In the first part of this series, we talked about all the things you don’t need, to become a successful entrepreneur (“exploding the myths…”); so now, let us focus on the things you do need. These essentials apply all the more strongly, if you do not have a watertight business plan, an existing killer product idea, strong funding and ready customers. But, even if you do have all or any of these strengths, it only means that you have an early start, and could still be exposed later on, to the brutal open market… so, you may still want to ensure that you imbibe these essential prerequisites to make the leap into entrepreneurship!
There are four major composite prerequisites for successful survival as an early stage entrepreneur anywhere:
1. Fiscal prudence – to ensure that you can survive indefinitely, or at least as long as possible, with as low a probability as possible of collapse
2. Preparation for failure or delayed success – most entrepreneurial ventures have about as much of navigation and acceleration control, as a leaf on a waterfall… which is to say, it is almost pointless to make rigid plans, when you are a tiny, insignificant speck in a huge, complex, competitive market. I have seen tons of six- and twelve-month plans fail miserably! However, just as a leaf on a torrential flow actually has a somewhat predictable trajectory over a longer stretch, if you do the right things long enough and often enough (as the saying goes), you may achieve much more than your expectations, but over something like, a thirty six month period! Which is to say, the market follows its own cycle, not that of the startup strategist… but the wise and patient entrepreneur who understands the cycle and correctly rides the tide, may earn rich dividends!
3. The ability to evolve naturally – just as many entrepreneurs tend to be wrongly optimistic about the results they will achieve in capturing market demand and delivering their offerings, they are sometimes overly pessimistic (or just disregarding) about their own ability to learn, grow their organizations, build and leverage new partnerships, and so on. Entrepreneurship is also a great teacher – the receptive student would learn enough over a few years to be many times more than the man he set out as! Therefore, just as the first time entrepreneur may overestimate success in the short run, he is more than likely to underestimate success in the long run.
4. Burning ambition – pt 1 above gives you a full fuel tank, pt 2 gives you a method of finding the right route and not getting stressed out about the time you take for the drive, and pt 3 gives you a method of continuously learning to drive on new types of terrain… but it is pt 4 which is the force on the accelerator!
Let me now try to elaborate on, and deconstruct the above prerequisites:
1. FISCAL PRUDENCE
1a) Staying power: If you are a working professional who has decided to become an entrepreneur, the first thing you need to do is a cash flow forecast which is approximate for the next three years, a more detailed estimate for the next one year, and as precise as possible for the next six months. Do you have a spouse who works? How much of your monthly expenses will her/his income cover? Do you have growing children to support, are there any major new expenses expected for them? Any medical expenses for aged family members? Do you have a home loan or a car loan, and how many installments to go? What is the net present value of your investments? As you prepare for the leap, you should be like a squirrel preparing for the winter, putting away every bit of resource you can find, cutting down expenses to the bare essentials such that your basic lifestyle standards can be maintained undisturbed for the longest period possible. If you have any assets you may need to convert to cash later, make sure they are liquid enough (eg, they should not be like property where you have a shared ownership and cannot sell, without agreement from your brother!)
1b) Minimize capital expenses: One of the only assets which appreciate with time is real estate. A smart entrepreneur friend of mine invested a part of his inheritance to buy a building when land prices were down, and he then converted it to a business center, let out to temporary offices – his point was, if the business idea failed, he could always recover his money and also make a profit by selling the property later (of course, he did well, so he never had to!). Any other asset you buy to start a business like vehicles, computers, furniture, interiors, machines, equipment – they all depreciate, and fast! So, do not over-invest in capital, unless you have someone who is funding you, and will not take a pound of your flesh, if the business goes belly-up! Even if you buy land, do not do so with too large a loan, and take care that you buy when land prices are not at their highest! You may need basic technology like a laptop and mobile phone, but keep it to the minimum that you actually need!
1c) Ensure that your business model is always fairly cash-flow positive: Whatever product or service you sell, it must get in money fairly soon, compared to the speed with which money goes out. As a rough estimate, your staying power could be high enough to cover 20 business cycles, for investing the money, and then recovering it with a profit margin – i.e., if you do projects where you have to invest some money, and only after completion of the project, you get back your capital plus some… then, you should be able to invest in 20 projects without receiving payment, before your cash (not only to cover your business expenses, but also your family and personal expenses) runs out. If you are able to get projects with investments small enough, and time cycles swift enough, to support 20 of them with your resources, then make sure you do handle NOT more than 5 to start with. By the time you take project 6 to 10, the money from the first 5 should start trickling in. This is a method of small, conservative and incremental risk taking, which will ensure you grow but do not risk going bankrupt!
1d) Avoid loans until your business cash-flow stabilizes: Many of the best run businesses have no long term debt, right from their inception until they grow huge in scale. The option of taking loans, especially secured, should be the last option, and only to execute orders already in hand. Once your startup is doing well in sales, revenue growth and cash-flow, if you run short of working capital, bill-discounting is a good way to get relatively low risk finance. Debt often works like a cancer which starts eating the insides of the business before you realize it… take it at your own risk, if you hate sleeping at night!
2. PREPARATION FOR FAILURE OR DELAYED SUCCESS
2a) Patience: probably the most important quality of an entrepreneur is the recognition of the fact that neither external factors in the market, nor even internal factors within his startup, work according to his timetable. Almost everything in an early stage startup takes longer than you expect – the time to get the first (or even the first 10) orders, the time to execute those first orders, the time to receive customer payments, the time to train employees internally, the time to achieve predictable quality, the time to build a brand. Startup operations which begin with statements like, “I’ll give this exactly one year…” are almost sure to die, even before they are born.
2b) Humility: Entrepreneurial activity is almost always a leap into the unknown. To say we know the unknown is not just vain and stupid, it is suicidal! Therefore, the entrepreneur must be hardwired to receive learning from all sides, from all sources. A complaining customer, a resigning employee, a critical observer – they are all great teachers, if only we stay humble enough to listen and learn from them!
2c) Resilience: Just as success is tough to come by in entrepreneurship and triumphs are not permanent, so also are failures not fatal. Loss making projects, failed product launches, spoilt customer relationships… are all both reversible and also opportunities for spectacular resurgence, for the entrepreneur who can learn, stay positive, and return to fight another day.
3. THE ABILITY TO EVOLVE NATURALLY
3a) Flexibility and rapid learning: No great entrepreneurial venture, whether it is Google, Microsoft, Infosys, Reliance or whatever, had the same capabilities on day-1 as on, say day-3600 (when they were about 10 years old)… that means, all these epic success stories, and thousands of others less famous but also successful, learned continuously. If your startup has fulfilled all the previous prerequisites and you have hit the market with a product or service offering, all you have to do is listen with 200% attention to everything your customers say. If you act on good quality, well intended feedback from serious customers, and quickly come back with changes, your startup is already accelerating on the road to growth!
3b) Opportunism: The striving entrepreneur often meets many fellow-travelers in his journey – not just customers, but competitors, suppliers, other startups and so on. I recently heard of a startup which was trying to break into a duopoly of two very large suppliers to the Government. Fortunately, the startup came across a good mentor, who advised them to instead become an ancillary supplier of a few essential parts to the two large suppliers, instead of competing with them. The startup is now building a robust, fast-growth business, because it was able to see a completely different opportunity (with the mentor’s help, no doubt), reorient itself, and then scale up fast.
3c) Innovation and incremental experimentation: Clearly, the kind of startup you will be 24 months after you have started, would be different from the kind of startup you are on day one. If you have a growing team, then that is a fertile ground for innovation, which after all, takes place first in peoples’ minds. Not all innovations are successful – some can achieve a breakthrough to give you a leadership position over competition, (if only temporarily), while some may be complete failures. While preparing for the leap to entrepreneurship, what you could do as preparation, is to commit yourself to the principles of innovation and small, low cost experiments, to test out innovation. A successful service sector entrepreneur I know, keeps a list of new ideas he and his team try out every quarter and actually has a target number (does not matter if they fail – they just must try so many new things, every three months!)
3d) Relationship management – 360 degrees: In entrepreneurship, as in politics, there are no permanent enemies or even competitors. It is critical to always keep building and strengthening relationship with all people you meet, whether they are customers, employees, your former employers, suppliers, partners and even your competitors. You don’t have to be a “people” person, if that does not come to you naturally – you must however, evolve a style of relationship management which suits you, which enables you to keep strong, fair, ethical and professional relationships with all your contacts. The reason for this is, that the entrepreneur is continuously learning and evolving, and often, the conduit for this learning is from the people he meets. Therefore, managing strong relationships with people all around helps the entrepreneur accelerate his evolution and therefore his probability of greater growth and success.
4. BURNING AMBITION
The wrong reasons to get into entrepreneurship are to make money quickly (you may make lots of money, but don’t bet on the “quickly”), to have more free time (you may be able to do that as a self-employed freelancer, but that is quite different from an entrepreneur), because you had a fight with your boss (that’s a good catalyst, but if that’s the only reason, it’s weak!). The most enduring right reasons are to create an organization according to your personal vision (however fuzzy that may be at this point in time), to create new products or services, of a type or quality which do not exist, to create value, to create employment, to change the world, or simply because you see entrepreneurship as the modern day equivalent of conquest, and you just MUST go out there and build that empire! You should be ready to make sacrifices in your personal choices and time (although, as I have said before, the prudent entrepreneur will take steps to see that his family can continue a satisfactory lifestyle and not make large sacrifices on that count), and you should be ready to be knocked down a number of times, and keep getting up. Therefore, with all the other rational “planning” and personal orientation you can do before you take the leap, there is really no substitute for this last ingredient – the fire in the belly to keep you going, for the next decade or three!!
The next parts in this series will start delving into some of the more detailed strategies that could be adopted by new bootstrap entrepreneurs. If you have any questions, please email me at jayaramk1968@gmail.com.
There are four major composite prerequisites for successful survival as an early stage entrepreneur anywhere:
1. Fiscal prudence – to ensure that you can survive indefinitely, or at least as long as possible, with as low a probability as possible of collapse
2. Preparation for failure or delayed success – most entrepreneurial ventures have about as much of navigation and acceleration control, as a leaf on a waterfall… which is to say, it is almost pointless to make rigid plans, when you are a tiny, insignificant speck in a huge, complex, competitive market. I have seen tons of six- and twelve-month plans fail miserably! However, just as a leaf on a torrential flow actually has a somewhat predictable trajectory over a longer stretch, if you do the right things long enough and often enough (as the saying goes), you may achieve much more than your expectations, but over something like, a thirty six month period! Which is to say, the market follows its own cycle, not that of the startup strategist… but the wise and patient entrepreneur who understands the cycle and correctly rides the tide, may earn rich dividends!
3. The ability to evolve naturally – just as many entrepreneurs tend to be wrongly optimistic about the results they will achieve in capturing market demand and delivering their offerings, they are sometimes overly pessimistic (or just disregarding) about their own ability to learn, grow their organizations, build and leverage new partnerships, and so on. Entrepreneurship is also a great teacher – the receptive student would learn enough over a few years to be many times more than the man he set out as! Therefore, just as the first time entrepreneur may overestimate success in the short run, he is more than likely to underestimate success in the long run.
4. Burning ambition – pt 1 above gives you a full fuel tank, pt 2 gives you a method of finding the right route and not getting stressed out about the time you take for the drive, and pt 3 gives you a method of continuously learning to drive on new types of terrain… but it is pt 4 which is the force on the accelerator!
Let me now try to elaborate on, and deconstruct the above prerequisites:
1. FISCAL PRUDENCE
1a) Staying power: If you are a working professional who has decided to become an entrepreneur, the first thing you need to do is a cash flow forecast which is approximate for the next three years, a more detailed estimate for the next one year, and as precise as possible for the next six months. Do you have a spouse who works? How much of your monthly expenses will her/his income cover? Do you have growing children to support, are there any major new expenses expected for them? Any medical expenses for aged family members? Do you have a home loan or a car loan, and how many installments to go? What is the net present value of your investments? As you prepare for the leap, you should be like a squirrel preparing for the winter, putting away every bit of resource you can find, cutting down expenses to the bare essentials such that your basic lifestyle standards can be maintained undisturbed for the longest period possible. If you have any assets you may need to convert to cash later, make sure they are liquid enough (eg, they should not be like property where you have a shared ownership and cannot sell, without agreement from your brother!)
1b) Minimize capital expenses: One of the only assets which appreciate with time is real estate. A smart entrepreneur friend of mine invested a part of his inheritance to buy a building when land prices were down, and he then converted it to a business center, let out to temporary offices – his point was, if the business idea failed, he could always recover his money and also make a profit by selling the property later (of course, he did well, so he never had to!). Any other asset you buy to start a business like vehicles, computers, furniture, interiors, machines, equipment – they all depreciate, and fast! So, do not over-invest in capital, unless you have someone who is funding you, and will not take a pound of your flesh, if the business goes belly-up! Even if you buy land, do not do so with too large a loan, and take care that you buy when land prices are not at their highest! You may need basic technology like a laptop and mobile phone, but keep it to the minimum that you actually need!
1c) Ensure that your business model is always fairly cash-flow positive: Whatever product or service you sell, it must get in money fairly soon, compared to the speed with which money goes out. As a rough estimate, your staying power could be high enough to cover 20 business cycles, for investing the money, and then recovering it with a profit margin – i.e., if you do projects where you have to invest some money, and only after completion of the project, you get back your capital plus some… then, you should be able to invest in 20 projects without receiving payment, before your cash (not only to cover your business expenses, but also your family and personal expenses) runs out. If you are able to get projects with investments small enough, and time cycles swift enough, to support 20 of them with your resources, then make sure you do handle NOT more than 5 to start with. By the time you take project 6 to 10, the money from the first 5 should start trickling in. This is a method of small, conservative and incremental risk taking, which will ensure you grow but do not risk going bankrupt!
1d) Avoid loans until your business cash-flow stabilizes: Many of the best run businesses have no long term debt, right from their inception until they grow huge in scale. The option of taking loans, especially secured, should be the last option, and only to execute orders already in hand. Once your startup is doing well in sales, revenue growth and cash-flow, if you run short of working capital, bill-discounting is a good way to get relatively low risk finance. Debt often works like a cancer which starts eating the insides of the business before you realize it… take it at your own risk, if you hate sleeping at night!
2. PREPARATION FOR FAILURE OR DELAYED SUCCESS
2a) Patience: probably the most important quality of an entrepreneur is the recognition of the fact that neither external factors in the market, nor even internal factors within his startup, work according to his timetable. Almost everything in an early stage startup takes longer than you expect – the time to get the first (or even the first 10) orders, the time to execute those first orders, the time to receive customer payments, the time to train employees internally, the time to achieve predictable quality, the time to build a brand. Startup operations which begin with statements like, “I’ll give this exactly one year…” are almost sure to die, even before they are born.
2b) Humility: Entrepreneurial activity is almost always a leap into the unknown. To say we know the unknown is not just vain and stupid, it is suicidal! Therefore, the entrepreneur must be hardwired to receive learning from all sides, from all sources. A complaining customer, a resigning employee, a critical observer – they are all great teachers, if only we stay humble enough to listen and learn from them!
2c) Resilience: Just as success is tough to come by in entrepreneurship and triumphs are not permanent, so also are failures not fatal. Loss making projects, failed product launches, spoilt customer relationships… are all both reversible and also opportunities for spectacular resurgence, for the entrepreneur who can learn, stay positive, and return to fight another day.
3. THE ABILITY TO EVOLVE NATURALLY
3a) Flexibility and rapid learning: No great entrepreneurial venture, whether it is Google, Microsoft, Infosys, Reliance or whatever, had the same capabilities on day-1 as on, say day-3600 (when they were about 10 years old)… that means, all these epic success stories, and thousands of others less famous but also successful, learned continuously. If your startup has fulfilled all the previous prerequisites and you have hit the market with a product or service offering, all you have to do is listen with 200% attention to everything your customers say. If you act on good quality, well intended feedback from serious customers, and quickly come back with changes, your startup is already accelerating on the road to growth!
3b) Opportunism: The striving entrepreneur often meets many fellow-travelers in his journey – not just customers, but competitors, suppliers, other startups and so on. I recently heard of a startup which was trying to break into a duopoly of two very large suppliers to the Government. Fortunately, the startup came across a good mentor, who advised them to instead become an ancillary supplier of a few essential parts to the two large suppliers, instead of competing with them. The startup is now building a robust, fast-growth business, because it was able to see a completely different opportunity (with the mentor’s help, no doubt), reorient itself, and then scale up fast.
3c) Innovation and incremental experimentation: Clearly, the kind of startup you will be 24 months after you have started, would be different from the kind of startup you are on day one. If you have a growing team, then that is a fertile ground for innovation, which after all, takes place first in peoples’ minds. Not all innovations are successful – some can achieve a breakthrough to give you a leadership position over competition, (if only temporarily), while some may be complete failures. While preparing for the leap to entrepreneurship, what you could do as preparation, is to commit yourself to the principles of innovation and small, low cost experiments, to test out innovation. A successful service sector entrepreneur I know, keeps a list of new ideas he and his team try out every quarter and actually has a target number (does not matter if they fail – they just must try so many new things, every three months!)
3d) Relationship management – 360 degrees: In entrepreneurship, as in politics, there are no permanent enemies or even competitors. It is critical to always keep building and strengthening relationship with all people you meet, whether they are customers, employees, your former employers, suppliers, partners and even your competitors. You don’t have to be a “people” person, if that does not come to you naturally – you must however, evolve a style of relationship management which suits you, which enables you to keep strong, fair, ethical and professional relationships with all your contacts. The reason for this is, that the entrepreneur is continuously learning and evolving, and often, the conduit for this learning is from the people he meets. Therefore, managing strong relationships with people all around helps the entrepreneur accelerate his evolution and therefore his probability of greater growth and success.
4. BURNING AMBITION
The wrong reasons to get into entrepreneurship are to make money quickly (you may make lots of money, but don’t bet on the “quickly”), to have more free time (you may be able to do that as a self-employed freelancer, but that is quite different from an entrepreneur), because you had a fight with your boss (that’s a good catalyst, but if that’s the only reason, it’s weak!). The most enduring right reasons are to create an organization according to your personal vision (however fuzzy that may be at this point in time), to create new products or services, of a type or quality which do not exist, to create value, to create employment, to change the world, or simply because you see entrepreneurship as the modern day equivalent of conquest, and you just MUST go out there and build that empire! You should be ready to make sacrifices in your personal choices and time (although, as I have said before, the prudent entrepreneur will take steps to see that his family can continue a satisfactory lifestyle and not make large sacrifices on that count), and you should be ready to be knocked down a number of times, and keep getting up. Therefore, with all the other rational “planning” and personal orientation you can do before you take the leap, there is really no substitute for this last ingredient – the fire in the belly to keep you going, for the next decade or three!!
The next parts in this series will start delving into some of the more detailed strategies that could be adopted by new bootstrap entrepreneurs. If you have any questions, please email me at jayaramk1968@gmail.com.
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