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..

Is there a Moore’s Law for business?

Back in the 1965, Gordon Moore predicted that the number of transistors on a chip would through technological advance double every (two) year(s). He made one prediction based on the period of a year, and adjusted the time period a bit later, although as co-founder of Intel he was in a good position to make such a tweak.

Of course, in the case of silicon chips physics does eventually limit this trend. You can’t go on making things smaller for ever, as you’ll eventually be dealing with sub-atomic particles. However, the prediction has stood the test of time and pretty much defined the IT industry as we know it with faster-cheaper-smaller computers year-on-year for the last five decades.

Nature also likes these kinds of exponential relationships, with simple organisms for example doubling their numbers in fixed (often quite short) periods of time as they reproduce. This is why disease can spread quickly and bread dough rises in just a couple of hours.

Sometimes business growth can be exponential; certainly that could be part of the plan in the first few years. A business that doubles its revenues every one or two years is doing very well, and during the initial startup phase this may be an achievable goal. But to keep this up over say just five years is a real struggle; and for decades is almost unheard of.

Google is probably one of the few companies that has bettered Moore’s Law over its lifetime.  Early data for its revenues are hard to come by, but in 2002 (after 3 years from being founded in September 1998) it was reportedly generating revenues of about USD 0.4 bn. The following years were 1.5 bn (much more than double), 3.2 bn (about double), 6.1 bn (just under double), and 10.6 bn (just under double). Fantastic growth continued year-on-year to nearly 75 bn last year in 2015. If Google’s revenues had followed Moore’s Law by doubling every two years it would have reached about USD 35 bn of revenue in 2015. And Google really is an exception because it has a very scalable business leveraging the growth of the Internet (and therefore the industry to which Moore’s Law applies!). However, I don’t think we should use exceptions like this to prove the Law.

Unfortunately, there might well be a Moore’s Law where costs are concerned. Doubling your headcount every one or two years is not unreasonable in early stages, and investment is often needed to sustain this level of growth in overheads as revenues, never mind profits, don’t tend to keep up.

Where manpower increases, so do overheads in general because in addition to salaries, there is also all the support functions that go with it; more computers, more offices, and more infrastructure in general. This explains how an exponential growth in costs can occur which, if unchecked, will put huge pressures on cash flow and bring a business down. Eventually you hope efficiencies and sales out pace the overheads so as to start repaying the investments and increase the profits; and this can only be achieved if you make sure your costs don’t follow Moore’s Law!

But increasing your staff is actually more closely related to Moore’s Law than just its direct impact on headcount or associated costs. Every new member of staff introduces a new node in the organisation; in effect a new interconnected transistor on the silicon wafer. These connections are where information must flow if the business is to function and grow. So, for example, one new member of staff in sales incurs multiple connections with the production team, the marketing team, the management team and so forth. Anyone who has scaled-up a business knows that the growing pains arise through maintaining effective staff communication to the extent that it can sometimes seem a bit like herding cats. Add just one member of staff and management complexity for the business might easily double!

However, don’t be put off, because the same considerations can help a business accelerate on the outside. Every new member of staff, every new partner, every new happy customer creates many more interconnections and links in the real world. This is the ‘network effect’ that will help spread the word and could result in your product or service ‘going viral’. We’re back at that exponential relationship that Nature likes again; and this is where I believe Moore’s Law may well apply more generally to a business startup scenario and therefore really make a difference. Empower the people in and around your business to make contacts, leverage social networking, and spread good news, and year-on-year your enterprise’s influence could easily grow exponentially and outpace Moore’s Law.

MooresLaw

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.