Business Times - 07 Jul 2009
SME INC
COMMENTARY
Don't be obsessed about raising capital, forget about first-mover advantage; instead, find a niche market and focus on customers
By KAREN CHO
SUCCESSFUL entrepreneurs are a rare breed because they face so many obstacles. And one fundamental flaw in the system makes it even harder for entrepreneurs to realise their dreams.
According to Joe Tabet, managing partner of Melcion, Chassagne & Cie, a group of international senior business advisers dedicated to helping entrepreneurs, many highly motivated entrepreneurs would have trouble working with institutional investors - which is counter-intuitive because these investors are usually seen as primary financiers.
Entrepreneurs have the hunger for creating businesses, but also a strong need to be flexible and in control of their destiny. This naturally generates tension with investors who need predictability and accountability, which often creates problems.
'Most investors do not realise that there is a disconnect between investors and entrepreneurs,' says Mr Tabet.
'They end up fighting with entrepreneurs, saying they are impossible to manage, which results in destroying value for every one. We believe there is a philosophical and cultural mismatch to start with.'
Mr Tabet, who is also the author of Hors Piste! - a book that debunks many myths about being an entrepreneur - was speaking to INSEAD Knowledge on the sidelines of the Global Entrepreneurship Forum held recently at INSEAD's Europe campus in Fontainebleau, just outside Paris.
Among other things, Mr Tabet thinks that entrepreneurs should not be obsessed with raising capital from prospective venture capitalists (VCs). Rather, his advice is to avoid over-funding the company from the start, because it's a recipe for disaster.
According to a Harvard study on the Inc 500 (fast-growing companies ranked by Inc. magazine), less than 5 per cent have raised VC funding, and 67 per cent have less than US$50,000 in capital. Entrepreneurs should look for financing in a much broader sense, tapping into other sources such as clients or suppliers, before giving away any equity.
'From the entrepreneur's perspective, the VC model looks more like gambling, and the chance of the individual entrepreneur making money once they enter the VC game is probably as low as winning the lottery,' said Mr Tabet.
'We have observed that many entrepreneurs are kicked out of their own company in the year following a major investment round. All this makes the individual entrepreneur's chances of success in this game quite tiny. In many cases, it's pretty much like Russian roulette - entrepreneurs often get 'killed' by investors because of this mismatch.'
Another myth that Mr Tabet debunks is first-mover advantage. Citing e-Bay and Google as examples of companies that were not the first to move in their space, he says that they were still able to achieve phenomenal success despite not being 'new' as such.
He also gives kudos to Swatch, which he says was not that innovative from a pure product perspective - it just tweaked the formula and made wearing watches made of colourful plastic very hip.
'I like the notion of small giants - companies that identify a niche market and secure their place in their eco-system, pretty much like the Blue Ocean strategy concept,' he said. 'You don't want to be where everyone else is.'
Mr Tabet's advice is to find a niche market and focus on customers. 'I think the more you understand your customer and your eco-system, the more likely you will succeed as a new company.
'If you have the right people with the right mindset, who are smart enough and open-minded to adapt to market needs, you come up with solutions that are faster to generate revenue. This is how entrepreneurial companies gain an advantage over larger firms.'
In fact, Mr Tabet says that his firm has noticed a correlation between companies that do not have VC funding and higher levels of creativity. 'They struggle, but they end up finding better, more robust and sustainable solutions than funded companies,' he said.
'In my opinion, the real competitive advantage that entrepreneurs have to secure their success is to focus on what money cannot buy. Whatever money can buy is a commodity.'
While he is not against entrepreneurs teaming up with external investors, he says it is important that both sides understand their own strengths and weaknesses - and anticipate conflict.
VCs, for example, are very good at investing in innovation and fast-growing companies. What they need to realise is that they are not always on the same side as the entrepreneur.
Entrepreneurs, on the other hand, are very good at starting up businesses. But they are quite bad at mastering the capitalistic game. Mr Tabet says there is one part of their life cycle they do not manage well: 'Very few entrepreneurs manage their own personal exit and anticipate it. Those who don't do it, unfortunately in most cases, will see it happen to them without them being in control any more.'
Karen Cho is an INSEAD Knowledge staff writer. This article first appeared in INSEAD
Knowledge's website (http://knowledge.insead.edu) in June
SME INC
COMMENTARY
Don't be obsessed about raising capital, forget about first-mover advantage; instead, find a niche market and focus on customers
By KAREN CHO
SUCCESSFUL entrepreneurs are a rare breed because they face so many obstacles. And one fundamental flaw in the system makes it even harder for entrepreneurs to realise their dreams.
According to Joe Tabet, managing partner of Melcion, Chassagne & Cie, a group of international senior business advisers dedicated to helping entrepreneurs, many highly motivated entrepreneurs would have trouble working with institutional investors - which is counter-intuitive because these investors are usually seen as primary financiers.
Entrepreneurs have the hunger for creating businesses, but also a strong need to be flexible and in control of their destiny. This naturally generates tension with investors who need predictability and accountability, which often creates problems.
'Most investors do not realise that there is a disconnect between investors and entrepreneurs,' says Mr Tabet.
'They end up fighting with entrepreneurs, saying they are impossible to manage, which results in destroying value for every one. We believe there is a philosophical and cultural mismatch to start with.'
Mr Tabet, who is also the author of Hors Piste! - a book that debunks many myths about being an entrepreneur - was speaking to INSEAD Knowledge on the sidelines of the Global Entrepreneurship Forum held recently at INSEAD's Europe campus in Fontainebleau, just outside Paris.
Among other things, Mr Tabet thinks that entrepreneurs should not be obsessed with raising capital from prospective venture capitalists (VCs). Rather, his advice is to avoid over-funding the company from the start, because it's a recipe for disaster.
According to a Harvard study on the Inc 500 (fast-growing companies ranked by Inc. magazine), less than 5 per cent have raised VC funding, and 67 per cent have less than US$50,000 in capital. Entrepreneurs should look for financing in a much broader sense, tapping into other sources such as clients or suppliers, before giving away any equity.
'From the entrepreneur's perspective, the VC model looks more like gambling, and the chance of the individual entrepreneur making money once they enter the VC game is probably as low as winning the lottery,' said Mr Tabet.
'We have observed that many entrepreneurs are kicked out of their own company in the year following a major investment round. All this makes the individual entrepreneur's chances of success in this game quite tiny. In many cases, it's pretty much like Russian roulette - entrepreneurs often get 'killed' by investors because of this mismatch.'
Another myth that Mr Tabet debunks is first-mover advantage. Citing e-Bay and Google as examples of companies that were not the first to move in their space, he says that they were still able to achieve phenomenal success despite not being 'new' as such.
He also gives kudos to Swatch, which he says was not that innovative from a pure product perspective - it just tweaked the formula and made wearing watches made of colourful plastic very hip.
'I like the notion of small giants - companies that identify a niche market and secure their place in their eco-system, pretty much like the Blue Ocean strategy concept,' he said. 'You don't want to be where everyone else is.'
Mr Tabet's advice is to find a niche market and focus on customers. 'I think the more you understand your customer and your eco-system, the more likely you will succeed as a new company.
'If you have the right people with the right mindset, who are smart enough and open-minded to adapt to market needs, you come up with solutions that are faster to generate revenue. This is how entrepreneurial companies gain an advantage over larger firms.'
In fact, Mr Tabet says that his firm has noticed a correlation between companies that do not have VC funding and higher levels of creativity. 'They struggle, but they end up finding better, more robust and sustainable solutions than funded companies,' he said.
'In my opinion, the real competitive advantage that entrepreneurs have to secure their success is to focus on what money cannot buy. Whatever money can buy is a commodity.'
While he is not against entrepreneurs teaming up with external investors, he says it is important that both sides understand their own strengths and weaknesses - and anticipate conflict.
VCs, for example, are very good at investing in innovation and fast-growing companies. What they need to realise is that they are not always on the same side as the entrepreneur.
Entrepreneurs, on the other hand, are very good at starting up businesses. But they are quite bad at mastering the capitalistic game. Mr Tabet says there is one part of their life cycle they do not manage well: 'Very few entrepreneurs manage their own personal exit and anticipate it. Those who don't do it, unfortunately in most cases, will see it happen to them without them being in control any more.'
Karen Cho is an INSEAD Knowledge staff writer. This article first appeared in INSEAD
Knowledge's website (http://knowledge.insead.edu) in June
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