Could Newton have found three laws of entrepreneurship?

Sir Isaac Newton was a renowned 17th Century scientist who, among other things, formulated his three famous laws of motion that to this day are taught at school and underpin classical physics.

When Newton was alive, between mid 1600s and early 1700s, trade and associated entrepreneurship was starting to boom in the UK. The largely domestic agrarian economy was beginning to change with the growth of overseas commerce, particularly with North America and the West Indies. The slave trade, rise of manufacturing, and the import and export of ever more exotic goods were the areas being exploited by entrepreneurs of the time.

So, had the University of Cambridge had a science park where academics could spin-off and commercialise their research, would Newton have perhaps mingled with those businessmen and inadvertently formulated three laws of entrepreneurship to add to his portfolio?  And if so, would they have been akin to his acclaimed laws of motion?

Newton’s first law states that an object either remains at rest or continues in motion with the same speed and in the same direction unless a force acts on it. So a ball lying stationary on a field stays that way until something like the force of a boot kicks it into play.

An entrepreneur doesn’t really behave like this.  Firstly, an entrepreneur is never at rest; he or she is always thinking about the next step, chasing a sales prospect, courting an investor, or multi-tasking at social media.  Secondly, an entrepreneur is rarely seen cruising in the same direction at the same speed until acted upon. By definition, entrepreneurs have some internal motivation that moves them forward despite forces acting against them. Indeed, some opposing forces like bureaucratic rules and regulations seem to give them even more drive to overcome and make progress.

So perhaps Newton’s first law of entrepreneurship would read “an entrepreneur remains restless and continues to progress generally forward despite a myriad of obstacles presented“.

His second law states that acceleration is produced when a force acts on a mass. The greater the mass (of the object being accelerated) the greater the amount of force needed (to accelerate the object). This means that if the force from an engine continues to push a car forward, overcoming friction, it will get faster. Mathematically, the acceleration is proportional to the force; twice the force on a fixed mass leads to twice the acceleration.

Entrepreneurs like acceleration, as this is business growth; the change from a start-up to a scale-up. Growth is produced when an enthusiastic, dedicated entrepreneur and their team act within a business.  And, business size (mass) does seem to play a role, as small agile start-ups can scale (accelerate) more quickly than larger companies with their legacy systems and cumbersome layers of internal middle management.  However, the growth results in a larger organisation, as if the mass accumulates like a snowball descending a mountain.  Yet, the metric of successful business growth is not usually linear; the hockey-stick shaped revenue curve that investors like to see has an exponential relationship with time despite the accumulating complexity of the business.  In fact, growth is all about the market opportunity and how quickly the business can capture it through slick execution.

Therefore, Newton’s second law of entrepreneurship might have been stated as “business growth occurs when an entrepreneur enters a market with a compelling proposition.

Finally, Newton’s third law of motion states that for every action there is an equal and opposite re-action. So could the equivalent read that for every entrepreneurial success there is an equal and opposite failure? Possibly, although there are many more failures than successes. Failure can be new businesses that simply don’t make it through, but also much larger established businesses that fail to adapt and innovate as the new start-ups steal their market share.  The law may therefore read “for every startup success there are an order of magnitude more failures“. This is why venture capitalists invest in a broad portfolio hoping that one turns out to be extraordinary and can compensate for the losses of the many.

I suspect, therefore, Newton may not have found entrepreneurs and their unpredictable world of business particularly satisfying to formulate.  By their very nature, they are mavericks; more akin to the unintuitive quantum mechanics that we have since discovered with the help of Planck, Bohr and Einstein to name but a few. We’ll have to explore if quantum entrepreneurship is a better description in a future article…

Adrian Burden is author of Start To Exit: How to maximize the value in your start-up

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Creating leverage in your business

Mechanical levers have been used by human civilisation to reduce the effort needed to move objects since the Stone Age and thus helping lasting monuments such as Stonehenge and the Pyramids to be constructed. Archimedes first described their operation in about 260 BC; basically a rigid length of material (like a plank) is rotated about a pivot (such as a tree trunk) so that a heavy object can be moved a short distance with a lower force applied over a larger distance of movement. If the pivot is between the two ends of the lever, then this is like an asymmetric see-saw in which a heavy adult close to the fulcrum can be balanced by the lighter child sat the other side and further away.

Leveraging Marketing

The term leverage has since been applied more abstractly in finance and business to describe taking advantage of a situation to generate returns or improve progress more rapidly.  But what does this really mean to the Chief Executive operating a business in the real world?

In an ideal company, a great workforce generates a highly desirable project or service that marketing tells everyone about so that profitable sales are generated and the business grows. Each of these stages can be leveraged, and the analogy with mechanics serves a useful purpose:

Firstly the great workforce is a team that pulls or pushes together to move the business forward weighed down by its many parts including supply chain, internal bureaucracy, and external compliance. The human resource sets itself up in a well organised manner along the length of one side of the lever to provide a measured force in the same direction that shifts the business in the desired direction at the other end. Each member of the team is being leveraged for their contribution by harnessing their best attributes. If some members pull in the wrong direction, they not only work against the team’s directed effort, but they actually help the business to fall further in the wrong direction.

The highly desirable project or service has a string of features each with different value propositions that when lined up along the length of the lever provide a driving force to move the business through its potential sales in the right direction.  Too few beneficial features, or a number of faults that don’t sit well with the user experience, wont provide enough impetus to propel the enterprise forward.

Marketing must leverage multiple channels to spread the word positively about the business. Putting the right message out through a range of traditional and social media outlets to drive awareness within the target markets is what is required. Not every channel is equally weighted, but a consistent message across the length of the lever forces it down and pulls up the business. One channel is not enough on its own, and as the business grows and the diversity of the customer base expands, so too the need for concerted effort from many quarters to impact business growth properly.

Finally, sales can be leveraged by having lots of customers all wanting the same thing and better still liking what they buy and coming back for more.  Not all customers are equal; some are big and sit far from the pivot with greater influence.  Some are small, sitting tight to pivot, but nevertheless contributing. Sometimes, customer demands are in the wrong direction because the sales process is ill-informed or poorly qualified. That’s when leverage fails and sales are lost.

Occasionally the very fabric of the business is strained and broken by the effort being applied to the lever.  Think of this as one or more of an oversized costly workforce creating excessive cash-burn, an all-singing all-dancing product or service that can’t be sustainably developed or supported, an overzealous marketing team that generates too much of a buzz that can’t be lived up to, or a sales team that over-promises so that the company can’t cope. That’s when the lever snaps and the business can end catastrophically. Too much leverage in business is not always a good thing; it needs to be measured and controllably applied within the framework of a strategy.

Start to Exit is due to be published in 2017.

Does your business lase?

When an army is marching in step, there is a powerful resonance that can instil fear in the heart of the enemy. The regimented advance is focused, controlled and impressive.  So much so that battalions have to break step as they cross bridges for fear of hitting the resonant frequency and destroying the very foundations they are marching on.  The wind did the same thing to the Takoma Narrows Bridge in 1940; it was not the strength of the wind per se but rather the fact it caused the bridge to oscillate at its resonant frequency so that each successive flex was enhanced until the structure collapsed.

In physics, there is a phenomenon called Light Amplification by Stimulated Emission of Radiation. This manifests itself in the form of a device called a laser, a creator of a bright light that almost everyone reading this will own in the form of a CD or DVD player. What is special about laser illumination is that all the electromagnetic waves in the light path are of the same wavelength and in step; they are coherent like a disciplined marching army. This results in a very intense, collimated beam that can be tightly focused and used for precision measurements and targeted applications. The verb to describe a device operating in this manner is ‘to lase’.

When a business is going well there is a buzz and an amplification of energy. The team is singing from the same hymn sheet and pulling in the same direction. Marketing is not only generating sales, but sales themselves are generating more sales, and the resulting customers are in turn evangelising and creating yet more sales. This is a business that is experiencing rapid growth and reaching that all important inflexion in the hockey stick growth curve.  Suddenly the business is resonating; it has started to lase!

But beware, not all bright lights are lasers. And the incandescent lamp that burns twice as bright burns half as long! Your business may appear to be doing well and sales may be accelerating, but is the activity sustainable? Is the team marching in step, efficiently conserving energy like a well trained army corp, or are they racing round the deck extinguishing fires in a frenetic attempt to keep the lid on it all?

A laser device achieves its spectacular light through very careful construction. Precision engineering creates a cavity in which the desired light energy is harnessed and out-of-step errants are discarded. Only the disciplined, aligned photons are allowed to pass and contribute to the emerging laser beam. Moreover, the same in-step photons encourage others to the same; they energise the material in the cavity to create photons with the same energy profile as their own

For your business to lase, your management team needs to create a similar cavity; an ethos and focus that brings everyone together and ensures that all the activity is focused on a singular aim of coherent and efficient business growth. Meandering staff dissipate everyone’s energy and need to be brought into line or discarded. Off-message tasks need to be quashed; mission creep needs to be avoided like the plague.

However, if you succeed in getting your business processes and working environment right in the early stages, everything can fall into place so that one action reinforces the next and scale-up becomes easier. As an entrepreneur, you’ll know when your business is lasing because rapid growth will appear unstoppable and everyone around you will be marching enthusiastically toward the same goal that you outlined in your vision, with an energy that seems unquenchable.

BusinessLase

Start to Exit is due to be published in 2017..

Shedding light on the startup spectrum

Not all businesses are created equal. When an entrepreneur or group of would-be co-founders set out to start a new venture, their business idea and mindset will often define where on the enterprise spectrum their startup will sit.

At one end, we have the lifestyle business. Using the analogy of the visible light spectrum, this will sit at the low energy red/infrared end. The lifestyle business is, after all, supposed to be relatively easy-going; generating income by doing something that is enjoyable and not over-demanding on time.

Next along, in the relatively low energy orange region, is the consultancy / professional services business. I know accountants, solicitors, management consultants, and so on will be up in arms with this verdict, but frankly these businesses are fairly simple. They may demand plenty of continuous professional development on a personal level to stay up-to-date with legislation and sector developments, but from a business perspective things are relatively straight forward.

The UK is often referred to as a nation of shopkeepers, but these type of businesses are a little more complex. Although effectively a reseller, this business needs product knowledge as well as the ability to efficiently monitor stock, deal with logistics, process returns and even offer on-line e-commerce options.  We’ll place the shop business in the yellow region of the spectrum.

Middle of the road, in the green region, is the systems integrator; offering specialist knowledge to create and install systems of products that work well together. All the skills and attributes of the aforementioned businesses apply along with some technical competence to effectively source, deliver and support bespoke options.

Once a business starts to manufacture products, so the complexity really goes up. Sitting squarely in the relatively high energy blue region are, I believe, software companies. Their virtual products don’t require much capital equipment to create, but they do need stage gates to specify, code, support and deliver. This applies equally to web applications, mobile applications, and software as a service (or indeed the older approach of software in a box). This type of business is also highly scaleable and can grow across the globe relatively quickly. Doing so adds complication in customer support, language support, and dealing in different jurisdictions.

Manufacturing physical products (even traditional products like furniture and food) are in the high energy part of the spectrum; shades of blue and indigo. Why? Because the business needs to deal with the bill of materials, a supply chain, the production process, all the associated quality control, warehousing and delivery logistics.  As the enterprise grows, along come warranty returns, export controls and worldwide distribution networks. This is all tricky and demanding stuff requiring diverse skills, fantastic management, facilities of equipment, and plenty of resources.

So, what can possibly be worse and command the violet / ultraviolet end of the spectrum? Well that would be the high technology start-up.  It’s all of the above, with specialist knowledge, R&D unknowns, patents, and early-stage venture capital thrown in for sure.

Before you start your business, look at your plan through a prism and see what colours come through. Understand the nature of what you might be letting yourself in for, and hopefully the pot of gold will be there for the taking at the end of the rainbow!

Startup Spectrum

Start to Exit is due to be published in 2017.

Data data everywhere, time to stop and think

As your startup business grows, you’ll be generating all kinds of data. Probably not Big Data like the big boys, but still enough to swamp you with information such that you can no longer see the wood for the trees.

Firstly you’ll probably be collating statistics about your website, using for example Google Analytics. This service has grown over the years to include a myriad of historical and realtime analysis tools including information about where people are located who visit your site, what kind of device they are using, what search terms brought them to you, and which pages caught their eye for the longest time on your site.

Then, if you have a Facebook page or Twitter account, you can receive information about the number of visits, number of retweets, who’s following, who’s stopped following, how many people you’ve reached, and so forth.

And yet, important (and fascinating) all this data might be, it is rather detached from the nub of the matter; how much money is your business making and how are the sales doing? This financial data is often the bit that is overlooked by the eager entrepreneur, and in many ways the recent years of dotcom web 2.o phenomena have fuelled this trend. Many high profile Internet and technology startups have generated value from eyeballs rather than dollar bills, and so social media data becomes more important than financial data.

But, as a small business owner with limited time and resource, you will need to decide what data to collect, what data to analyse, and most importantly what data to act on. Without care, this task can either be wholeheartedly ignored during the day-to-day firefighting, or an action that occurs sporadically when you happen to log into one of your accounts and stumble across the analytics page.

My advice is to include key data analysis as part of a monthly exercise alongside the review of your management accounts. To some, the suggestion of a monthly review of management accounts might come as a shock, but many entrepreneurs do this almost unconsciously.  You will probably have a fair idea of your bank balance each month, but now is the time to structure this appraisal a bit more methodically.

So, on reviewing a monthly profit and loss, balance sheet, sales forecast and debtors aging list, that is also the time to look at some other key data; how many website visits, where are the visitors from, are the important (sales generating) pages being visited, and what is the conversion (from visit to closure of a sale) rate like.

By making a specific effort like this, on a regular basis, you are (to paraphrase Cliff Stoll) turning data into information, information into knowledge, knowledge into understanding, and maybe in some cases understanding into wisdom. More importantly, you are also being selective about the data you analyse with a goal in mind so that you can drill down into something useful for your business. By doing this regularly, an important aspect is to look back at the earlier data and see if things are improving each month, each quarter or each year, and most significantly try to understand why.

Each business will benefit from studying different kinds of data beyond the financial data. If you make widgets, you’ll want to look at the inventory, order book, manufacturing process data and quality control.  If you run an e-commerce site, you’ll want to focus on your web analytics and conversion rate.  If you run a marketing agency, your social media footprint will be important. And so on.

Finally, it is also beneficial to encourage your colleagues to do the same. As a business owner, you can’t be analysing all the data yourself into the future. Once you have decided what is informative, delegate the analysis to someone appropriate fro example in finance, production or marketing.  This will then free you up to move on to the advanced level of data analysis which is to spot trends across these reports: did the increased marketing effort that led to more Twitter followers result in more website conversions and higher sales, and did that rush cause the mid-month quality control issue because you started a night shift?

In this day and age, your business activities will be generating a lot of data. Some aspects you will be choosing to measure, others will be being collated in the background by default. The key is to step back and think through what you want to do better understand from all that data and put a bit of focused quality time into to studying it. You’ll learn a lot more that way than trying to just amass data or gleefully ignore it.

Start to Exit is due to be published in 2017.

Entrepreneurship: Never a dull moment

Being an entrepreneur brings with it an endless succession of challenges. Thankfully most of them are also interesting; even if some can bog you down in bureaucracy because they revolve around government-induced paperwork and compliance. The forced interest in these cases tend to lie in learning how yet another cog in the nation’s commerce machine works.

But the really interesting things are the range of tasks needed to steer the ship; a ship that is continuously taking on more cargo as it progresses and thus becoming less agile after every nautical mile .  At the helm, you’re the one that has to keep an eye on the progress of many tasks as they pass by, hopefully none of them so out of control that they sink the vessel.

One minute you’ll be honing the marketing message on your website, proof reading the brochure going to print, or Tweeting a word of wisdom to your fanbase. The interesting thing is that you now have a basic grasp of website design, typesetting publications, and running a social media campaign.

The next you’ll be studying your cashflow forecast, trying to fathom your P&L and wondering why you need to ring customer X yet again to chase payment. You’ve inadvertently learnt about accruals accounting, balance sheets, and credit control.

And then you’ll turn to procurement to see if you can source things a little cheaper, tighten up on the specs of a critical component, or drop ship something somewhere to speed up delivery. Suddenly you have become a logistics guru that understands at least the basics of supply chain integrity.

That sorted, its time to look at stock and fulfilment whilst trying to determine whether its worth outsourcing this entire operation to free up a bit more time.  Before embarking on all this, you probably knew very little about warehouse management and the vast business of fulfilment centres.

As you take on more staff, you’ll be guiding them on all these tasks and fretting that they can’t benefit from all your experience to date. You’ll be solving issues around project management and how to successfully motivate a team. Suddenly you’ll have an interest in human resources, successful recruitment techniques, and employment law that you never thought possible. And you’ll be trying to find out more about effective communication software packages, enterprise resource planning, and how to delegate rather than micro-manage.

Then, just when you think you have the general hang of day-to-day operations as your venture expands around you, the unexpected one-offs come along. These are where you really have to learn quickly on the job; someone wants to do a joint venture, you need to pitch for for your first tranche of venture capital finance, or a suitor has suggested acquiring all of your company.

As long as you set out willing to expect the unexpected and accept you’ll never know all the answers when you need them, entrepreneurship is an exhilarating experience. Boredom, thankfully, is not on the menu.

And if you can start out with a modicum of organisation and structure, the journey can be even more exciting because you’ll have more time to be circumspect and soak it all in.

Start to Exit is due to be published in 2017.