Build a world class business with a clear blueprint to success Entrepreneur: Building Your Business From Start to Success is your guidebook to achieving entrepreneurial success. Whether you're an existing business owner seeking to increase your reach, or a budding Entrepreneur ready to take the next step, this book provides invaluable guidance from experts who have made it happen time and time again. A simple step-by-step process will help you translate your ideas into effective business plans, raise the capital needed to start and grow your business, build a winning team and leave the competition behind. Drawing upon their experience founding more than 30 companies, the authors share their entrepreneurial wisdom and reveal the real-world techniques that lead to success. With a pragmatic and personal approach, the authors explore the personal characteristics that are vital to achievement; managing stress, withstanding heavy workloads and coping with potential health concerns are subjects often overlooked in the pursuit of business achievement. Addressing the link between business concerns and personal welfare, the authors offer suggestions on how to most effectively reconcile entrepreneurial drive with personal well-being. * Build or revitalise a business with proven methods from two globally-recognized experts in the field * Develop an effective business plan to maximise your probability of success * Understand funding markets and raise capital necessary to start or grow your business * Grow your business by beating the competition and dominating your market Providing invaluable insight into real-world entrepreneurial methods that work, this book arms current and future business leaders with the skills, knowledge and motivation to create the organization of their dreams.
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INTRODUCTION BY PETER WARNOE
PART 1. ABOUT ME AS AN ENTREPRENEUR
1. MY ENTREPRENEURIAL ROLE
Why do people become entrepreneurs?
What kind of entrepreneur?
It has become easier!
Lifestyle or growth entrepreneur?
How big is the risk?
How can I reduce the risk?
Alternative paths to the entrepreneurial life
Risk is relative
What does it require of my personality?
Who are most successful?
Can entrepreneurship be taught?
Do I need to be an expert within the sector?
Is it really as hard as they say?
Is it economically worthwhile to become an entrepreneur?
At what age should you become an entrepreneur?
Does it require management experience to start?
Does it require a lot of capital?
Should I wait for the brilliant idea?
2. MY PERSONAL EFFECTIVENESS
Decide how to tackle the unpleasant parts of your job
Don't defer your life
Optimize the combination of work, sport and socializing
Combine and time your efforts
Plan your work week before it commences
A good day
Read and listen effectively
Use voice recognition
Organize your thoughts and control your projects effectively
Free up time for the most important and what you do best
Keep track of the many invitations
Streamline your travels
Optimize the use of electronic productivity tools
Keep track of contacts
Be practical with emails
Manage your passwords
Use time-saving tools when designing documents
Organize meaningful meetings
Maintain a positive attitude
Maintain your social ecosystem
Efficiency in other words
3. MY PUBLIC IMPACT
How do I get invited to give speeches?
How do I prepare great speeches and presentations?
How do I structure a good speech?
How do I use illustrations during my speech?
How do we optimize our presence at exhibitions and fairs?
How do we get set up on social media?
How do I use social media to become better informed?
How do I promote my social media presence?
How do I become a blogger and make webinars?
Which equipment do I need for multimedia posting?
How do I make compelling social media posts?
How often should I post?
How do I use social media at corporate events?
What is the 70:30 rule?
How can my business become well covered by the press?
What should I do when I am contacted for an interview?
Should I make an agreement with the journalist?
Are there practical issues regarding the interview that I need to consider?
How do I make journalists come back for more?
Is there anything I should be careful about in interviews?
4. MY FACE-TO-FACE IMPACT
How should I run sales processes?
The sales funnel
The efficient sales meeting
Sales processes must be planned
Methods concerning the sales opening
How to prepare for a sales meeting
Using sales crutches
How do I find out about the organization I am selling to?
What is the sales compass?
Closing the deal
Managing complex sales
What do I do if sales turn into negotiation?
Can a negotiation process be scripted in advance?
Lists of requirements and deadlines
PART 2. ABOUT MY COMPANY'S IDEAS AND FUNDING
5. MY COMPANY'S BASIC IDEAS
Business idea generation
Techniques to develop ideas
Examples of product ideas to consider
Ideas regarding speed and timing
Ideas regarding marketing
How to think about ideas
But can it make money?
Five mental tools
6. MY STRATEGIES FOR NETWORK EFFECTS
The chicken-and-egg problem
Using initial coin offerings
Token network effects
7. FOUNDING AND STARTING MY COMPANY
Where should the company be located?
Other location criteria
The quality of the overall start-up environment
How successful are different venture scenes?
The European venture capital market
Why are European venture capitalists earning less than American VCs?
Which accounting system should I use?
How do I make a shareholders' agreement?
How do I choose a company name and a web domain?
How do I create a logo and website quickly and cheaply?
What if I need a webshop?
8. MY SOURCES OF FUNDING
Bootstrapping via free labour
Types of funding in various growth phases
Which sources of capital can you choose between?
How do investors think about return from my company?
Where does the capital come from?
What types of investors exist?
The founders' investments
Investments from friends and family
Funding from business angels
How do seed rounds work?
Funding via convertible notes
Funding via initial coin offering
Use of crowdfunding
Funding and support from incubators
Funding from accelerators
Funding from venture capitalists
The favourite children
Funding from growth funds and private equity funds
Funding from companies, strategic investors and corporate VC funds
Funding/investment through venture debt
Financing via initial public offerings
Pros and cons of external financing
9. MY FUNDING PROCESSES
Tools you need from the start
The pitch and the summary
The written summary
The pitch emails
Excel with financials
Demo reel or physical working demo
The pitch deck
How should my pitch deck look?
The pitch meeting: what's on investors' minds?
The trend is your friend
What do investors think about presenters at pitch meetings?
How do I run my pitch meeting?
Famous first words
How do investors determine my company valuation?
Some mechanics of valuation calculations you need to know
What should I be aware of in the shareholders' agreement when dealing with investors?
The term sheet
What should I think about the term sheet they gave me?
How does the share subscription work?
How can I raise loan capital?
Can I avoid raising capital by streamlining my working capital?
How do I get grants for my business?
PART 3. ABOUT MY TEAM AND MY CORPORATE CULTURE
10. MY CORE TEAM
Should I have a co-founder?
Important discussions between founders
Entrepreneurs' deepest motives – from the investors' point of view
Who are the ideal co-founders?
Relevant work experience
The ability to understand each other
The crucial difference
The shareholders' agreement
What is the value of previous experience?
What is the idea worth?
Dynamic versus static equity allocation?
Which founder should be the CEO?
How do I work with boards?
A great board
How should I cooperate with my board?
How should my board meetings play out?
Do I need a mentor, coach or advisory board?
11. MY OUTSOURCING AND MY STAFF
When should I outsource?
Crowdsourcing – the coolest outsourcing
How do I structure an employment process?
How do I find my candidates?
No-go companies and preferred companies
How do I cooperate with recruiters?
What about references?
How do I interview a candidate?
About highway builders in start-ups
How do I remunerate employees in my start-up?
How do option schemes work?
What should happen when an employee starts?
Tell your colleagues who you have hired
What about job titles?
How should I fire people?
What if a CEO should be replaced?
Purpose, virtuosity, culture and autonomy
Thoughts on culture
The monkey's world
How to avoid politics
Start-ups are unpolished
PART 4. ABOUT MY COMPANY'S GROWTH, STRATEGIES AND CHALLENGES
12. MY GROWTH PHASES
Traditional marketing cascade
Agile business development
Customer development during the discovery phase
The earliest market analysis – desk research
The earliest market analysis – field research
Business plans versus business canvases
The validation phase
The efficiency phase
From nailing to scaling
How the market for a product evolves
How distribution structures change as markets evolve
13. MY MARKETING MIX
What are mass customization and big data?
Becoming ‘category king’
Which pricing strategies can I choose from?
What is crucial to my promotion?
Optimization of the marketing mix in head-to-head competition
How the company can be strengthened through alliances
When and how do I make a marketing plan?
14. MY FIVE BIGGEST COMMERCIAL THREATS
Mistake #1: poor product/market fit
Mistake #2: internal disputes
Mistake #3: premature scaling
Mistake #4: unbalanced scaling
Mistake #5: unsuccessful transition from early adopters to mainstream
PART 5. ABOUT MY EXIT AND WHAT COMES AFTER
15. MY ALTERNATIVE EXIT ROUTES
Why should I sell out?
In which ways can I make an exit?
How do I sell shares on secondary markets?
How do I sell to strategic partners?
Selling shares to the public
What about my own role after a sale?
16. MY EXIT PROCESSES
How do I increase the exit value?
How do I make a trade sale?
What is my role after the trade sale?
How does an IPO play out?
What is the due diligence process and what is the red herring?
How do the lock-up period and green-shoe work?
Roadshow, quiet period, pricing, book building and allocation
17. MY NEXT PROJECT
We and our hubris
Should I become a serial entrepreneur?
Final words …
APPENDIX A: 116 BUSINESS STRATEGIES FOR ENTREPRENEURS
APPENDIX B: 46 TYPICAL CRITERIA FOR SUCCESS IN START-UP COMPANIES
APPENDIX C: LIST OF USEFUL WEBSITES, APPS AND WEB-EXTENSIONS FOR ENTREPRENEURS
ABOUT THE AUTHORS
END USER LICENSE AGREEMENT
Table of Contents
“Teaching entrepreneurship, I have a high bar for what entrepreneurs should use to educate themselves and use as a reference. This book is an invaluable resource in its rigor, accessibility and comprehensiveness. I plan to have this book readily accessible at all times for myself and highly recommend it to serious entrepreneurs everywhere.”
Bill Aulet, Professor and Managing Director of the Martin Trust Center for MIT Entrepreneurship
“Becoming an entrepreneur is a great way to make a difference in the world, and this book shows you how.”
Anders Fogh Rasmussen, Founder and CEO of Rasmussen Global, Former Secretary General of NATO and Prime Minister of Denmark
“Entrepreneurs are essential for our world, as they develop new solutions to key problems. This book tells you how to be successful as an entrepreneur.”
Taavi Roivas, former Prime Minister of Estonia and youngest Prime Minister in the EU
“To all the entrepreneurial minds out there: this book is a must read!”
Oliver Samwer, Founder and CEO of Rocket Internet
“Even though technology will keep changing the world, there is no certain recipe for success. All companies are unique and at the end of the day, it's the entrepreneurial people behind the companies, their approach and leadership that makes the difference. Lars and Mads make an absolute stunner of a team, giving hands-on and valuable advice allowing start-ups to leverage these into great opportunities.”
Preben Damgaard, Member of the Danish Research and Development Ministry's Board, co-founder and former CEO of Damgaard Data, former VP of Microsoft.
“Entrepreneur is a great practical guide on how to build a company and become inspired to make things happen, from guys who have done exactly that, many times over. You can learn to be an entrepreneur. You can have a go at making your dreams reality. You can learn a lot from this encouraging, fun and accessible book.”
Hugo Burge, former CEO of Momondo Group
“A great practical guide by entrepreneurs for entrepreneurs on the power of execution, stamina and how to unlock the full potential of your ideas.”
Jimmy Maymann, Entrepreneur, Investor, former CEO of Huffington Post
“It is surprising how much useful guidance and information Lars and Mads have managed to squeeze into this book. I would definitely recommend it strongly to any ambitious entrepreneur.”
Christian M. Motzfeldt, CEO Danish Growth Fund
“This is an excellent book with lots of great hands-on advice for ambitious entrepreneurs. Very practical and highly recommendable.”
Brian Mikkelsen, Danish Minister of Industry, Business and Financial Affairs
“Finally an entrepreneurship book that is based on first hand experiences! The reality of having a start-up is really captured here - from strategy to the ‘street smarts' one accumulates along the way.”
Sophie Trelles-Tvede, Entrepreneur, winner of Forbes 30 under 30 Europe and Nordic Business Forum 25 and Under in Northern Europe
“The book provides a comprehensive scope of practical decision-making tools and philosophies to overcome all the unavoidable obstacles and challenges every start-up founder faces on the journey. A must read for any aspiring entrepreneur.”
Mads Fibiger, CEO & Co-founder, Organic Basics
“This book covers in depth how to build a company whether you are dreaming about starting one, have already started or are running a larger organization.”
Peter Holten Muhlmann, Founder and CEO of Trustpilot
“Mads and Lars explain all aspects and considerations of a business in thorough and precise detail. If you read this book and add your own naive persistence, you will succeed. Moreover, funny enough I never really saw myself as an entrepreneur, having read Entrepreneur, I now do, and I’m proud of it! - Thank you for that Mads & Lars!”
Kaspar Basse, Founder and CEO of Joe and Juice
This edition first published 2018© 2018 Lars Tvede and Mads Faurholt
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Library of Congress Cataloging-in-Publication Data
Names: Tvede, Lars, 1957- author. | Faurholt, Mads, author. | Faurholt, Mads. Iværksætter. English.
Title: Entrepreneur : building your business from start to success / Lars Tvede, Mads Faurholt.
Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2018. | Includes bibliographical references and index. | Originally published in Denmark in 2017 by Gyldendal as: Iværksætter / Mads Faurholt Lars Tvede. |
Identifiers: LCCN 2018023716 (print) | LCCN 2018025759 (ebook) | ISBN 9781119521280 (Adobe PDF) | ISBN 9781119521259 (ePub) | ISBN 9781119521235 (pbk.)
Subjects: LCSH: New business enterprises. | Entrepreneurship.
Classification: LCC HD62.5 (ebook) | LCC HD62.5 .T94 2018 (print) | DDC 658.1/1—dc23
LC record available at https://lccn.loc.gov/2018023716
Cover Design: WileyCover Image: © iStock.com/RobinOlimb
‘Peter, do you think we can …?’
I don't know how many times I have heard these words from Lars Tvede, co-author of this book – but it's many. For instance, once when we were three couples sailing his boat along the Italian coast, he suddenly asked:
‘Peter, do you think we can drink beer under water?’
I guess I didn't, but Lars soon became quite insistent and before I knew it, we were three guys in scuba gear deep down drinking beer. (You hold it upside down, blow air in and swallow, as beer comes out. I have it on video.)
Another example: in 2017, Lars was invited as speaker for the Danish Growth Fund's annual meeting, a yearly flagship event in Danish venture business attended by government ministers, leading investors and entrepreneurs, etc. However, about half an hour before he went on stage, he pulled me aside in a hallway and asked with a smirky grin: ‘Peter, do you think I can end my speech by saying “Fuck you”?’
I thought he was joking, so I laughed it off. OK, mistake, because when he later jumped on stage, he immediately pointed me out in front of the 1900 delegates and proclaimed that I didn't believe that he would end this speech by saying ‘Fuck you’. ‘Just watch me’, he continued while staring at me from the stage. OMG!
Towards the end of his speech, he called me up on stage, put his arms around my shoulders and then pulled up a PowerPoint slide of a now famous email from Marc Andreessen to Ben Horowitz, which ended with the words ‘Next time do the fucking interview yourself. Fuck you’. I am not sure I would have done this, but people actually laughed.
Two years before that, in April 2015, Lars called me and said, ‘Peter, I met the craziest guy at a TEDx event. His name is Mads Faurholt’. He then rambled on and on about how clever Mads apparently was. Next thing I knew, Lars had invited Mads and his girlfriend to go sailing in Greece. That became the beginning of a great friendship leading, among many other things, to the production of this book.
Today, I know Mads very well privately and as a businessman. Personally, I don't think ‘crazy’ is the right word to describe Mads. ‘Impressive’ would come closer, but also ‘efficient’ and indeed ‘very fast’. About the latter – as a student, Mads set a speed record by completing his Bachelor's degree at CBS (Copenhagen Business School) within one year and nine months against a norm of three years, and amazingly, he achieved this while having two demanding jobs on the side – one of them managing 50 sales people. He then went to MIT where he graduated with his Master's at age 23, after which he became one of the youngest associates ever in McKinsey & Co. This is what I mean by very fast.
Working at McKinsey sounds like a great job, but Mads soon – pretty fast again – moved on to Rocket Internet, where he quickly became CEO of 3500 employees in Asia at Groupon. This was when he was still only 26 years of age. While living in Asia, he also co-founded numerous web companies, including Zalora, Lazada, Zanui, The Iconic, Airizu, GlassesOnline, HelloFresh and Foodpanda. In 2017 he raised $50 million for his company CompareAsiaGroup. As I write this, his other businesses include CompareEuropeGroup, CompareLatAmGroup, Startech Asia, Private Equity Insights and others.
Like Mads, Lars is also fast, even though this might not be the first impression you get of him. In fact, he typically appears calm, if not even slightly absent and perhaps nerdy. But then take a look at his career: after dropping out of college for a year to travel in South America, he returned to Copenhagen to graduate and then completed a Graduate Diploma in Business Administration at CBS within three years – it normally takes four – while in parallel taking a Master's degree in engineering. Oh, and while also in parallel co-founding several companies. Aged 19, he and a friend bought a summer house in Spain with money they had earned in their spare time during their studies.
Then he had a hectic career in marketing and finance while also being part-time professor and censor at a university and writing the first few of his by now 15 books. Eventually, he ended up as chief corporate dealer trading bonds, forex and futures for what is now the dairy giant Arla Food, after which he became a serial entrepreneur within tech, lifestyle, property and finance.
One of my personal observations about Lars is an amazing tendency to get things done and deliver on his plans, even though he does the latter partly by often having, say, 10 alternative plans, out of which one (almost) always works.
It appears to me that Lars sees business partly as a sport. For instance, some years ago, he had a portfolio of investments in global top quartile hedge funds. However, as they failed to deliver his expected 15% annual return, he set up his own investment company to see whether he could beat them. During the following six years, he grew an initial investment of CHF 20 000 plus a private pledge into approximately CHF 50 million in cool cash, after which he rather abruptly stopped trading, cashed out most of the money and spent it on charity, a villa in Mallorca, a Learjet, a collection of sports cars and his ever-since beloved boat.
Lars is convinced that he cannot sell, and as he also doesn't like to manage people, he typically starts his companies with one or several partners for those challenges. However, apart from that, he is very flexible in the challenges he takes on. For instance, he has built up businesses dealing within anything from satellite communication to mobile information services, property development, financial trading, wholesale food trading, IT supplies and more.
His latest and probably last and thus lasting adventure is within venture capital, which of course is an ideal way to combine his two favourite playgrounds: serial entrepreneurship and finance. To be more specific, he co-founded Nordic Eye Venture Capital with me in 2016.
Being who he is, he subsequently virtually disappeared for four months, ploughing through mountains of literature about venture business, after which he reappeared and declared that the venture sector had been lousy in Europe for decades but that there were several ways to do much better, out of which the most important, funny enough, was helping portfolio companies very actively with the one and only discipline he believes himself to be incapable of – sales.
Fortunately, this is my home ground, and together with our great team, we proceeded to produce 203% return (IRR) within our first full year, where we also returned more than the entire investor commitments in the fund in the form of a single distribution (dividend).
As I read the manuscript for this book, it struck me that there is nothing in it that at least one of the two authors hasn't done hands-on, and for the most part, they both master what they write about here to near-perfection.
Take, for instance, raising money for start-ups. Mads has done this from numerous investors, including Summit Partners, JPMorgan, Kinnevik, Goldman Sachs, The World Bank, Alibaba and SoftBank, and Lars has raised capital from various venture funds plus Intel, Deutsche Telekom, Reuters, Loral, BT, Telecom Italia, Lucent, Kirch Group and Singapore Press Holdings.
Another example: the book describes media activities and marketing via social media. This is also home ground for the authors – between them, Mads and Lars have probably done more than 1000 interviews and public speeches. Moreover, Mads was a radio host as an 11-year-old child and again in a TV series about start-ups when he was 31. Lars has been a guest host on Danish radio and TV plus CNBC. Furthermore, between them, Mads and Lars now have more than 50 000 friends and followers on social media.
In other words: these guys are rather experienced, including from the famous School of Hard Knocks, and both have closed down failing operations, hired the wrong people, failed to close vital contracts and messed up stuff like the rest of us. However, they have also created spectacular successes and made profitable exits, ranging from trade sales to asset sales and public listing. Furthermore, Lars has won numerous international awards for entrepreneurship and technology, including the Wall Street Journal Europe Innovation Award, the Red Herring Global 100 Award, the Bulli Award (twice) and the IMD Swiss Start-up Award. In The Guru Guide to Marketing, he is listed as one of the world's leading thinkers in marketing strategy.
I guess what I mean to say is that they really do know what they are talking about. And I should add that even though I personally have been an entrepreneur since I was 23, there was much in this book that I actually didn't know.
I hope and trust that any reader will enjoy this manuscript as much as I did.
Peter WarnoeCEO, Nordic Eye Venture Capital
1. My entrepreneurial role
2. My personal effectiveness
3. My public impact
4. My face-to-face impact
Do you want to own your own business? Become an entrepreneur? In this section, we describe the many alternative roles as self-employed and/or entrepreneur: why and how to learn from practice before possibly taking on the harder and more ambitious tasks.
We also look at how entrepreneurs can tackle the huge workload and a high risk of stress and health problems. It is all about efficiency – ‘work smart, not hard’, as one might say. Or at least smart if hard.
But how do you do that?
In the third chapter, we move on to study aspects of your ability to make a personal impact and break through when it really matters. People who work in large, well-renowned companies do not always have a big personal impact – they work well within the shelter of a powerful and well-known organization which can sometimes make the impact for them. But in start-ups you often need to get noticed and force your will through, even though your business is small and perhaps rather rickety. So how do you make an impact in everything from sales meetings and negotiations to public speeches, media interviews, on social media and more? We share some practical tips that can help you with this.
Being an entrepreneur is about creating something new, moving into the unknown and maybe starting on projects where you can really foresee neither the outcome nor the financing. Many ‘self-employed’ people are ‘entrepreneurs’, but you may be one without being the other. For instance, a self-employed dentist is probably not an entrepreneur, and someone running a wild new project within Google might work as an entrepreneur but not be self-employed.
We believe it is important for anyone who has a dream of becoming an entrepreneur to understand which entrepreneurial roles exist and what they entail. In this chapter, we study various entrepreneurial roles and personal traits that increase the likelihood of success with start-up projects. We also consider the risks and benefits that are likely to occur when selecting the entrepreneurial life.
‘I want to become an entrepreneur.’ That's what both of us would say often when we were young students.
But what does that mean? When we were 15 or 18, we thought it meant only one thing: getting a brilliant idea and starting a company to pursue it. However, life has since taught us that there are many other ways to be an entrepreneur. And while there are many ‘hows’, there are also many ‘whys’, so let's start with those.
Statistics show that most entrepreneurs are highly motivated by:
: hoping to achieve financial freedom
: hoping to gain control over their lives and work.
But there may be many other motives. For instance, quite a few people start their business as a result of frustration in their former job. Perhaps they were irritated by stupid bosses or unambitious co-workers. Possibly they felt that they didn't fit into the ‘system’ and were fired for exactly that reason.
For some entrepreneurs, the decision to start their company was a matter of self-image. Where their parents perhaps dreamed of owning a house, the next generation can dream of getting their feet underneath their own table.
Others may be primarily driven by a passion for motivating co-workers, or for delivering excellent products to the clients, working with cutting-edge technologies or trendy new styles.
There may also be more professional motives. Entrepreneurial work is very all-round and therefore offers a high degree of responsibility and a palette of different challenges that is almost impossible to find in normal jobs. An entrepreneur in the early stages can thus be sales, marketing, product and HR manager at once. Some will find this extremely stressful, but others – great entrepreneurs – will find it extremely fun. Some would also like to sit at the top of the pyramid and feel that the way to the top seat is shorter if they create the company themselves.
Some are attracted to the challenge and hardship – they almost regard entrepreneurship as a sport, if not a test of manhood (this includes women). These are the people who love to test themselves and find out where their limit is. ‘How far can I go?’ they might think. Let's face it: there are probably some adrenaline junkies among entrepreneurs, though others might rather end up as hobbits on their reluctant way to Mordor.
If you recognize yourself in any of these roles, the next question is: what kind of entrepreneur do you want to be?
In many people's imagination – and in our own, too, when we were younger – it is probably quite simple. You get a brilliant idea in the shower one morning. ‘Bingo!’ There it was! Then you persuade a bank to lend you a few million. A few years and a lot of work later you sell the company. And then … off south to the beaches!
Now we have become older, but none of us has seen such a course of events. Why not? First, brilliant ideas rarely arise out of the blue and in an instant. They evolve over time, in fits and starts. Second, a bank will not lend you money to implement your idea unless you pledge full collateral for it. Because why should they? To potentially earn 5% interest but risking a 100% loss if the company goes down, as it very well might? And third, we have never known entrepreneurs that settled themselves on a beach after they sold their first company. Maybe it happens every now and then, but as far as we can see, the typical successful entrepreneur loves work and immediately starts the next project as soon as there is time available.
Start-ups with great ideas need all kinds of profiles early on. Perhaps you are not the idea man but still have the passion to pursue the entrepreneur life. All start-ups are looking for help and resources and appreciate any approaches they receive. And lots of people have become entrepreneurs by joining others’ start-up projects early on.
For sure, being an entrepreneur is typically very hard, but in our opinion, conditions for entrepreneurs have improved in important ways in recent decades. It has become a lot cheaper and technically easier to start new companies. Certainly, the amount of red tape may have increased, but overall costs of setting up a basic operation have dropped massively. For instance, software and hardware have become significantly cheaper, as have flights, and you can now use video conferencing free of cost. Furthermore, there is access to plug-and-play tools, cloud computing, crowdsourcing, focused and thus inexpensive advertising opportunities, global payment systems, effective logistics services, smartphones, tablets, etc., all of which are easy and inexpensive to use. Therefore, a lot that was previously expensive and cumbersome can now be dealt with cheap or for free. Overall, we believe that with the exception of salaries, running costs for many types of start-up have declined by as much as 90% over the past two decades.
Moreover, network effects sometimes can help start-ups to create huge value very quickly. In the entrepreneurial environment, the word ‘unicorn’ is used to describe companies which achieve a market value of more than $1 billion. In the 1990s and earlier, it took typically at least 20 years for the greatest winners to get there, but since then it has gone ever faster – Airbnb, for example, did it in less than five years, Snapchat within a year and a half and Slack within just nine months.
It has thus become a lot cheaper and technically easier to start companies.
Another advantage for modern-day entrepreneurs: today there exist several great online networks for entrepreneurs in all developed nations, such as Young Upstarts, Sandbox, Fast Company and YourStory. Here you can regularly seek advice and inspiration as well as find useful contacts. Appendix D contains a list of 76 of the best in the English language.
In addition, many new businesses manage to create large companies without having to invest much in equipment or production. As often pointed out, the world's largest property landlord, Airbnb, owns no hotels. Facebook, which is the world's largest media company by far, has no production of media content, and Uber, the world's largest taxi company, owns no cars. Therefore, they have been able to expand incredibly quickly.
So yes, in many ways it has become cheaper and easier to be an entrepreneur, even if taxation and legal tangle might have pulled the other way.
All of this, plus a new set of management tools called ‘lean start-up’, has contributed to a significant change in the entrepreneurial landscape. We see ever more ‘micro-multinationals’, which are global companies with limited staff and investment needs. And the fact that you can now start a company for less money means that investors such as venture capitalists (VCs) can spread their investments across multiple projects – some of them leaning towards the ‘spray and pray’ principle in which they invest small amounts in many start-ups. Finally, even on the funding and exit side, there is significant innovation, where the recent development of ICOs (initial coin offerings) is a prominent, if at times problematic, example.
You can divide entrepreneurs into two main types. The first are lifestyle entrepreneurs. They are the ones who found and run, for example, a restaurant, a paint shop or a dental clinic. For sure, being a lifestyle entrepreneur requires some risk taking and typically a lot of work and determination, but it does not necessarily require great creativity (nor does it exclude it either, of course). But it is characterized by a limited growth ambition.
VCs typically don't invest in lifestyle entrepreneurships, since the profit potential is often quite limited and the founders are rarely interested in selling the company and therefore are not able to provide a reasonable return to foreign investors either. Also, lifestyle entrepreneurships are often related to some single person's unique skill or talent, which adds to the risk for an investor.
The second category are growth entrepreneurs. They are the ones who get their project to multiply or ‘scale’, as people in the industry often call it. If your restaurant is the first of an international chain of restaurants, you have ‘scaled’ it. For instance, McDonald's was a burger business and the McDonald brothers had little scaling ambition. However, then they met Ray Kroc, who offered to start scaling it for them and eventually bought them out for $2.7 million (we can recommend the movie ‘The Founder’). Similarly, James Oliver is a cook, but instead of working as an employee or lifestyle entrepreneur, he became a growth entrepreneur.
The McDonald brothers were innovative but not growth entrepreneurs, but most growth entrepreneurs need to be both very innovative in terms of new technologies, products or business practices and able to drive scaling.
Some entrepreneurs start only one company that they keep for life. Often, after some years they will continuously pull money out of their company and invest it in other things such as property or private equity funds, but without starting new companies. Others, meanwhile, become ‘serial entrepreneurs’ – they constantly see new opportunities which tempt them. An extreme example is Richard Branson, who has founded around 500 companies within lots of different sectors.
Perhaps the explanation of the difference between single-company founders and serial entrepreneurs is that those who keep the same company for life are most fascinated by people management, whereas serial entrepreneurs may be more fascinated with ideas.
Is it risky to be an entrepreneur? The literature is full of studies of what proportion of start-ups go belly up. You might find some that say that around 90% fail, or that 75% fail within three years. We have looked at the statistics, and they are … err … confusing.
But let us give some examples. Shikhar Ghosh from Harvard Business School found that 75% of all companies receiving VC investments do not give a profit to these investors.2
It can be worse. A major study covered 2462 Israeli technology start-ups over many years. Among these, 46% went out of business. Splash! Even more alarming was that about two-thirds of those that had received investment from venture capital firms failed. Two-thirds! And even worse: no less than 96.5% of the 531 of the companies that had received incubator investments failed.3 (Incubators are facilities for young start-up companies offering special service functions – we describe them in more detail later.) Now it must be said that incubators invest in early stages where the risks are higher but so are the potential gains; nevertheless, these are not pretty numbers. Just think about it: nearly 97% failed!
An even larger study included close to 10 000 US start-ups that had received venture capital funds between 1975 and 2007.4 It showed that 87% of start-ups led by first-time entrepreneurs did not (not!) succeed. Of those which were led by entrepreneurs that previously had tried and failed, 80% failed, and of those whose leaders had previously managed successful start-ups, ‘only’ 70% failed. Clearly, past performance is no guarantee of future results, as bank disclaimers often say.
Nearly 97% failed!
Let's conclude that entrepreneurship is not easy. And then there are the statistics showing the proportion of start-ups in the United States that fail within a given period after founding:5
US business failure rate, year-over-year, % of business failed.
Another survey shows that among 4841 German internet and ecommerce start-ups up until 2004, 21% failed, but bizarrely a higher proportion, namely no less than 53% of the 895 of the companies that received VC funding, went out of business.6 Oops!
There are numerous other studies, but comparing them is challenging. For instance, the data may involve growth entrepreneurs only, in one country, for a short time span, often within a limited sector, and typically only with companies that have received a certain kind of external funding, e.g. from the VC funds. In addition, there are widely divergent definitions of ‘failure’ and ‘success’. To fail, for example, in some studies may be referred to as going bankrupt and in others not providing profit for a venture capital fund. (When we use the term ‘fail’ later in this book, we simply mean that one does not live up to their own expectations.)
But again, the studies make one thing quite clear: it's hard. The typical impression people in the venture capital industry express is this:
Approximately 25% of lifestyle entrepreneurs fail within the first three years or so.
Approximately 75% of growth entrepreneurs fail within the first three years or so.
Venture capital funds are therefore cautious. A typical VC fund receives around 500–1000 investment proposals per year. They do a quick screening of them all and might then give a closer look at perhaps 100, where, for example, they meet the founders once or twice. Among these, they might perform deeper studies of 20 or so. And then, they might end up investing in maybe two.
What happens with the two perhaps that they invest in out of, say, 700? A rule of thumb in the industry says the following:
30% go bankrupt.
30% survive but nevertheless provide a negative return of the fund's investment.
30% survive but provide a roughly break-even result for the fund.
10% go extremely well and may even give a 1000% return or more.
So, it is 10% of the two out of 700 that do really well, so now we are talking about the order of one company out of 23 500 that reaches the stars. Again: The number is very uncertain, so think of it only as an indicative range.
In any case, if anyone asks whether starting companies is risky, our best answer would be: ‘Yes, unfortunately, the risk is huge. Especially if it is a growth entrepreneurship.’
And this is despite the fact that it has become cheaper and easier to start your own business. Nevertheless, we would recommend a lot of people to at least try, because if you know more about the task than others, the chances of success increase a lot. And after all, it has also become far cheaper to fail.
There are numerous factors that can reduce the risk of start-up failure. Here are a few samples (they will, along with many others, be explained in more later in the book):
Your chances of success increase dramatically if you have at least one co-founder, whom you have worked with before and know very well. If you previously have had a job in another start-up, it will increase your chances of success even further. All of this has been borne out by statistics (more on that in
In the beginning, you have no need for either a business plan or a lot of money, as you will typically spend the first several months or even years creating a ‘minimum viable product’, which you test with potential customers. Your plan can at this stage simply be on a large piece of paper and might consist of nothing else but bullet points. In addition, you should use a spreadsheet with some simple back-of-the-envelope calculations. And you will need some PowerPoint slides that tell your story, short and simple. Nothing else. You should review all this every week, if not more often. The purpose at the start is to learn, not to do (see
for more details).
It is not embarrassing if you make some dramatic change of direction (‘pivots’) at the start. In fact, statistically, this increases your chances of success (see
for additional information).
The statistics also show that it will further enhance your chances tremendously if you get a good mentor and/or follow blogs from entrepreneurial gurus (this will be further explained in
Your greatest commercial risks are (i) a poor product/market fit, (ii) internal strife, (iii) generally, investing heavily before you have clearly proven that you have a product that enough customers really love and want to pay for, (iv) accelerating parts of your project before other parts are up to speed, and (v) failed transition from early adopters (the earliest users) to mainstream customers (more about this in
As mentioned, these examples are just a few of the many we will show throughout the book.
Earlier, we wrote about the traditional view of the entrepreneurial life, which was suddenly getting a brilliant idea, then building a company around it. However, there are lots of different kinds of entrepreneurial life. The following 12 are probably the best examples:
Working in a private equity fund
Private equity funds buy large and often controlling positions in private companies and then typically implement several programmes to create more value, then sell their positions again. This work may sometimes be relatable to the traditional entrepreneurial life.
A friend has founded a start-up and it is beginning to do well. You are invited to join as an investor and ‘co-founder’, even though the company has already existed for seven months, for example.
You acquire the rights to become a reseller or franchisee for a growth company such as McDonald's (franchisee is someone who has bought the rights to do business with other people's trademark and products, etc.). As a franchisee, you may, for instance, build retail stores or other local distribution. Admittedly, it is based on someone else's idea, but it's still your business. And you are working as an independent in something that might be called an entrepreneurial project.
You have a hobby that you think is more fun than your day job. Perhaps you decide to make a website about your hobby and build up a large network of like-minded people. One day you may conclude that since you now know a great number of potential customers within this area – and they know you – there is a basis for starting your own business.
Some companies actually work as serial entrepreneurs, thus creating plenty of opportunities for their staff to start entrepreneurial lives.
You work in a large company and you – or someone on your team – have had a brilliant idea. You now propose that the management team implements this, but they respond that although the idea is fine, to fit it into the company's profile is hard. You therefore propose they make a new spin-off company to implement the idea there. The company may finance the first few months or years of operation, perhaps against a 50–80% stake, and you get the remaining shares, but at the same time your salary is reduced to a minimum. Thereafter, the rest is up to you. Incidentally, there are some businesses that are doing serial spin-offs, i.e. lots of them, giving plenty of opportunities for employees to become entrepreneurs.
Consultant to start-up
You develop on a consultancy basis a solution for a customer – for example, a software solution to a specific problem. Afterwards you start thinking, ‘if the customer would pay so much for this, there are probably others who are willing to do so as well’. Thus, you're starting a business that turns this one-off solution into a scalable product. Or maybe you are wondering why the employer in the consulting firm you are working for bills the customer three times as much for the work you are conducting as you receive in wages. So why not become your own employer?
Independent lifestyle entrepreneur
You incorporate a little business to become your own boss.
Lifestyle to growth entrepreneur
You are a lifestyle entrepreneur but while being so, you develop an innovation, which allows you to scale your project.
The concept skunk works originated in Lockheed Martin during the Second World War and is still being used with great success today. This means that a company allows some of its employees to work on projects that run outside the normal management routines. Lots of successful companies – including many of the largest multinationals – have skunk work programmes and the work which is conducted there typically has a strong entrepreneurial flair.
You work unpaid as a consultant for a start-up business, but only because you will receive stock options or shares in that business. Or here's a variation: you work for a start-up for a beggarly salary and stock options. The company goes really well and suddenly its stock options are worth millions. One day, with a few of the other people, you choose to quit the job and make a new start-up, financed with the earnings.
Oh, right, and then # 12:
The brilliant idea
You get a terrific idea during your morning shower, find investors and build your business.
However, note that many of the 12 paths to entrepreneurship are far less risky than # 12. And many who implement # 12 have previously cut their teeth trying one of the other 11 approaches. Also, remember that many who have success failed once or several times before, and the horrible entrepreneurial statistics do not cover this aspect. So if, for example, 80% fail but everyone tries five times, most will arguably succeed eventually.
Many who have success failed once or more before succeeding.
As a 14–15 year old, I bought a wholesale stock of discounted clothes with my pocket money – and then I walked into a store and tried to sell it. It cost me a lot of money, but it was one of many times when, while young, I practised my entrepreneurial capabilities – many years before I really began in earnest. Actually, my last time at Groupon and Rocket Internet was probably also a kind of ‘sheltered workshop’ for entrepreneurs, where I learned a lot by helping to create around 15 companies under a common framework. There is nothing wrong in practising – actually, quite the opposite. You wouldn't participate in a very difficult sports competition without training first, would you?
I had a lot of practice in business as a young man. During my studies in college, I helped a friend importing containers with cakes, which we distributed to supermarkets, and together with another friend I sold antistatic screen cleaners to computer companies. I also borrowed money and invested it in the stock market. At the age of 19, I bought a country house in Spain with a friend with money which in my case was earned during my leisure work. For me, buying the house was 50% about learning the ropes of buying and restoring a house. I just wanted to learn. And although none of my first businesses was a major success, I learned a lot from them and got familiar with the basic processes of running a business.
Here is our take on start-up risk in a nutshell: when you think of risk, you must of course also think of the alternative. If you start a business, for a certain period you will live with extreme uncertainty, and it may well end up going wrong. But if it actually ends well, you get into a situation where you never – never! – again in your life need to have economic problems. Thus, you can achieve the ultimate financial freedom. And what exactly is the alternative? That you go through your whole life dependent on an employer to keep you financially secure – and if you do lose your job, you can get into quite big financial trouble rather quickly. Our point is that entrepreneurship is indeed risky, but the same can apply to a traditional career as an employee.
When you ask the elderly what they regret about their lives, they rarely mention something that they have done, it is usually something they did not do. Therefore, if you dream of creating a company, try. If it fails, then you know that you at least tried, you just couldn't make it work. If, however, you do not try, you might wonder to your dying day what it perhaps could have resulted in.
This ethos of trying for all the world is also very common among entrepreneurs: ‘True failure is failing to try’ has almost become an industry motto, and that is how we see it. When our days are about to be counted, we want to feel that we tried the best we could – even if some of the things we tried failed. By saying this, we certainly do not mean to say that failure should be glorified, as you sometimes hear in the entrepreneurial sector, but merely that it may be the biggest mistake of all not to test your potential.
The biggest mistake is perhaps failing to try.
Successful entrepreneurs have different personalities, yet we believe that there are some common characteristics that increase the likelihood of success substantially. Here we must admit immediately that we have never met a person – and certainly not ourselves – that lives up to all of these characteristics. But at the same time we would like to add that, at least in our opinion, you are able to train some of your personal weaknesses away. Working as an entrepreneur will most likely make you far stronger.
The first useful trait is showing initiative. When people are annoyed about something, they complain to their friends on social media, etc. We all do. But some people may afterwards say, ‘OK, no more complaining. Let's fix it instead!’ Then they come up with a proposal for a solution. ‘Let's do it!’ Such initiative is one of the typical features of entrepreneurs.
In parallel, entrepreneurs often tend to think of continuous improvement. When they enter a restaurant, for example, they immediately consider how they would change it. Therefore, there are constantly myriad possible projects running through their heads. Their attitude is that they typically do not improve anything by fighting the existing but by creating an alternative.
What else could help? One of the most important attributes among entrepreneurs is arguably that they are self-motivated, i.e. they can work persistently without being ordered to do so. This leads logically to the next property, which is to have a passion for a project
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