolutionary management techniques) were only possible due to an economic system where risk was properly rewarded and the process of trial and error was stimulated. In the second half of the twentieth century, the United States, in turn, established itself as the major economic superpower based on: capital (Wall Street, Silicon Valley and its angel investors and VC/PE funds, R&D subsidies); talent (Americans and immigrants educated in universities such as Stanford, Harvard and MIT); and institutional climate (pro-business laws, efficient legal system, overall social fabric etc.)

Immigration was especially important in the U.S. As proof, 40% of Fortune 500 companies were founded by immigrants or their children, including giants such as Intel, Google, eBay, Apple and GE. Furthermore, ¾ of patents developed in American universities had the participation of immigrants. It is no wonder that immigration reform is constantly brought up within the debate for promoting American competitiveness and sustained economic growth.

Recently, the most successful cases of economic development were the Asian Tigers. The political, economic and institutional reforms that occurred in these countries, combined with investment in education and the development of capital markets, enabled a flurry of investments and skilled immigration, driving the growth and development of these countries. Another interesting case is Israel, a nation created just over half a century ago, in the middle of the desert, and that thrives due to skilled immigration and education, dynamic access to capital (private and public), a culture conducive to risk taking, and solid institutions.

Traditionally, the quest for prosperity has been driven by top-down policies, often based on unrealistic economic models. Looking at economies through the lenses of “capital-talent-accountability” gives us a clearer view of the issues at hand, from the bottom up. It provides better grounds for understanding the underlying factors that build an economy and allows for more factual and entrepreneurship-friendly policy making.

Andre Averbug is an entrepreneur and economist.

See also An Idea Is Just That – Not Yet An InnovationImage: source unknown (anyone?)

What’s your opinion about the link between entrepreneurship and prosperity? Leave us a comment!