Are You Ready to Be an Entrepreneur?

My last column identified five decisions you need to make when starting a new venture: Do you have an entrepreneurial mindset? Is your business idea really worth pursuing? When should you start? Should you go it alone or with partners? How to structure a partnership? Here are the other five decisions you need to make carefully to have a good chance of succeeding as an entrepreneur.

Should you take funds from outside investors?

Should you pursue outside funding? You may need money for product development, to grow faster, or to bridge over a temporary cash shortage. You may have started with funds from the “3Fs” (family, friends and fools), but you eventually may need to turn to others, such as angel investors or a venture capital firm, to satisfy your financial needs. However, getting a fresh round of funding from outsiders may lead to you losing control of your business, as you may need to give equity and a seat on your board in return for the investment. And yes, that means you will have to have a board of directors. Think carefully about whether this trade-off is worth it for you. If your answer is yes, then work hard to get investors who can offer you more than money, such as startup expertise or access to their professional networks.

Are you ready to step aside one day?

Once you’ve decided to take outside funding, it may lead to another difficult decision: Are you ready to step down as the leader of your venture in favor of a professional CEO with more experience than you have? If not, your board may someday ask you to leave the company you founded. What happened to Steve Jobs with Apple in the mid ’80s could also happen to you. Far better to plan your succession and step aside when it’s time, so you can survive at your firm.

What entrepreneurial strategy will you follow?

In his book The Founder’s Dilemmas, Noam Wasserman identified two basic startup success strategies: Either “get rich (at least on paper)”, or “become king (of a small kingdom)”.

To get rich (the “wealth” strategy), focus on quickly building financial value by pursuing cofounders and external investors early in the venture. You should expect to give up more and more control over time, and eventually to be replaced by a professional CEO. This strategy is appropriate when you need a lot of capital and expect very fast growth.
On the other hand, if you want to retain control (the “king” strategy), then you should accept that you will likely reign over only a “small kingdom”. Your business may grow more slowly and be valued less than if you accept external funding.

Wasserman found that very few entrepreneurs manage to both retain control and get wealthy, while the majority of businesses that start with one approach and switch to the other eventually fail to develop their potential.

How to make it big as the “king”?

If you prefer to retain control over your business as “king of a small kingdom” — as I chose when starting my company — listen to Saras Sarasvathy’s three entrepreneurial principles that are the core of “effectual entrepreneurship”:

The affordable loss principle. Successful entrepreneurs focus on how much they can afford to lose, rather than on potential profits.
The strategic partnerships principle. Effectual entrepreneurs enter into strategic partnerships early on, and then continue expanding the range of those partnerships.
The leveraging contingencies principle. This is flexibly responding to surprises and sudden changes, thus transforming the unexpected into the profitable by adapting to change.

What to do when your venture fails?

Of course you hope to avoid failure, but you should face reality. The vast majority of businesses fail in their first decade. What should you do if that happens to you? Remember that many successful entrepreneurs, including Henry Ford and Walt Disney, failed with their first business before they eventually succeeded. Consider taking a temporary break from the entrepreneurial game — find a lucrative job that lets you improve your finances, lick your wounds, and think about what you can learn from your business’s failure. If you do this, pay attention! When you get bored and can’t stop thinking about your next business idea, it’s time to get back into the game. Just be sure to play better this time.

I think of an entrepreneur as someone who creates something out of nothing. Do you have a new, unique, and meaningful business idea that excites you so much that you’re willing to accept the risk of entrepreneurship? Do you have what it takes — the intellectual, social and financial capital — to realize your idea? If yes, then go ahead, begin your adventure, and welcome to the entrepreneurial society!

Are you ready to be an entrepreneur? (Part 2)