Max Mednik

In my last entrepreneurial finance class, we went over a reading by a famous Harvard professor of entrepreneurship, one of the first formal papers on the subject submitted to a colloquium in the 1980s. It is surprising how much the advice from 30 years ago is so close to today's. Below were the points that most caught my eye and caused me to think; some I agree wholeheartedly with, and others I'm still trying to come to terms with.

1. The definition of entrepreneurship. The professor's definition read as follows: "the relentless pursuit of opportunity to create and sustain value by making decisions on both sides of the balance sheet at each stage of a complete process which begins with identification of opportunity and runs through harvesting without regard for resources currently controlled." This is somewhat long-winded in my opinion, but it does cover all the important areas (but places a bit too much emphasis on the finance/accounting aspects).
   
   I prefer the more concise definition I learned at Stanford: "the pursuit of opportunity without regard to the resources currently at hand."
   
   Either definition, though, highlights the difference between the entrepreneur and the administrator. Entrepreneurs look forward and are not hampered by insufficient resources, whereas administrators or managers often look backward and worry about constraints and what is or isn't "possible." I find that the entrepreneurial mindset most jives with me because I'm a naturally optimistic person, and I think a lot of entrepreneurship has to do with an innate optimism (combined with accuracy and some sense of being realistic as well).
   
   
2. Financing decisions and incentives are critical to deal structure and overall success. This I definitely agree with and posted on these subjects more extensively in the prior weeks.
   
   
3. Greed vs. Fear. These are the two counteracting forces that the entrepreneur balances in making any decision. For instance, in the decision of how fast to raise money, the greed is the consideration of equity given up, and the fear is the threat of time for other players to enter the market.
   
   
4. Some projects are better with limited resources and fume dates. Often, people will perform more efficiently when they have no other way out, and if they are forced to come to various "fume dates" when their funding or resources run out, they will have to make decisions in rounds and re-evaluate their strategy continuously. This turns out to be better due to the inherent "real" options present in the strategy, such as the option to abandon the project or the option to grow or change the plan. By raising capital in smaller steps and over several stages, the entrepreneur can receive better valuations as he or she and the investors have more information (and less uncertainty) over time.
   
   
5. Financial analysis never reveals truth; it only cuts down on "the region of darkness." This is why our professor always said to not worry about the numbers so much; it is impossible to make accurate predictions, and the numbers can be manipulated to show anything you want. They should be used more for reality-checking and understanding what is not within the realm of likelihood ("the region of darkness") rather than guessing what will happen.
   
   
6. From whom money is raised is more important than the valuation terms, and the terms of the money are more important than the amount or even getting it. This was an interesting play on words, but I agree with most of it. Generally, raising money from parties who will be on your side and bring value to the table is more important than the terms. However, the flip side is that if you're in a rush and accept horrible terms, it can often be worse than not accepting money at all. I think this needs to be tempered somewhat and considered within context, since it could be better to raise money at mediocre terms (from a good partner) than to worry about optimizing the terms and run out of cash.
   
   
7. Acknowledge your ignorance; no one can predict markets and the economy, so don't build ventures or make decisions depending on your ability to predict these unknowables. I definitely agree with this. I am most frustrated when I have to work with people who think they know more than they know or do not acknowledge the likelihood of their being wrong or being able to learn from others.
   
   
8. Pay attention to the ultimate harvest strategy, and never fall in love with operating your business; there is no ROI until you cash out. I have the most qualms with this point. I think that considering exit strategies is important, and yes, if one's goal is purely economic gain, then this is true. However, I think that if one's goal is happiness and accomplishment, then one can get that through a combination of financial windfalls and pride in operating a growing, healthy business.
   
   
9. When you can gather distilled market data on a company or industry, that usually is a good clue that there is no opportunity. This point made laugh, as I personally have believed in variants of this thought for a while. My personal philosophy is that anything in life that's worth doing or having is hard to achieve and complex to understand. Anything that looks too good to be true or a quick buck doesn't last or do much good.
   
   
10. The distinction between high- and low-tech, service and manufacturing, and for profit and non-profit is artificial; all businesses have elements of each and the only distinctions lie in cash flows and risk characteristics. This is an interesting point and one that I think is valid and grows in importance in current times with the increasing diversity of business models combining social good with for-profit enterprise. I definitely agree that there are important common elements among all of them, and that many of the same strategies can be effective across domains. I do think, though, that the differences between the domains provide important sources of value for entrepreneurs who can understand them and access them more directly than completely general practitioners.
    
    
11. The length of time invested by the entrepreneur and his or her experience is key; the most successful age happens to be between 35-50. Well, given my age, I'd obviously like to disagree and hope I can achieve success throughout my life. Clearly, there are many recent examples of wild success of "inexperienced" entrepreneurs who possessed special skills or brains. I think as a general rule, though, experience is important. It's often a difficult decision, however, between which experience is more valuable: working as a consultant or general manager and then trying a start-up or having the experience of doing a start-up. I tend to lean towards the latter and therefore somewhat disagree with this point from the professor.
    
    
12. Success is ephemeral and can be destroyed when people focus on protecting existing resources rather than creating value by pursuing opportunity. This point rings extremely true to me based on some of my past experiences. Part of what excites me about working on building new companies is the pursuit of new opportunities, whether they be new markets, locations, or new people to work with and learn from. I am always turned off by people who want to just stick only to what they know and are good at and protect that versus stepping out of their comfort zone to try something new.
    
    
13. Each person in the team has different goals of how much he or she wants to earn and how hard he or she can or wants to work; also, everyone is mortal and aging, so teams are by definition ephemeral. This is a slightly pessimistic viewpoint, but the essence is certainly true. People tend to have different outlooks on life and styles of working. I've often heard the advice that one should first choose whom to work with and then choose the project; it's often easier said than done, but I agree with that. The other lesson inherent in this point, though, is that one needs to plan ahead and be flexible, realizing that things may change drastically over time, and a team needs to have measures in place to continue functioning and growing even as its membership may change.

I found that most of the lessons above rang true today and particularly hit close to home for me and my personal past experiences. I'm sure I read advice like this before, but it's strange how it always takes on a new meaning when it matches things that you've actually had to deal with in your personal life.