Management Team Issues

Entrepreneurial Team. The best opportunities have existing teams that are strong and contain industry superstars. The team has proven profit-and-loss experience in the same technology, market, and service area, and members have complementary and compatible skills.

Industry and Technical Experience. A management track record of significant accomplishment in the industry, proven profit using tech­nology in the market area, and lots of achievements where the venture will compete is highly desirable. A top-notch management team can become the most important strategic competitive advantage in an indus­try. Imagine relocating the Chicago Bulls or the Phoenix Suns to Hal­ifax, Nova Scotia: do you think you would have a winning competitor in the National Basketball Association?

Integrity. Trust and integrity are the oil and glue that make economic interdependence possible. Having an unquestioned reputation in this regard is a major long-term advantage for entrepreneurs and should be sought in all personnel and backers. A shady past is for B team players only.

Intellectual Honesty. There is a fundamental issue of whether the founders recognize what they do and do not know, as well as whether they know what to do about shortcomings or gaps in the team and the enterprise.

Fatal-Flaw Issues. Basically, ventures cannot have fatal flaws; an opportunity is terminal if it suffers from one or more fatal flaws. Usu­ally, these relate to one of the above criteria, and examples abound of markets that are too small, that have overpowering competition, where the cost of entry is too high, where an entrant is unable to produce at a competitive price, and so on. Air Florida provides another example here: a second fatal flaw was the company's inability to get flights listed on reservation computers.

Personal Criteria

Goals and Fit. Is there a good match between the requirements of business and what the founders want out of it? A very wise woman, Dorothy Stevenson, pinpointed the crux of it with this powerful insight: "Success is getting what you want. Happiness is wanting what you get."

Up side/Downside Issues. Informed investors always examine an opportunity's downside risk. The upside and the downside of pursuing an opportunity are not linear, nor are they on the same continuum. The upside is easy, and it has been said that success has a thousand sires. The downside is quite another matter, since it has also been said that failure is an orphan. An entrepreneur needs to be able to absorb the financial downside in such a way that he or she can rebound, without becoming indentured to debt obligations. If an entrepreneur's financial exposure in launching the venture is greater than his or her net worth—the resources he or she can reasonably draw upon, and his or her alterna­tive disposable earnings stream if it does not work out—the deal may be too big. While today's bankruptcy laws are generous, the psycho­logical burdens of living through such an ordeal are infinitely more painful than the financial consequences. In addition to fiscal matters, an existing business needs to consider whether a failure will be too demeaning to the firm's reputation and future credibility.9

Opportunity Cost. In pursuing any venture opportunity, there are also opportunity costs. An entrepreneur who is skilled enough to grow a successful, multimillion-dollar venture has talents that are highly val­ued by medium- to large-sized firms as well. While assessing benefits that may accrue in pursuing an opportunity, an entrepreneur needs to take a serious look at other alternatives, including potential "golden handcuffs," and account honestly for any cut in salary that may be involved in pursuing a certain opportunity.

Further, pursuing an opportunity can shape an entrepreneur in ways that are hard to imagine. An entrepreneur will probably have time to execute between two to four multimillion-dollar ventures between the ages of twenty-five and fifty. Each of these experiences will position her or him, for better or for worse, for the next opportunity.

Desirability. A good opportunity is desirable to (i.e., the good oppor­tunity fits) the entrepreneur and investors. An intensely personal crite­rion would be the desire for a certain lifestyle. This may preclude pursuing certain opportunities (i.e., those may become opportunities for someone else). The founder of a major high-technology venture in the Boston area was asked why the headquarters of his firm was located in downtown Boston, while those of other such firms were located on the famous Route 128 outside of the city His reply was that he wanted to live in Boston because he loved the city and wanted to be able to walk to work. He said, "The rest did not matter."

Risk/Reward Tolerance. Successful entrepreneurs take calculated risks or avoid risks they do not need to take; as a country-and-western song puts it: "You have to know when to hold 'em, know when to fold 'em, know when to walk away, and know when to run." This is not to suggest that all entrepreneurs are gamblers or have the same risk toler­ance; some are quite conservative while others actually seem to get a kick out of the inherent danger and thrill in higher risk and higher stake games. The real issue is fit—recognizing that gamblers and overly risk-averse entrepreneurs are unlikely to sustain any long-term successes.

Stress Tolerance. Another important dimension of the fit concept is the stressful requirements of a fast-growth, high-stakes venture. Or as President Harry Truman said so well: "If you can't stand the heat, then stay out of the kitchen."

Strategic Differentiation

Degree of Fit. To what extent is there a good fit among the driving forces (founders and team, opportunity, and resource requirements) and the timing given the external environment?

Team. There is no substitute for an absolute top quality team, since the execution and the ability to adapt and to devise constantly new strategies is so vital to survival and success. A team is nearly unstop­pable if it can inculcate into the venture a philosophy and culture of superior learning, as well as teaching skills, an ethic of high standards, delivery of results, and constant improvement. Are they free agents— clear of employment, noncompete, proprietary-rights, and trade-secret agreements—who are able to pursue the opportunity?

Service Management. Several years back the Forum Corporation of Boston conducted research across a wide range of industries with sev­eral hundred companies to determine why customers stopped buying these companies' products. The results were surprising: 15 percent of the customers defected because of quality and 70 percent stopped using a product or service because of bad customer service. Having a "turbo-service" concept that can be delivered consistently can be a major com­petitive weapon against small and large competitors alike. Home Depot, in the home supply business, and Lexus, in the auto industry, have set an entirely new standard of service for their respective industries.

Timing. From business to historic military battles to political cam­paigns, timing is often the one element that can make a significant dif­ference. Time can be an enemy or a friend; being too early or too late can be fatal. The key is to row with the tide, not against it. Strategi­cally, ignoring this principle is perilous.

Technology. A breakthrough, proprietary product is no guarantee of success, but it certainly creates a formidable competitive advantage (see Exhibit 2.3).

Flexibility. Maintaining the capacity to commit and decommk quickly, to adapt, and to abandon if necessary is a major strategic weapon, par­ticularly when competing with larger organizations. Larger firms can typically take six years or more to change basic strategy and ten to twenty years or more to change the culture.

Opportunity Orientation. To what extent is there a constant alert­ness to the marketplace? A continual search for opportunities? As one insightful entrepreneur put it, "Any opportunity that just comes in the door to us, we do not consider an opportunity. And we do not have a strategy until we are saying no to lots of opportunities."

Pricing. One of the most common mistakes of new companies, with high value-added products or services in a growing market, is to under-price. A price slightly below to as much as 20 percent below competitors is rationalized as necessary to gain market entry. In a 30 percent gross margin business, a 10 percent price increase results in a 20-36 percent increase in gross margin and will lower the break-even sales level of a company with $900,000 in fixed costs to $2.5 million from $3 million. At the $3 million sales level, the company would realize an extra $180,000 in pretax profits.

Exhibit 2.3   Major Inventions by U.S. Small Firms in the 20th Century_________

Acoustical suspension speakers

Aerosol cans

Air-conditioning

Airplane

Artificial skin

Assembly line

Automatic fabric cutting

Automatic transfer equipment

Bakelite

Biosynthetic insulin

Catalytic petroleum cracking

Continuous casting

Cotton picker

Fluid flow meter

Fosin fire extinguisher

Geodesic dome

Heart valve

Heat sensor

Helicopter

Source: Small Business Association

Distribution Channels. Having access to the distribution channels is sometimes overlooked or taken for granted. New channels of distri­bution can leapfrog and demolish traditional channels; take for instance, direct mail, home shopping networks, infomercials, and the coming rev­olution in interactive television in your own home.

Room for Error. How forgiving is the business and the financial strat­egy? How wrong can the team be in estimates of revenue costs, cash flow, timing, and capital requirements? How bad can things get, yet be able to survive? If some single engine planes are more prone to acci­dents, by ten times or more, which plane do you want to fly in? High leverage, lower gross margins, and lower operating margins are the sig­nals in a small company of these flights destined for fatality.

Conclusion

Complacency is the first symptom of a terminally ill company. Usually, that rut is formed because a small firm either becomes comfortable with a seemingly consistent revenue stream or is spending all its time fighting day-to-day fires. The result is a detachment from market dynamics and lost vision about why the company was originally founded. Successful entrepreneurs are personally and organizationally self-reflective. Stay­ing close to your entrepreneurial roots means constantly reassessing the nature of the opportunity and your firm's ability to exploit market needs. That knowledge affords you the power to be strategic in your plans to grow and then reap large capital gains. We hope this chapter has moti­vated you to do the hard work of reflection and assessment that will pro­vide the foundation of knowledge required to grow your company.

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