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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If only an exit was this easy

Push to ExitExits are usually illuminated and clearly marked. The doors often open outwards to make egress even more straightforward. If only exiting a business was as easy as leaving a building.

In reality, growing a business to create a valuable well-oiled machine that appeals to an acquirer or indeed the stock market is hard work.

Not only does the enterprise need to be delivering products and services, satisfying customers, and generating revenue, it also needs to have an enthusiastic workforce, excellent further growth prospects, and systems in place to facilitate the next stage of development.

Unfortunately the operation cannot be put on hold whilst a suitor is sourced and their due diligence satisfied. Rather, it must be business-as-usual dealing with existing customers, winning new ones, and fighting fires in the sidelines. This process can be very demanding on the management team, as putting together the deal needs plenty of additional bandwidth to compile information, answer questions, draft agreements and negotiate hard.

One solution is to prepare for an exit right from the outset. As the business expands and new employees join, systems can be put in place that help facilitate the growth and make both third party investment and acquisition easier. From how the business is regularly reported, how the server is setup, how the finances are monitored, to how the departments function, there are ways to organise and systemise the business that will pay dividends in the future.

Get it all right from the start, and the exit may be a mere formality; push to exit, rather than punch, kick and scream to exit.

Start to Exit is now available.

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.

Entrepreneurship: action this day!

One of the things you quickly learn about running a small rapidly growing business is that the sooner you do something, the sooner its impact is felt. Moreover, the ability to do something and then see the result is part of the appeal. Anyone stuck in a Dilbert cartoon in their current place of work will have long forgotten the joys of cause and effect.

It therefore amuses me when I hear some would-be entrepreneurs say they’d like to start their new business when the time is right and that they are just waiting for all the stars to properly align.  In many ways it would be better to just get on with it; action this day!

“Fail fast” (“fail often”, “fail forward”) is the gung-ho American Silicon Valley mantra. Whilst failure itself may not be the best tactic, getting on with it and finding out what works and what doesn’t most certainly is. Entrepreneurs need to make many decisions every day, some of them really quite crucial for their business.  The skill is making the balanced decision rather than vacillating endlessly for fear that it will turn out to be the wrong decision.

And decisions tend to go hand-in-hand with actions as new courses are set. This agility often leaves larger corporations floundering, and is precisely why disruptions in the market place frequently originate from small medium enterprises spotting an opportunity, deciding to pursue it and responding quickly. This is the entrepreneur’s competitive edge.

It is a double-edged sword, as putting the wrong foot forward through an ill-informed decision could of course trip the whole venture up.  The good news is that another quick decision to change course can save the day. And that’s the key; make a choice, do something, review, do some more of the same or do something different all in quick succession with the facts at your fingertips.

The trick is to keep this ethos of fast decision making and rapid response well oiled as your company grows.  When it is just you, perhaps a co-founder and a handful of employees, it is easy.  But as your company expands and you want to empower your managers to be as nimble-minded with their day-to-day operations, you’ll need them to understand the workings of the business and have any past lessons you learnt accessible to them as they move forward.

It generally boils down to good, frequent communication and centralised, accessible information.  And a company structure that promotes this.  If this isn’t already in place in your organisation, simply decide to make the change and roll it out today!

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.

Wanted: Scale-ups

A report published just over a year ago by Sherry Coutu CBE, non-executive director of the London Stock Exchange, titled “The Scale-up Report on UK Economic Growth” highlighted some of the challenges of ensuring that small medium enterprises are supported sufficiently to provide the desired impact on our economy.

Startups have received a lot of attention in recent years with the promotion of an entrepreneurial culture to encourage would-be entrepreneurs to take a measured risk and start their own business. Initiatives like Startup Britain have been tracking the record number of yearly company incorporations in the UK, highlighting how this pipeline of new companies is boosting economic growth for the nation.

The issue, of course, is that many new companies fail to grow or simply fail outright. The real economic benefit comes not from the sole-trader or micro-enterprise but from the rapidly growing SME.

Sherry defined a Scale-up as “an enterprise with average annualised growth in employees or turnover greater than 20 per cent per annum over a three year period, and with more than 10 employees at the beginning of the observation period.”

This may sound manageable, but in reality if you are the founder on the ground orchestrating this rapid growth, you have numerous balls in the air and a whole host of issues to worry about. As Sherry stated, “In growing from 10 to 100 employees, to 500, 1,000 and so on, companies have specific requirements for capital, management, skills and organisational processes.”

Communication within a rapidly expanding team can be fraught, cashflow can be excruciating, and seeking new customers exhausting. Using an engineering analogy, it is during this period that the company’s foundations, processes and ethos are stress-tested way beyond specification. In short, Scale-ups need all the help they can get if they are to succeed in this fiercely competitive world.

I also believe another key factor in the success of a Scale-up is having the simple, streamlined organisational processes in place from the outset. If the company starts poised for growth, it will find the journey much smoother.  Don’t build your enterprise foundations on sand; underpinning is expensive in both civil engineering terms and enterprise organisation terms.

So this means thinking at the earliest opportunity about how your company might grow. What job functions are you likely to have in the business down the line?  Who will need to know what information?  How will new staff be quickly inducted into the ethos of the company so they can hit the ground running? How will you ensure the right templates, correct price lists, most up-to-date presentations, and so on, are used by all throughout the organisation?  This is some of the nitty gritty of the internal challenges faced in the rapidly growing SME.

So although more Scale-ups are indeed needed, one of the key things that will help them emerge is a pipeline of well organised and spring-loaded startups.

Start to Exit is due to be published in 2017.