Google’s warning sent me to an article titled “Beating up the chances of launching a new venture capital” that just appeared in the May issue Harvard Business Review , author Clark G. Gilbert and Matthew J. Eyring. It was one of the best jobs I've ever read about entrepreneurs, their views and risk management. They said that entrepreneurs are not cowboys - they are methodical risk managers. I thought their concepts were equally applicable to small and large businesses. I contacted one of the authors, Clark Gilbert, to discuss his ideas and decided that I wanted to share my thoughts with my little business friends. As a result, my interview (below) with Clark. My comments follow his answers and are mostly addressed to small business owners. Clark gilbert He is President and CEO of Deseret Digital Media and previously Professor at Harvard Business School.
1. BR: Do you think that a small business spends enough time determining its risks and planning how to deal with them?
CG: Since there is not enough capital, start-up companies are unlikely to get very far without adjusting to market data. In this sense, risk identification is practically “imposed” at launch. Lack of discipline capital forces. However, entrepreneurs who think more carefully about the risks that they face will systematically aim at the most important risks and remove them, will be more successful than those who do not. When you start a new venture, you have all the data to make the right decisions. You just need to enter the venture process and find out from the data that comes out. For example, you may have a hypothesis about the pricing structure, and you can do something to check it, but as long as you do not actually close the sale, you do not have data on the price that people are really willing to pay.
BR: I discovered that in startups and small businesses, so much time and energy is being spent on fires and survival, that risk management becomes short. Periodic timeouts are needed to reflect.
2. BR: Differences between startups and established companies?
CG: Believe it or not, one of them has an advantage. Established companies are the lack of available capital. This forces startups to be more disciplined with their risk capital, either because it is insufficient, or it will cost them justice. Too often, large companies had a surplus of capital, which makes them less susceptible to the changes they need to make when an enterprise is officially developed.
BR: To support this moment and no. 1, I would like to tell you about the interview that I had with Stephen Gordon, the founder of recovery equipment. In response to my task: "What factors contributed to success?" He replied: "If sufficient capital were available to me in the early stages of the company, I probably would not have been as successful as I am." I myself learned that Bootstrapping, by necessity, helps you to form good habits that keep you in a good place, even when you are in a healthy cash position.
3. BR: Do you think that entrepreneurs come into their business with the idea that they must take risks to be successful and therefore take more risks than they comfortable or able to overcome?
KG: Good entrepreneurs don't risk them managing them. Of course, you can manage them completely, but what I find distinguishes good entrepreneurs from others is the ability not to take risks, but to manage them.
BR: I believe that the media promoted the idea that for success, entrepreneurs must see and take the risk. (Think that reality manifests itself as a student and a tank shark.) Those who buy it and do not identify risks, no less controlling them, will turn out to be statistical data in a long list of failed companies. This is certainly a myth that good entrepreneurs love risk.
4. BR: In your recent article for Harvard Business Review titled "Beating Chances" When you start a new venture, “you refer to the case of R & R to illustrate some your promises. Since I have a deep knowledge of this case, I was interested if you think his lessons apply to service companies, as well as to products, which r & r? Also, if they apply to large companies that R & R did not have?
CG: I used the R & R case with non-profit leaders, Fortune 500 companies and more traditional entrepreneurs. His lesson is applied everywhere and grows out of the idea that entrepreneurship is a management method, not a type of company. I remember teaching a case to a new group of adventures of a large American media company, when the coverage went on for everyone. Initially, they viewed the case as something for a small business owner. But when they came in and looked at how you used risk reduction, not only to save money, but also to fundamentally increase the prospects of the enterprise, their perspective began to change. Ironically, the capital deficit imposed on a start-up entrepreneur gives him an advantage over large corporations with all their resources. One performer finally realized: “We need to manage as if we have no capital, not to save money, but to increase the likelihood that we will find a winning strategy.”
BR: When the Harvard Business School case was written, R & R was my only company in a small office in New York. The incident was about my adventure to ride the swimming trunks of the fast-growing game Trivial Pursuit. To give R & R credibility, we received a TV Guide license view to use their name and create the 6,000 questions that were needed. It was a very time-sensitive project, since we knew that large toy companies were developing their own games in Trivia. In short, we transferred the production, sale, delivery and financing of the game. Our main RISK was that we would not receive purchase orders that we wanted, because large toy companies that advertise their games on TV and Trivial Pursuit orders will be ahead of us in the chain of orders. To combat this risk, we asked and received 5 free ads in the TV Guide in exchange for an increase in royalties. Then we promised large retailers their names in these expensive ads for free to them. This resulted in immediate purchase orders of $ 3,000,000 prior to our first shipments and eliminated our risk. (This case and all the Bootstrapping tactics used are outlined in my book, Bootable 101. )
5. BR: Can you explain your dissertation that “risk and value are inversely proportional?”
CG: Think of a chart where every time you take a risk unit from the table, you increase the cost unit. This is how risk works in a new venture. This enterprise demonstrates multiple investments. Every key risk that an entrepreneur takes on increases the value of the enterprise in the next round of financing. The challenge for entrepreneurs in corporations or non-profit organizations is that they do not have this intermediate system of indicators. But this is in principle, and the managers who take it will be more successful with their enterprises.
BR: Everything you say is also true for small businesses. For them, every risk taken off the table increases their chances of survival and profit. Small companies do not have a pillow to absorb the risk that did wrong than large corporations. Risk reduction or prevention should have a higher priority.
6. BR: Can you briefly explain the three types of risk to which you refer, which should be deal with?
CG: Let me focus on the first two. Deal killer risk is a type of risk which, if left unresolved, will kill the enterprise. Some entrepreneurs make the mistake of waiting until they go into the life of the enterprise before eliminating this type of risk. In the article, we will talk about the example of a satellite radio company pouring millions into the satellite system, only to discover that the receiver was prohibitively expensive. Path dependence risk is the risk that, after its resolution, the consistent direction of the enterprise may change. For example, work on product pricing can drastically change your manufacturing strategy. The decision of one will determine the other. The problem is that many managers act as if all risks are equal. Here is the problem with this approach. Suppose you do not look at the risk of a killer deal until you spend millions on a new venture. Or you spend millions on one risk that is not related to future information. That is why we talk so much about the sequence of risks in such a way as to recognize that all risks are not equal.
BR: The third type of risk, according to Mr. Gilbert, are those that can be solved without spending a lot of time and money. They are not as serious as “Deal killers” and “Path dependent risks”, but if not addressed, this can lead to a serious problem. Not every risk in this category can be considered before your venture capital education, or you will never start ... and no one can be detected until you are in business. However, your chances of success improve if you deal with them. You should try to prioritize them.
7. BR: How an entrepreneur with limited cash moves to the process identifying the various risks that the enterprise will face?
KG: The fact that you have limited cash should make you more focused on identifying risks. You can start by asking such questions, what risks, if they are not resolved, can threaten the entire enterprise? What risks will affect others? What are the easiest and cheapest risks?
BR: I would also challenge all assumptions in business planning, for example, about your projected sales and how quickly they will occur, about the costs that you might not expect, especially in acquiring customers, and about your main reasons where customers will buy your product or service. If any of your assumptions is seriously flawed, unforeseen risk expects that you may not have the resources to solve. I would be looking for free external help to solve these problems.
8. BR: In your experience, how much does the direction change, the average start Does the company work in the first year of work and in the following years?
KG: There are a number of academic studies in this area. Most of them will show you that most new businesses must change several times before they get on the right path. At Deseret Digital Media, we have a huge poster that says, “We are adapting,”
BR: My experience and research show that almost all business plans change dramatically as the business moves. Many of the opportunities that you envision are not materializing, and many new surprises appear. Write your business plan in pencil.
9. BR: Expand your thesis on investing in stages to maximize success.
CG: The key is to find points on the path to retreat and adjust. Capital capital often leads to a reconfiguration (as well as running out of money). Overlapping miles, where key uncertainties will be resolved or managed, forces one to learn at an early stage in the enterprise. When resources are scarce, it forces. When resources are scarce, the entrepreneur must impose discipline. A phased approach can help.
BR: In my experience, testing has always been paramount in introducing a new product or creating a company ... no doubt motivated by the lack of cash. Never start at the national or global level. Test your product in a small geographic area for customer acceptance and customize your offer and / or product. If this is a product, make a prototype and show it to potential buyers. If everyone says no, rethink whether to continue or process the product or offer it. Test on the Internet, direct mailing, advertising, etc. In small, inexpensive doses. Staging allows you to set measurable goals that need to be accomplished before moving on to the next step and its resource commitments.
10. BR: What advice can you give to a resource, challenged a new Entrepreneur, where get advice or decision-making process about the risks risks that he correctly defined?
CG: Learn from others. Get a group of people around you who are ready to tell you where you are wrong. Do not reinvest until you learn and are not adapted to the market.
BR: You can learn from others using mentors, counseling advice, or free advice from organizations such as SCORE, SBDC, and incubators whose missions help small businesses start and grow.
1 1. BR: Why experiments are not good for validating your original ideas. and also redirect the enterprise?
CG: Too many people conduct a test to “prove” that they are right, and not to tune in and learn. The power of experimentation is learning. That is why I continue to return to the topic of scarce capital. It forces you to customize and prevail over in order to perpetuate a pattern that does not work.
BR: We conducted our tests to determine whether we were right or wrong, and the result dictated our next steps regardless of previous beliefs.
12. BR: You find that managers are involved in closing their businesses when evidence shows that this will not succeed?
CG: Hope is forever for good entrepreneurs. This is good, but it needs to be tempered with coercive mechanisms that will help you adapt. You can hold onto pride / ego because of financial commitments you have made, or from pure cognitive blindness. That is why structured experience and phased capital can be such powerful mechanisms of coercion. They allow you to retreat and tune.
BR: Many managers get a false impression of their productivity because they fall in love with their idea, and not the other way around. They are very concerned about the opinions of family, friends or employees, who are usually overly supportive and relate to pronounced negativity, even if it is required. Often their ego interferes with their objectivity. It’s better to change course and admit that you were wrong than you failed.
13. BR: Could you compare the development of new enterprises between a large company? and a budding entrepreneur based on their financial resources?
KG: Perhaps two things stand out. First, many large companies do not consider resources limited, and venture managers receive on average more resources. Secondly, resources are not venture managers, but corporations, so some people in large companies do not view resources with the same sensitivity.
BR: There really is a difference when it's your money or someone else. Bootstrappers with their money are at stake more targeted to take less risks and manage what they do to reduce or eliminate them.
14. BR: is it safe let's say that by reading these errors, do not produce the intended rewards?
CG: Risks themselves do not give rewards, and risk reduction does not. Those who are better than this skill, better profit.
BR: It should calm down, public opinion that good entrepreneurs love and are looking for risk.
BR: Some additional risk considerations: risk is not absolute. Two people in the same circumstances may have dramatically opposite risks. Someone who has experience in a company with industry knowledge, a good and experienced team and a strong rolodex faces minor risks compared to a person with a small industry knowledge, experience and relationships whose risk may be too great. The first is the insider, and the second is the outsider. The risk is a bit like beauty - it changes in the eye of the beholder. An insider sees more beauty than an outsider. Regardless of which camp you are in, your assessments and risk management must be analyzed and evaluated against your assets. Sometimes the best decision you can make is to interrupt a business, because the risk of a transaction killer cannot be successfully managed.
