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Jim Price
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Shedding the New Venture Mystique

6/17/2009 --

Serial entrepreneur Jim Price shares ways in which big companies can model the entrepreneurial agility of small startups.

ANN ARBOR, Mich. — With big companies shedding jobs in this recession, some former employees and unattached executives are exploring entrepreneurship. Those venturing there for the first time will find entrepreneurs play by a different set of rules, says Jim Price, adjunct lecturer of entrepreneurial studies at Ross. Price, a serial technology entrepreneur who is chairman and co-founder of Cielo MedSolutions LLC, wrote "The Venture Value Chain: A Conceptual Framework for Building Successful New Businesses." The note is accessible via GlobaLens, an online library of notes and case studies authored by Ross faculty. Even if executives prefer to stay at an established firm, says Price, they would be wise to exercise the agility that defines their entrepreneurial peers. In the following Q&A, he discusses the challenges of funding startups in today's ailing economy.

The capital markets were frozen for quite a stretch and while there's been some recovery, things still aren't what they were. How does a startup get its venture off the ground when the funding is so hard to obtain?
Price: It's not pretty out there. All the investors have become more conservative. The people who used to do seed deals, which means investing in pre-revenue companies, now would like to see revenue before they invest. The folks who used to do A-rounds (which would be companies that are just starting to produce revenue and releasing first products) are now looking for a very proven revenue stream and established sales growth. Everybody has jumped to the right on the graph.

It's so frustrating for us as entrepreneurs. We're left there with this huge funding gap. So we simply have to work smarter than we did in the past, and more aggressively seek out different types of what I call "non-dilutive financing" sources. I see two or three approaches that are really making the difference for startups in this economic environment.

One is that the smartest entrepreneurs and start-up teams have been going after customer and supplier funding. They're seeking out corporate strategic partners who are already in their ecosystem. This is particularly true for B-to-B companies, but it could work for B-to-C businesses as well. It might not be equity funding.

For example, here's something I've done with a number of companies where I've been a founder or executive or board member: We go to a potential large customer and we say, "We'd be interested in working with you to bring our planned product to market. Left to our own devices, we'll be there in 18 months and we'd love to have you as one of our first customers. However, if we can work with you on the specifications and have you provide some development acceleration funding, we can get there faster, say in nine months. We can have the specifications for version 1.0 fit your company's needs like a glove, you get it twice as fast, and we'll grant you an extraordinary below-market discount." These kinds of strategic relationships — close, win-win tie-ins with customers — are what drive the best start-up companies. Secondly, most of the smart start-up companies in the U.S. are going after government grant funding these days. Through so-called SBIR (Small Business Innovation Research) and STTR (Small-Business Technology Transfer) grants, it's really fantastic the extent to which the federal government continues to fund applied R&D in a wide range of fields.

And all this is a virtuous circle. The more successful you become as a company, and therefore the less you need to raise outside financing, the more interested the angel investors and venture capitalists will become. It's as though there's an undocumented law of physics at work: Your ability to raise start-up financing is inversely proportional to your need. Back when we were all partying as if it were 1999 (because it was) and venture financing was plentiful, you and I could just write a business plan and go out and raise a few million to get our company launched. But now the money only flows, perversely, to those who don't need it. So, as entrepreneurs, it's our job to trick that law of physics into working for us. How? These days, we need to figure out a way — by winning grants, landing advance customer funding, borrowing from Aunt Betsy and Uncle Krishna, whatever — to get our venture to the point where we have an actual product and real paying customers. Only then, when we're closer to showing evidence of a self-sustaining enterprise, will today's VCs and more conservative angel groups start showing interest.

You read a lot of stories these days about people — including executives — starting their own businesses and becoming entrepreneurs. If you're the kind of person who has worked a long time for an established company, what do you need to know before going into an entrepreneurial venture?
Price: I think there are a few major differences between working in the corporate world and working in the entrepreneurial world. One is that we succeed in large, established organizations by playing by the rules, and most of those rules are unwritten. Probably the most important unwritten rules in big companies are the don'ts, such as don't break the china, and don't screw up what's already been built here. That makes so much sense for the current stakeholders, particularly the shareholders.

XYZ Global 2000 Corporation has an established business ecosystem, and one of the first imperatives for a newly arrived middle manager or senior manager is to not mess up what's already there. So to the extent that she or he is asked to innovate, it tends to be relatively minor and tends to involve tweaking changes at the margins. Consequently, we're promoted for successes, but much more importantly, we rise and succeed in the organization based on the double negative of not failing, not breaking the china.

Let's skip over to the entrepreneurial world where it's just the opposite. There, we learn and succeed by falling down, by failing. We learn and we succeed through very rapid, iterative experiments. Do it, try it, fix it. And then do it, try it, fix it again ... and again. We're not afraid to fail. In fact, failure is cool; we learn through failure. That sort of mindset is an absolute anathema for someone who has spent eight or 20 years in the corporate world. It's a mentality they've never encountered.

In entrepreneurship, it's not only okay to fail; it's a required skill set. Think of launching a new business from scratch as akin to skiing. Think about it: falling down without getting hurt — that is, failing and recovering gracefully — is the first thing we learn on the first day of ski school. Well, as skiers, we're going to fall. That's okay. That's part of the process. And that's really a good metaphor for building new businesses from scratch. Entrepreneurs, people in start-up organizations, we've all got our knees bent and keep a low center of gravity because we know we're going to fall. But we all have these silly grins on our faces knowing that's part of the process, knowing we're going to learn from those bumps and bruises. We're constantly running these rapid, iterative experiments with every imaginable aspect of the business: trying out different product configurations and features, different pricing and packaging schema, product naming conventions, hiring practices, promotional programs, and so on.

Back in the established organizations, it's too common for things to get calcified and for everybody to have rigid legs with their knees locked. So when innovative new ideas come around in that environment, we almost never have perfect information with which to make the decision, right? In the entrepreneurial world, we don't have all the data either but we make a decision anyway. We bash ahead and try something. As entrepreneurs, our attitude is that we can always stay loose, adjust, and change course as we learn more from the market. In the big company, it's too easy in the same circumstance to form a committee, convene a task force, continue to study — and avoid making any decisions. At the end of the day, nobody's career gets hurt if we make no decision and take no action.

So, as I look at people coming out of big companies to try entrepreneurship — whether it's enthusiastically or by default — this is the biggest place they stumble. Are they comfortable operating in an environment rife with ambiguity? Are they willing to make decisions and take actions based on hopelessly inadequate information? And are they comfortable falling down and brushing themselves off daily? That's the entrepreneur's life.

Right now, you're seeing a lot of companies with sales tailing off, and maybe they see they're too calcified, too locked in, and they want to adopt entrepreneurial characteristics. Can they or should they do that?
Price: The rules of entrepreneurs and the thinking of entrepreneurship can work in the corporate world. In fact, we have in the Executive Education curriculum a three-day program called Commercializing Corporate Innovation. And a big part of what I teach there is the pattern of thinking like entrepreneurs and what corporate executives can learn from entrepreneurs. A lot of it revolves around what we were alluding to earlier: skiing with your knees bent, not being afraid of failure. In short, what all of this comes down to is culture. It's not good enough for me as a CEO or a division general manager to feel comfortable with skiing loosely and not being afraid of failure. I must imbue that through my organization from the top down so that my next level of managers (and the next level) is telling this to their people. And people must be rewarded for taking a considered risk. It involves applying risk management techniques from the entrepreneurial world.

We have a paper up on GobaLens titled "What's your VQ?," which stands for venture quotient. It's a way of taking what a lot of entrepreneurs and venture capitalists do intuitively in terms of managing new business risk and reduces it to an equation that can be applied by teams in the corporate world. It involves understanding and then systematically managing and mitigating the risk associated with projects and new business ventures being launched from underneath the corporate umbrella. By systematically driving down business risk, you're driving up probability of the project's success.

When I started teaching entrepreneurship to Ross MBAs seven years ago — a second-year elective called New Venture Creation — I found myself thinking my job was that of a missionary: to convert X percent of them to become entrepreneurs someday. I quickly came to realize this was wrong-headed: that a very large majority, north of 90 percent of my students, would be accepting jobs at first with large, established organizations. And I'm at peace with that. What I came to realize was twofold. One is that we're equipping Ross MBAs with an action-based learning set of life skills that demystifies the entrepreneurial world and enables them to sort through and recognize strong start-up opportunities when they see them. They know what questions to ask, and have a set of intelligent filters and models burned into their brain circuitry. Second, as they step into Sony, General Electric, Citi, ABB, AmEx, or Eaton, they have those "skiing with your knees bent" venture thought processes on how to shape a new business opportunity and manage new business risk. They know how to intelligently, and with low, managed risks, start something from scratch while working under the corporate umbrella. The corporate world is always launching new products, entering new markets, experimenting with new business models, opening new geographies. To do this well, they need managers with true entrepreneurial skills. So our job is to make sure that Ross MBAs have those skills differentially over other candidates coming out of other programs.

—Terry Kosdrosky



For more information, contact:
Bernie DeGroat, (734) 936-1015 or 647-1847, bernied@umich.edu