April 27, 2012 6:30 pm

Ask the Expert: Entrepreneurship 2012

Entrepreneurship

As a result of the uncertain corporate job market, entrepreneurship is flourishing among recent MBA graduates and business schools have recognised the importance of teaching the subject. But is this a viable career move for MBA graduates? What are the biggest pitfalls? Furthermore, how do you involve co-founders, recruits and investors?

On Wednesday, 2nd May 2012, between 1 4.00 and 15.00 BST, a panel of experts will answer these questions and others on FT.com. Post your questions now to ask@ft.com and they will be answered on the day.

More

IN Ask the Expert

On the panel are:

Jonathan Moules - enterprise correspondent for the Financial Times. Jonathan has been writing about UK business life for the FT since October 2003. Since September 2005, however, he has focused specifically on the issue of entrepreneurship. He now edits the newspaper’s Entrepreneur section, which provides news and practical advice on the challenges of running growing companies.

Philippe Silberzahn - associate professor at EMLyon Business School and research fellow at Ecole Polytechnique. A former high-tech entrepreneur, Professor Silberzahn is now in charge of EMLyon’s introduction to entrepreneurship course which is mandatory for all incoming students. Prof Silberzahn’s research focuses on strategy, innovation and entrepreneurship - how businesses deal with radical uncertainty and the roles and actions of entrepreneurs and innovators.

Daniel Callaghan - founder and co-director of MBA&Company, which matches skilled professionals, including those with MBAs from the world’s best business schools, with short-term projects, and interim and full-time corporate jobs. An MBA graduate from Iese Business School, Daniel set up his business in 2010. The business now has consultants in more than 100 countries.

Noam Wasserman - professor at Harvard Business School. For more than a decade, his research has focused on founders’ early, often difficult, decisions that can make or break the startup. His bestselling book, The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup , delves into the core lessons from that research. At HBS, Prof Wasserman developed an MBA elective, Founders’ Dilemmas, for which he was awarded the HBS Faculty Teaching Award and the Academy of Management’s Innovation in Pedagogy Award.

-------------------------------------------------------------------------------------------------

What gave you the courage to start your own business? And do you think it’s ok to create a business based on a gap in the market even if you’re not necessarily passionate about the product?

Jonathan: I have never started a business, but I would question whether it is wise to start something if you are not passionate about what you are selling. In the early days of a business you will not have many financial rewards and the hours are long. It is often the passion for what you are doing that will get you through each day.

Philippe: I’ve never considered that it takes particular courage to start a business. It was just the obvious thing to do. This is because I started small, so there was no real big “plunge” decision. Regarding passion, I’d say it’s better if you have an interest in the product. I would find it difficult to do a good job in a domain I don’t really like. So courage maybe not, but passion, probably! This is also because, between your initial idea about the gap and the reality of the business, there will be a lot of changes and bumps, so best to be passionate!

Daniel: For me the courage came through a combination of factors rather than any isolated incident. Firstly, the idea received excellent feedback from the outset, from all parties. We spoke to over 60 companies who said they would largely use the service and over 200 MBAs who said that they too would use the platform. We received excellent feedback from investors and the business plan won a number of awards which helped to largely eliminate any doubt about the concept.

Additionally, the timing was right. MBA&Company is all about helping companies get more for a better value price. We look to remove the traditional barriers and vast expense of traditional houses and provide an unparalleled cost to quality ratio. In 2009, the market was ready for such a solution.

Thirdly, I was president of the entrepreneurs society and always wanted to run my own business but thought it would come later. However, with the combination of the first two elements, I thought that whilst I was without any family commitments it was an opportune moment to execute my plan.

Regarding the second question, I think it is certainly ok to create a business based on a gap in the market. However, the continued success of that business, unless you are well funded and have a strong team from the start, will certainly flicker.

There are moments - certainly in very lean start-ups - where it is the passion for the business that gets it through the bumpier times. When you start it will largely be you and the initial team. Without an element of passion, it becomes hard to inspire or convince those around you that this is the right company or venture for them to be part of. It will always be easier to launch a business in an area that you are passionate about.

Ideally, you should look for a gap or a means of building a sustainable competitive advantage in an area that you are passionate about.

I live in the UK but am thinking of starting a business in a developing country like Brazil or China, do you think this is a wise move or best to invest and take risks in a developed country?

Jonathan: I do not think it is a wise move. If you think the opportunity is in Brazil or China then you need to be close to that market, which probably means living there yourself, especially in the early days. Why not start in the UK then look to expand into other countries at a later date? If you do have operations abroad, you need to have people you can trust on the ground locally, who also understand your company’s culture. Often this is a case of finding people who have worked with you for a while, who also have a connection with the market you are looking to move into.

Philippe: I don’t think we should think in terms of countries. Rather think in terms of people. For me, an opportunity starts with your personality and the people you know. You can have great opportunities in developed countries as well. So consider the people you know and think about what you can do with them.

Daniel: I think that starting a business in a developing country can equally be as risky as in a more mature market. As I write this, I am sat in Hong Kong and have seen some incredible things in terms of opportunity and entrepreneurship.

I think the most important thing is to identify the country risks, realise that unless you move to that market it will be a lot more difficult to fully capitalise on the growth opportunities and make sure that the developing market is ready and accepting of your solution.

As is often said: “the bigger the risk, the greater the reward” and if you feel that you can manage and mitigate the levels of risk then the choice becomes easier.

What is the most effective way of promoting your business? Do you think social media is proving more useful than traditional - and sometimes costly - forms of marketing, e.g. trade shows, distributing flyers and placing adverts in relevant newspapers and magazines? I think the hardest part is getting your name out there especially when there are plenty of competitors during an economic downturn. Any advice please?

Jonathan: Social media can be a cheap way of marketing a business, but it is all about execution. If this does not sound too obvious a thing to say, Facebook is a different proposition to Twitter. One may be ideal for your business, but not another. You can get your name out there without using social media, but you do need to have a strategy for dealing with this kind of communication.

Philippe: Social media is a fantastic way to promote your business. When I started my first business in 1987, there was no internet. I used to go to the post office every evening to post my brochures. So by all means use the internet, but never forget that a business is first and foremost about real people, don’t ignore occasions to connect with them for real. Social networks are great, but not sufficient.

An economic downturn is never a bad time to start a business, it has plenty of advantages: cheaper offices, easier recruiting, better retention, competitors looking elsewhere or busy surviving, etc. Again, work your network. Entrepreneurship is a social process, you create your market by bringing stakeholders to your project.

Daniel: We have found that a well rounded marketing campaign has been the most effective to promote our business. However, this has still largely depended on more traditional methods such as display advertising and SEO, PPC, direct sales etc.

We are essentially, when attracting clients to post projects, a B2B or B2b service business and as such are more conservative in our marketing approach. We offer a high quality project through an innovative delivery method and find that as such a level of conservatism in our communications can remove some of the doubtful elements for our client.

For our members however, we use social media a lot and can be followed on Twitter or on Facebook. We post regularly and find it a very useful means of enhancing our community feel. As with all marketing, it is vital to understand who your audience is and communicate with them in their preferred manner rather than yours.

What differences do you see in the way new ventures operate in developed markets, such as the US and Europe, and Asian countries, particularly China?

Philippe: I don’t particularly know China, but the entrepreneurs I meet from all over the world essentially work the same. Probably Chinese entrepreneurs are better at mobilising their networks. But the principles are the same I would say.

Do you think that MBA students are starting their own companies simply because there are no jobs in investment banking? And is a recession a good time to start a new company?

Jonathan: There are lots of reasons why a recession is a good time to start a company - suppliers may be more willing to cut you a deal on price, if your product or service offers cost savings, customers may be willing to take a chance on you and rising unemployment can make it easier to find staff willing to work for less money.

Most importantly, however, starting a business may be the only alternative if you have lost your job or you are struggling to find employment. It is for this reason that start-up activity often rises during economic downturns. Whether it is right for you to do that is another question.

Philippe: The idea that an MBA student can start a business has been gaining ground and that is good, but there is no general rule. What matters is not whether MBA students should start a business, but whether YOU should and if yes, when you should. It can be wise to wait a bit to pay off these loans…

An economic downturn is never a bad time to start a business, it has plenty of advantages (see answer above). I’d suggest that you don’t think in general terms, such as recession or no recession, but very specifically: Do you see an opportunity? Do you know people who could help you? Do you feel like giving it a try?

Daniel: I think there is an element of truth in the statement. Given the recession, I think people have said: “Hey my dream job is no longer available and as such I do not want to settle, I will do my own thing even though it will be tougher”.

I think that a number of people have also become “entrepreneurs by necessity.” The labour market was and is very tough. MBAs are a resourceful breed and if the opportunity is not available in one place, they will look to create it elsewhere.

We have a number of members who have used our service as a means of getting projects to supplement cashflow whilst setting up their own business and it has proven very useful to them.

Noam: I have deep knowledge of the MBA students at my school, but not of MBA students at other schools. With that caveat, for a long time (throughout all stages of the business cycle and with only two exceptions), there was a pretty constant percentage of HBS students who founded companies right out of school: between 2.5 percent and four percent. Then, two years ago, that percentage increased to five percent and last year to seven percent (that’s a total of about 65 student-founders).

There are multiple reasons for that increase. One is that other career alternatives (e.g. the investment-banking jobs you mentioned) were or are less attractive than during boom times. However, there are a lot of other factors affecting it. For instance, because of the increase in the quality and quantity of entrepreneurship education, students believe that they are much better armed for founderhood now and therefore are more willing to leap right out of school. (Historically, about 50 percent of HBS alumni are involved in ventures by their tenth reunions. It’s possible that that percentage won’t increase, but that those 50 percent are more willing to get involved earlier in their careers.) Also, beyond the classroom, there are a lot of other resources available that help early founders succeed, including incubators (e.g. the Harvard Innovation Lab, but also YCombinator, The Founder Institute, the Kauffman Foundation’s FastTrac and Global Scholars programmes and Techstars) and books that are more solidly grounded in data and research.

Regarding your second question, depending on the company and the industry, a recession can indeed be a good time to start a new company. For instance, such a company will probably face less competition and may be able to attract better hires. The founder-CEO may be able to grow the company at a more measured pace so s/he can learn how to tackle the challenges facing the company, rather than falling behind the competition by doing so. However, if the company is very capital intensive and investors are retrenching because of the recession, the recession may prove to be a much more challenging time to found.

Last semester, in my Founders’ Dilemmas MBA course, I asked my students your question. 46 percent of them said it was better to found in a recession, 21 percent said it was worse to found in a recession and the rest said it was about the same. To me, the 46 percent are viewing the environment very entrepreneurially: For something that others usually see as a challenge, can I instead turn it into an opportunity?

What evidence do you have that a business school education can make you a more successful entrepreneur?

Jonathan: This is the old nature/nurture argument. The stereotype of a successful entrepreneur is someone who has dropped out of college, such as Bill Gates or who struggled at school, such as dyslexic Sir Richard Branson. Like all stereotypes, however, this is not the reality for many entrepreneurs.

What business schools can do is provide you with the space to research an idea and test it. You may also get access to researchers and technicians who can help you with R&D. What business schools cannot do is turn you into an entrepreneur if you do not have some of the necessary character traits, such as a strong work ethic and ability to inspire others to follow your lead.

Philippe: I’ll be honest: there is none. I started my first business without any business education and I made all the 101 mistakes. Had I had some education, I would at least have avoided such basic mistakes. So while business education will never guarantee that you’ll be successful, I tend to think it will help you avoid mistakes. In general, when we teach entrepreneurship, we have two aims: motivating students and giving them the skills. Motivation is important…

Daniel: I think unless you spent several years in consulting, working across multiple operational units from finance to HR to strategy etc, it would be very hard to understand the full commercial jigsaw. Business school gives excellent training to provide you with that wider knowledge that is very useful in the early stages of a business.

However, that is not to say that business school is a route to guaranteed success or you need an MBA to become an entrepreneur. It easy to find examples to dispel that myth. We use an MBA as a means of pre-qualification of academic grounding in our service because it is an appropriate filter, however it is only one of seven measures in place to ensure that the delivery of each piece of consultancy work is upto the client’s expectation. One of the other key criteria for selection is relevant professional experience, which can quickly surpass academic theory.

To what extent can governments help create or destroy entrepreneurship? What are the fiscal challenges of creating an enterprise culture?

Jonathan: Governments tend to have little power to create entrepreneurship, but can do a lot of things to destroy it. In the UK, tax reliefs such as the Enterprise Investment Scheme, Entrepreneurs’ Relief and R&D tax credits have all been created to foster start-up behaviour but they tend to encourage those already running or investing in businesses to do more rather than providing the spark for people to start a new venture.

Having said that, many entrepreneurs fail to appreciate the need for government. One man’s excessive red tape is another man’s system of rules and regulations to protect their enterprise. In fact, for some companies, bureaucracy is the reason people buy their services.

Philippe: Governments tend to focus on new business creation, whereas research shows that encouraging entrepreneurship should be the right focus. The difference is that entrepreneurship can exist within existing firms. Governments should encourage an entrepreneurship culture in general. For some people, their entrepreneurial energy can better be applied in existing organisations.

Regarding the fiscal challenges, high-tax countries do not necessarily lack entrepreneurship. We have to distinguish corporate tax, which can asphyxiate a company from capital gain, which can in turn deter successful entrepreneurs who sold their companies to stay around and fund future business. In short, it can kill business angels.

What would be the three most important pieces of advice you would give to someone planning to set up their own company?

Jonathan: Ask yourself how much you are willing to give up to make the business a success. Do as much research as you possibly can. Find someone you can trust who can support you when the going gets tough, is not afraid to tell you you are wrong and provide you with advice that you may not wish to hear - entrepreneurship can be a very lonely pursuit.

Philippe: First, do not plan. Second, think in terms of people and networks. Entrepreneurship is a social process. Third, read the following book: Effectual Entrepreneurship . That’s it!

Daniel: I think the three most important pieces of advice are:

1. Research your market well. It is important that you identify if there is a business there and who you will be going against and all of the other important factors. Without this knowledge you are setting yourself up to faill. Whilst some (i.e. Steve Jobs / Henry Ford) would say that market research is in part redundant, it will be vital to you moving forward - especially if your product or service is not technologically revolutionary.

2. Understand all it comes with - starting a business can be a stressful activity. It will mean limited social time, potential loss of earnings, sleepless nights and a whole host of other factors. It also comes with a lot of highs - your first sale, the satisfaction of creating something, greater potential freedom in the long run. If you can measure and accept these and believe the highs will outweigh the lows and there is a market or an opportunity to exploit then go for it.

3. Listen to all advice - seek out advice from those who have been there before. You do not always have to take it but certainly expose yourself to it. Learn from their mistakes to prevent you making your own.

Noam: Big, important question. (The last time someone asked me it, I ended up writing a 370-page book. I’ll try to tackle it in about 370 words here, though!)

First, you need to understand the potential pitfalls in the path ahead – the ones that will prevent you and your company from having the impact you desire. Of the failures in high-potential startups, 65 percent of them are due to early decisions about the people you will involve. Those people include potential cofounders, hires, and investors. In my research on 10,000 founders, I have focused on a strikingly common pattern in those decisions: The most common people decisions are the ones that are the most fraught with peril. Those decisions are in three particular areas: relationships (i.e., with whom you cofound; more than half of the teams in my dataset cofounded with friends and family, which happens to be the least stable of all types of founding teams), roles (the positions you each take and how you make collective decisions) and rewards (in particular, how you split the equity with your cofounders; 73 percent of teams split within a month of founding but do not allow for adjustments due to any of the inevitable upcoming changes).

Second, by understanding those potential pitfalls ahead of time, you can take concrete actions to avoid them. There are very actionable things you can do to protect yourself from the dangers. If you are founding with friends or family – “playing with fire” – then you should be creating the firewalls that I have found are effective for protecting yourself while building that magical, tight-knit team that can lead you to the “promised land.” If you are splitting equity, there are clear early actions – too rarely taken – that will keep you from getting burned by drop-out founders and other problems that destroy founding teams (as vividly depicted in the movies The Social Network and Startup.com ).

Third, a critical complement to that knowledge of the road ahead is your own self-knowledge. You need to be aware of your own motivations (do you want to become rich, even if it means losing your kingship within the venture or do you prefer to remain king even if it means you’ll be less rich?), how your early passion and confidence can turn into Achilles heels and which strengths and weaknesses should be bolstered at each step along the way by attracting cofounders, hires and investors.

It’s too easy – and problematic – to just say, “I’ll be able to avoid the usual pitfalls.” Instead, make sure you anticipate and avoid those pitfalls so you’ll have the impact that we want you to have!

How do would-be entrepreneurs compare to others students in business schools? Is there a typical profile of would-be entrepreneurs?

Philippe: What research has shown is that entrepreneurs are not different from other “normal” people. Anybody can be an entrepreneur. Successful entrepreneurs come from all walks of life, have different traits and attitudes etc. Hence we have to think about entrepreneurship as an attitude, something you do. For sure, entrepreneurs tend to think in terms of doing, rather than being.

Daniel: No - I do not think they stick out or anything. They will largely know that they want to do something by themselves and will probably share ideas about potential ventures more frequently, however do not think there is a unique entrepreneur DNA.

Noam: Observing my entrepreneurship students over the years, the ones who have impressed me the most are the ones who are able to mix “heart” with “head” – to have the passion for bringing their ideas to life and impacting the world through them, while also being able to anticipate and avoid the pitfalls that will prevent them from doing so.

At the same time, this is a broader question that also applies to (the much more numerous) would-be entrepreneurs outside business schools. Three decades ago, academia expended considerable effort on a “traits-based” approach to entrepreneurship. Because founders are a very varied bunch, that effort yielded few solid insights about what differentiated entrepreneurs from others. Instead, I’ve found it far more useful to focus on the common decisions that founders (of all traits) tend to face and see what we can learn about the potential pitfalls and how to avoid them. Studying that also means that we can come up with actionable steps that founders can take, which would be harder to do if our focus is on which traits (much harder to change!) are good/bad.

How difficult is it for new entrepreneurs to secure funding? What do you think about Kickstarter funding?

Jonathan: Funding is difficult to secure whether you are a new venture or more established. For most new businesses, the best sources for funding are what is known as the three Fs - friends, family and fools.

Philippe: It depends a lot on the country. While generally I think it’s relatively easy to get some initial funds from fools and family and maybe business angels, there tends to be a gap after that to bridge to the VCs, especially in Europe. That’s why we find it very easy to start, but more difficult to grow. That’s probably easier in the US.

Daniel: I think all methods for entrepreneurs to secure funding are great things. Kickstarter is great as is the more commercially oriented Crowdcube.

MBA&Company was recently selected as one of 12 businesses worldwide to be named a New York City Venture Fellow and it was enlightening to see how the funding scene varied between Europe and the US. Rounds in America, even angel rounds were just exponentially larger - which can be explained in part due to the size of the market and opportunity and market maturity etc, however also due to a very different and far less conservative attitude.

I think the level of difficulty to secure funding can depend on the idea and the amount looking to be raised. It can often be easier to raise £200k rather than £50K unless from friends and family. I would certainly avoid any group that looks to charge you to present to some investors. Unfortunately, this seems to be the growing trend in the UK.

What does it take to do business overseas? What are the prerequisites? What are the risks?

Jonathan: It takes guts, but it also takes careful planning and putting the right people on the ground in the country you are moving into. Timing is also crucial. Your product may be right for another market, but your potential customers are not ready to buy. You also need to be aware of cultural differences.

Philippe: It depends a lot on the business, but you have to be sure that your business truly can be global. Some businesses are multi-domestic and going abroad does not make a lot of sense. So look at the intrinsic nature of your business and then look at the local business culture.

Is it important to create a support network when creating a start-up? What is the best way to find and make these contacts?

Philippe: To me, entrepreneurship is a social process. That means that your ability to take advantage of your network and grow it around your project is critically important. When times are tough, we tend to hunker down and try to solve our problems by ourselves. But we should do the opposite: go and see people, talk about your project and try to involve them one way or another.

Often, students tell me: “but I don’t know anybody.” I tell them: take a piece of paper and write down the names of the people you know, from your uncle Joe all the way to you Facebook friends. And guess what? I have 20-year old students with no particular connection coming back with 200 names, at least 10 percent of them can be of direct use. So tell people about your project and find a way to get them involved - in any way, it can be small: a piece of information, an introduction, access to a colour printer, whatever.

Jonathan: Some sort of support is always valuable. There are several mentoring and coaching bodies set up to meet this need, such as the Young Presidents’ Organization and the Entrepreneurs’ Organization, but there are many other networking groups where you can meet potential mentors. It is often as simple, and difficult, as getting out there, meeting people and asking those you feel a connection with. Entrepreneurs on the whole tend to be fairly generous with their time. If they cannot help, they usually know someone who might do.

Daniel: Support networks are always useful whatever the context and certainly no different when building a business. A useful sounding board or go to person can be vital however is by no means an absolute requirement - it will always end up with you making the decision and this is a fact you have to be able to accept.

As mentioned, seeking advice/insight from intelligent sources is key to building a successful business and as such should be done whenever possible. First, look within your own community to find these contacts. Hidden gems of people who can shed light are often hard to find however you should go to events that concern a subject you are struggling with and speak to people. Fortunately, people are typically kind enough to help a young person who is looking to make a difference.

I am confident in my ideas, but am concerned about accessing sufficient start-up capital on reasonable terms. Short of going on the Dragon’s Den or the Shark Tank, what is the best way to meet the right people and gain early investment?

Philippe: A start-up should always exist in an institutional setting. That means that you need to make sure you meet people in the ecosystem and that you’re actually part of this ecosystem. I tend to think that funding happens by proximity: a VC will hear about you from someone who knows you. You have to engineer that.

In a way, selling shares of your company is just like selling your product. So get traction on the market, make a mark, get noticed. You can always cold call a VC but it’s unlikely to work. Also think about the people you gather around your project. Why not set up an advisory board? It’s cheap, useful and adds weight to the venture - it also sends the right signals.

Daniel: This truly depends on how much capital you require. If a modest amount then perhaps starting with the 3 Fs will be best (Friends / Family / And those less fortunate - Fools).

If not, you should look through the BVCA and Gust websites, for registered angel investors who could provide a useful source.

If a lot is required then look to VCs. Cold calling does work and ideas can easily be submitted and reviewed. However, your idea, team and plan will need to be extremely well prepared to get past the first gatekeeper.

The most important thing in any fundraising is that you show activity or momentum. If you can show your first prototype, your first customer order, your first piece of PR etc then the journey ahead will become infinitely easier. You are asking people to invest in you and as such need to show in whatever way possible that you are capable of delivering. The internet and web based development tools have made it even easier to get some element of your operation up and running.

Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

SHARE THIS QUOTE