Risk Management and Mitigation

Objective: Understand risk management considerations as well as mitigation through insurance, proper security procedures, and contingency management strategies.

Key Concepts

Goal: What are the most important precepts and prescriptions for an organization to consider regarding risk management and mitigation?

Risk Management Considerations

Protect or Enhance Value

Definitions

• Risk is “the “effect of uncertainty on objectives” (ISO, 2009; ISO 2015)
• “Risk management is a systematic approach to setting the best course of action under uncertainty by identifying, assessing, understanding, acting on and communicating risk issues.” (Heinz-Peter, 2010)

Risk management consists of organizational activities to identify, direct and control risk. Risk management can enhance value and help it achieve outcomes or protect it from untoward events or conditions. Categories of risk include (The Institute of Risk Management, 2002; DCU Risk & Compliance Office, 2015):

1. Financial,
2. Operational,
3. Reputational/ Knowledge Management
4. Governance and Compliance,
5. Strategic.

As an example, in terms of reputation risk, the damage to a brand and reputation may be to the short or long term. Its effect can be in multiple spheres from revenue and expenses to perception such as ranking among the competition, revenue, employee morale, community support, overall rating, and public perception. It can affect relationships and oversight including agreements with partners and government regulation. Examples would include the recent events at United Airlines, Wells Fargo, and British Petroleum).

Inadequate risk management can impact the entire organization, customers, potential customers, or the broader public. Engaging in risk management ensures the organization achieves maximal benefit. The intent is to minimize adverse or unanticipated effects.

Address Uncertainty

The goal of risk management is addressing uncertainty in a stepwise, logical, consistent, and comprehensive fashion (The University of Adelaide, 2005; WorkSafe ACT, 2012). Here is an example step-wise strategy:

Step 1: Establish the context: Identify the objectives and internal and external parameters that represent potential types of risks. Identify those on a daily operational level as well as longer-term strategic concerns including those associated with new activities.

Step 2: Describe the specific risks in detail. Identify

1. Negative factors that affect achievement of objectives. How will they impact the objectives – will they lead to prevention, degradation, or delay?
2. Positive factors that might create, enhance, or accelerate success.
3. The impact of doing nothing and potentially missing an opportunity.
4. The source of the risk and the likely cause.
5. The potential consequences and impact on the internal aspects of the enterprise.
6. The potential consequences and impact on components that are external to the organization.
7. The relationship of the risk to other events and thus its predictability as well as potential impact.
8. The likelihood of the occurrence of the risk in time, place, or activity
9. The predictability of the risk and the potential for a repeat of the risk.
10. The ability to control the risk or influence it
11. What personnel or departments have authority to control the risk. Who will coordinate if there are more than one?

Step 3: Understand the risk: Outline the strengths and weaknesses of existing sources available to mitigate the risk.

Step 4: Evaluate the risk: Determine if the risk is acceptable or not. If the risk is not acceptable decide on the need for actions to mitigate the risk by changing behavior or accepting the risk.

Step 5: Treat the risk: If management decides to take action, apply effort to mitigate the cause of the risk.

Step 6: Monitor risk response effectiveness (or performance).

Risk Management Mitigation (Step 5 above)

Responses to risk include (Crane et al, 2013; The Chartered Institute of Management Accountants, 2007):

1. Acceptance: Hope the risk doesn't happen or calculate that if it does, it will be more straightforward to deal with it after it happens.
2. Avoidance: Stop activities that potentially lead to risk. This approach is not an option in most cases since the action is typically essential to accomplish an objective.
3. Reduction: Mitigate the risk via an internal action. Outline the management processes to address the risk including:
   1. Decrease the likelihood of the risk occurring such as by emphasizing prevention, quality assurance, closer management, or a change in the business process
   2. Minimize exposure to the risk or potentially isolate the source of the risk from other activities to minimize consequences
   3. Contingency planning. Create a “what if” scenario.
4. Share or transfer risk: Engage external resources such as insurance to address risk. This strategy moves the responsibility to an organization outside the enterprise using a contract, insurance, or partnership/joint venture. Note that this strategy can, in fact, introduce additional risk if the intended transfer, transfers the risk to an organization that suffers from its own risk or cannot assume the risk and eventually returns it to the original organization.

Insurance

Risk financing such as an insurance program mitigates the financial consequences of risk. Some losses or may be uninsurable and thus may have a broader impact (e.g., the consequences of allegations related to Uber’s leadership). Types of insurance for business include

1. Professional liability or errors and omissions (E&O) insurance. Protects against negligence claims. Such insurance does not cover fraud or criminal acts.
2. Property insurance. Covers items owned by the company (e.g., equipment, inventory, and furniture) and the office if the company owns the office. Note that some risks are not typically covered including floods and earthquakes; they require separate insurance coverage.
3. Workers’ compensation insurance. Required to cover medical treatment, disability, and death benefits if the employee is injured or dies because of work performed as a part of the enterprise.
4. Unemployment insurance. Required insurance to provide benefits to employees who have sufficient work in the recent past to qualify.
5. Home-based business insurance. Your homeowner’s insurance may not cover your business loss if you work from home.
6. Product liability insurance. Essential insurance in case your product causes damage to a customer or as a result of its normal use.
7. Vehicle insurance. Similar to personal car insurance; however the total coverage may need to be higher depending on the assets of the company that are at risk. Personal insurance usually covers vehicles that the employee uses as a part of work except for when the vehicle is used for delivery.
8. Business interruption insurance. Compensates company in case of an acute event that limits the productivity of the company
9. Key man and Director’s insurance. Key man insurance compensates the company if an officer is injured and cannot work. The payout is to the company to cover its need to replace the value provided by the officer. Director’s insurance covers the board of directors in case they are sued based on an action of the company. A member of the Board of Directors may insist that she or he is covered by director’s insurance.

Security Procedures

Security provides protection via a separation or control between the asset at risk and the threat (the agent that will be responsible for the risk. The asset can be harmed, changed, or destroyed. A control can be physical or non-physical, including electronic controls and documented processes.

Conceptually there are three types of security controls:

• preventative,
• detective, and
• responsive.

For example, a security mechanism

• prevents alteration by the threat to the asset (e.g., a locked door),
• detects that a compromise occurred or a compromise is happening (e.g., a monitoring camera that detects motion and sends an alert) or
• responds to a compromise while it’s happening or after it has been discovered (e.g., sounds an alarm or locks a door to prevent further compromise).

Similarly, virus detection software can stop the installation of dangerous software, detect that software is trying to something it is not supposed to do (e.g., change key operating system file) or respond to a virus by renaming the file and put it into a special “quarantine” folder.

Contingency Management Strategies

A contingency strategy manages exposure to an infrequent event that is unpredictable in its timing or severity (Protiviti, 2006). A marketing contingency plan will identify a change if sales disappoint due to market changes in desire, a new entrant or perception of poor product quality. Similar contingencies could be in place for higher than expected usage or purchase. In the case of Pokemon Go, the software game had frequent crashes because the designer of the software required much network traffic to play the game. And there were not enough resources to handle the increasingly frequent requests as the game grew quickly.

Similarly with new iPhone sales seem to grow higher and higher. Apple has learned to develop contingencies if it cannot build new equipment fast enough. Not only do they avoid annoying customers but they gain the bragging rights based on the rapid and enormous sales value that occurs soon after the launch of the new iPhone.

Interrogate and Extend Concepts

Goal: Propose and answer clarifying questions about the topics to consider and challenge the resources, ideas, and concepts.

Q & A #1

1. Q: In my company how do I make sure that an employee who works with the finances doesn’t steal from me?
2. A: From a security perspective of risk management you can prevent theft by having careful hiring practices, clear policies and expectations and a dual role model such that large transactions require effort by 2 people. Detection can be done by having credit cards and bank accounts sent out warning emails when large transactions occur, say > $5000. One can also have a monthly review of finances on an unpredictable day of the month. Finally, one can set up one's accounts such that a very large transaction request will shut down access to the bank account until a phone call is made from a corporate officer.

Q & A #2 (Devil’s Advocate)

Q: Accounting for all risks is a waste of time. Wouldn’t it be more efficient to just deal with all risks on a contingency basis?

A: For some risks, yes. That the purpose of interrogating the risks and understanding them. Some risks are so minor or so infrequent and unpredictable that it makes little sense to prepare for an eventuality that may never happen, for which no preparation is possible, or where the negative outcome is minor in impact.

In contrast, if you had a fire in your office not only could it destroy your office and lead to significant downtime, but it may eliminate some records that are absolutely essential. Further, if your office includes a server which has your electronic files, you may lose far more than a bunch of papers. Even though a fire may be a relatively uncommon event if it did occur it could potentially destroy the viability of the entire company.

In contrast, it is relatively simple to make sure that server files are copied off-site on a routine basis. Paper-based records can be scanned and stored in such a system so that even if the papers are destroyed there is an electronic copy available. Finally, there is the risk to staff which is incalculable. Simple mechanisms such as safety procedures, fire detectors, and fire extinguishers are inexpensive controls which can prevent, detect, and mitigate such risks.

Supplement Concepts

Goal: Supply current, quality web links to supplementary material that support, illustrate, elaborate/expound on, typify, and challenge a concept, piece of content, or idea.

Discussion of Supplementary Material

1. The Wells Fargo Scandal is a Failure in Risk Management
   1. Why we chose the supplementary material: Not all risks are to materials; reputation risks can be the most expensive
   2. What is important about it: Wells Fargo set up a compensation system the increased the risk of fraudulent activity. It did not have systems in place to detect or halt such activity.
   3. What part(s) of the Learning Module it supplements: Security Procedures
   4. What the key takeaways are: Through corporate choices, one can actually introduce a novel security risk.
2. Volkswagen Side-Steps Enterprise Risk Management
   1. Why we chose the supplementary material: An example of a risk internal to the company
   2. What is important about it: We often see “teaching to the test” as acceptable, but any support for gaming the system opens up the company to the risk of internal fraud
   3. What part(s) of the Learning Module it supplements: The need to avoid some risks at all costs.
   4. What the key takeaways are: Fraud can inflict enormous damage on a brand. Scrupulous honesty is essential to avoid this risk.
3. GM's risk management failures provide lessons for other firms
   1. Why we chose the supplementary material: To highlight the importance of monitoring the risk management system
   2. What is important about it: GM had a system, they just ignored it
   3. What part(s) of the Learning Module it supplements: The final step in the risk assessment process when one assesses if the system is functioning adequately
   4. What the key takeaways are: There is no sense in creating a risk mitigation system if you aren’t going to take action when a problem is identified.
4. How Did BP's Risk Management Lead to Failure?
   1. Why we chose the supplementary material: To highlight the importance risk management to an enterprise and to management
   2. What is important about it: Errors due to an inadequate risk management system are inevitable and can lead to failure of the company
   3. What part(s) of the Learning Module it supplements: The role of management is creating, supporting and evaluating a risk management system.
   4. What the key takeaways are: Ignoring risks is not an option. The steps can seem distracting and time-consuming but skipping necessary risk management assessment and mitigation can have an enormous impact.

References

• ISO 31000:2009, Risk Management – Principles and guidelines (2009). Geneva: International Standards Organization, 2009.
• ISO 31000 Risk Management: A Practical Guide for SMEs (2015). Geneva: International Standards Organization, 2015 [Note: SME: Small and Medium-sized Enterprises]
• Risk Management: Procedures, Methods And Experiences, Heinz-Peter Berg, Bundesamt Für Strahlenschutz, Salzgitter, Germany, (vol.1) 2010, June.
• IRM: A Risk Management Standard: The Institute of Risk Management, 2002, London
• Introduction to Risk Management (Theory & Practice), DCU Risk & Compliance Office, Dublin City University, November 2015
• The University of Adelaide Risk Management Framework. Legal and Risk Branch, Division of Services and Resources, The University of Adelaide, SA, 2005 Australia.
• 6 Steps to Risk Management. WSACT HB 0002 - WorkSafe ACT 2012.
• Laurence Crane, Gene Gantz, Steve Isaacs, Doug Jose, Rod Sharp. Introduction to Risk Management. Understanding Agriculture Risk: Production, Marketing, Financial, Legal, Human Resources. USDA. Extension Risk Management Education and Risk Management Agency. 2013.
• Introduction to Managing Risk. Topic Gateway series no. 28. The Chartered Institute of Management Accountants, London, 2007
• Guide to Enterprise Risk Management. Frequently Asked Questions. Protiviti. January 2006

Social Responsibility in 2017 and Beyond (630-7)

Corporate Social Responsibility (CSR) was all the rage post Enron. Then we had more and disasters including the BP oil spill, banks selling toxic mortgages, sexual predator behavior by company leaders, ill-treatment of an airline customer, and defrauding bank customers by creating fake accounts. What happened?

CSR was a tag along. As It’s a Jungle in There implies, if you add the following elements to your business:

• “be responsible” and,
•  “give something back,” 

you are good to go. The reality was these words are and were hollow add-ons. So, for example, some movie producers gave us wonderful movies and were abusive at the same time. A company was "Beyond Petroleum", but actually did nothing to move us away from a carbon-spewing economy.

The problem is that being “responsible” wasn't built into the core company. Even Google’s “don’t be evil” is a little vague. It leaves a lot of wiggle room for “get away with whatever you can as long as no one gets hurt.” Apple’s hiding of profits offshore (and Google’s) is an excellent example of “legal” behavior. Unfortunately, that action is not supporting the country that launched Silicon Valley startups, trained staff in top universities, built communication and travel infrastructure, created the dynamic economy required to develop wondrous innovations, and (lest we forget) invented GPS and the Internet.

Honestly, in a world of “profit” vs. “responsible” which one is going to win? What will the board of directors demand? How about the investors? Or the stock owners? Or the mutual fund? Is a mutual fund guided by pension plans that are seriously underwater due to overoptimistic (or deceptive) promises of future revenue from investments going to risk a low ROI? They certainly aren’t going to trade ROI for some fuzzy “good for the world/earth/society/individual” mission. If being “responsible” isn’t baked into the core organization then like a bumper sticker that has gotten old and out of date, it will be removed. And “stakeholders” will demand that "responsible" behavior stays on the periphery of the company's agenda.

Additionally, there is the familiar “everyone else is doing it” argument. If you don’t put profit first (and second and third), then you’ll be out of business in a heartbeat. The mantra says, "Better to live on for another day then to drown in a sea of red ink." That argument, although quite useful has never been compelling and lacks ethical rigor.

The winning strategy is then to come up with slogans like “Beyond Petroleum,” greenwash your company, follow the leaders in the industry, and give some money to charity. Prove that yours is a “good” organization and it will be showered with profit.

When corporations and other organizations weren’t looking, the customer suddenly took charge. Sure some industries have successfully treated their customers poorly (e.g., airlines), but the positive feelings toward the monopoly that is Amazon are instructive. At Amazon, the “customer experience” is king. Somehow it is hellbent on providing more products, faster, with unbiased reviews, at lower prices, and with greater convenience. Where is the profit in that? How did that happen? Because Amazon actually responds to customer demand and customers are pretty demanding. Customers want all the aspects of the Amazon experience that Amazon delivers.

Even the punching bag that is the airline industry recently learned that it couldn’t drag a person off of a plane without generating a firestorm of rage from consumers. You won’t see an airline treating a customer like United did again (as long as folks have smartphones in their pocket). “Beyond Petroleum” is gone as a slogan. Wells Fargo paid for is misdeed; again that strategy isn’t likely to be followed by anyone else. Uber’s leader and a movie industry leaders have been toppled.

The alternative argument for the rise of consumer power would be to search for examples where organizations have been “irresponsible,” continued that behavior, and still remain profitable and successful. Starbucks settled with the EU. Pharma companies that tried to gouge customers backed off. Companies may stay profitable, but almost always they change their ways. What about Apple, Facebook, Google, and Amazon? When are they going to acknowledge the country that supported the means to acquire such enormous wealth? In the end, they too will need to explain why profit is more important than being responsible. Keep in mind that they are the most powerful companies (and valuable). When they change course, there won’t be many enterprises left that can act like being responsible is a mostly meaningless add-on to fool everyone and justify maintaining the status quo.

Perhaps customers don’t really care about clean water – tell that to folks in Michigan. Do they prefer money or healthy food? We see low-carb diets increasing and people demanding GMOs. Sales of fast food are down even though it is cheaper than “fast-fresh” restaurants. It’s hard to find high fructose corn syrup, and soda profits are decreasing. Customers are demanding more and slowly getting what they want.

The good news for corporate leaders and future organizational leaders is that customers want you to bake responsibility into your organization and will reward you for it. They have seen the perils of a “profit-first” approach, potentially first hand when they lost their house in 2009 or when yet another company told them “too bad for you, what are you going to do about it?” You can even see the change in autocratic regimes like China where folks are finally fed up with pollution. They may not have the power to attack the political system, but they can demand cleaner air.

So greenwashing your company won’t work. Now will adding flowery words to the mission statement. If you want to please customers, you need to provide clear benefit and not sacrifice it when it becomes inconvenient. In a few years, it’ll be the only way to survive in this competitive business environment.

So if you are building a new enterprise, take a chance and tell everyone that your goal is only to be profitable and provide high ROI to investors. Or take the safe route and demand that your organization considers its interaction with the environment, society, and individuals in everything it does.

References:

• Madden Bartley J. Value Creation Thinking. Vol 1 edition. LearningWhatWorks, Incorporated. May 26, 2016.
• What is value-based management? Timothy Koller. An excerpt from McKinsey & Company, Koller Tim, Goedhart Marc, Wessels David. Valuation: Measuring and Managing the Value of Companies. Vol 6 edition. Hoboken, New Jersey: Wiley. August 17, 2015.
• Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.

Photo Credit: Deepwater Horizon offshore drilling unit on fire 2010.jpg. 20 April 2010. US Coast Guard - 100421-G-XXXXL- Deepwater Horizon fire. public domain

Building a Successful Working Environment (630-6)

Creating a working environment seems simple. As in It’s a Jungle in There, you can distill that down to:

• Care about your staff or co-workers.  (ch. 21)
• Recognize and praise their accomplishments. (ch 22)
• Help others out (ch 23).

But creating a successful organization takes much more effort and a mini-degree in psychology.

The challenge starts with how you hire people. 

What are your current criteria? Are you seeking intelligence, flexibility, compassion, perseverance, energy, enthusiasm, mental toughness, physical fitness, leadership, or adherence?

Then decide what makes a person a good fit for your organization by describing:

1) Characteristics that help someone succeed in your enterprise

• If your Friday dress code means that staff can ditch the suit but should still be "professional," that tells you a lot about what you value.
• If your industry is rapidly changing and challenged with new technology, then flexibility and innovativeness may be your top priority. 

2) Criteria that helped others in the past, assuming the environment hasn’t changed.

3) Personal values that predict success in the position

1. Options include money, autonomy, work-life balance, travel, quiet, minimal interaction, constant action, desire for a big success, fear that effort will be discarded, etc.

Once the staff member is on board, it’s time to get them up to speed. Don’t just dump them onto the organization and assume they will “figure it out.” Have a plan for training and inspiration that conveys the organization's core vision, mission, philosophy, and values. If someone doesn’t seem to buy the core organizational direction, you have a problem you need to fix promptly.

Then use qualitative and quantitative to assess the accuracy of the fit. Perhaps you thought that the person having “energy” was paramount. Then you realized that the person you hired based on that criterion was always pushing for a change in a direction that conflicted with your obligations or timeline.  Perhaps the proper criterion you are looking for is “passion” for your mission and goals. That passion will translate to “energy” for staying the course to achieve success.

The fit might be great, but the organization isn’t consistent or is providing conflicting messages. The solution is organizational, not personal.

Or, despite your best efforts, the fit for this position isn’t right. Before you give up, maybe another area would demonstrate an improved fit. For example, you assumed that the person was more extroverted, but it seems that they like quiet and working one to one with people. Migrating to a position that involves coaching vs. one with the leadership of a large team may be the right solution.

Finally, there are the red flags. Occasionally some folks have a toxic side. They breed resentment; they crave control; they manipulate and intimidate. You need a system to identify such people. It is unlikely they are going to tell you that harming your organization is their goal. And other staff are likely to be intimidated and unwilling to come forward. Folks who are bullied look to supervisors to take action; that’s your (unpleasant) job. You need a system in place to ensure you collect information from other staff so you can identify the problem and take action.

To summarize, It’s a Jungle in There recommends to be kind and helpful to folks and give out praise liberally for work well done. That is a tiny piece of ensuring that you are creating a working environment where everyone is working together, doing their best, and helping the organization meet its mission.

References:

• Collinson Rachael, Bevoc Louis. Industrial/Organizational Psychology: A Basic Introduction. NutriNiche System LLC. April 9, 2016.
• Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.

Photo Credit: Competency-circle.jpg. Components of competency-based management. 1 October 2010 (UTC).  Paduch. Creative Commons Attribution-ShareAlike 3.0 License.

Summary of It's a Jungle in There (630-5)

Chapters 17-20 of It’s a Jungle in There were, shall I say, trite. If like me you are a slow reader and see value in "Hey, I read a chapter," you'll love this book. I've never seen a book with chapters that are 2 and 3 pages long.

So rather than write the book that should have been written, this week I will provide a digest of the ideas of the book, chapter by chapter. I'll add something to 17-20 since that is the focus of this week's blog.

I'm at a loss for an image, so I will insert a shameless plug for my book, Reaching Tomorrow's Customers: Trends in Digital Marketing. It's free via Kindle Unlimited (or if you ask me, I'll send you an EPub!)

My book on Digital Marketing.

1. Be a risk-taker.
2. Be passionate.
3. Don’t fall for “Get a life” or “Take it easy.“ Be ambitious (see passion).
4. Dream about the future.
5. Multitask.
6. Come up with a product, believe in it, and sell it.
7. Be the best you can be.
8. Pay attention to detail.
9. Look out for the next big thing.
10. Do R&D and learn new things.
11. Make improvements.
12. Make sure folks can find your product and go to the customer to make a sale.
13. Pay attention to the budget and spend wisely, but don't cheap out.
14. Improve efficiency through strategic partnerships.
15. You, the entrepreneur are a product. Sell yourself. Hey, see my book image to the right!
16. Don't quit - persevere. Clear objectives should guide you. Set a goal and clear objectives. Use them to tell you when you have arrived. A setback can be assessed against the purpose and objectives. If the impediment is that Google is doing it now, well your goal just got stomped on and its time to create another goal. If your goal was to create an app and you found out that 4 others already exist, then persevering is foolish. If your objective was to be done in two weeks, and its been 2 weeks and you are only 1/2 done, then adjust your schedule and get moving. Figure out what got in the way.
17. Don't accept a rejection from someone; don't quit too early. Sure, hit the wall, step back and then try again. There are situations where you can ask 100 people. So a rejection from one means there are 99 other people to ask. You can ask that first person again, or you can move on. In other cases, there are only one or two people (say, you invited your state's senators to come to your launch and both rejected you). Ok, dig deep and keep trying. You only have two options.
18. Failure is just success in disguise. The business world is full of "learn from your failures" advice. It makes sense. But learn from your successes too. Learn from other people's failures. Learn from their successes too. I'd say the broader statement is "learn." Every chance you get, see what you can learn and apply that to your next activity.
19. Be positive. That's easier said than done. The author says "I've never had a bad day." Most of us cannot say that; self-deception is not easy. But the point is, don't get down on yourself or your situation. Take each challenge as an opportunity to see something new. But really, it's okay to have a bad day. The good news is that the sun seems to keep rising every morning. Tomorrow (if this is not the movie Groundhog Day) there will be a new day. [Aside: I admit that I watch that film every year, but I spent 10 years in Pgh, so perhaps that it].
20. Care about people and things. I suppose the alternate strategy is "don't care." We live in a scary world that apparently has to point out these kinds of things.
21. Make people feel good. Praise is cheap and useful.
22. Help others out (1.5-pages long chapter!).
23. Shape your image of yourself.
24. Connect with the media. 
25. Be truthful. Again, is the alternative to lie? I'm a big fan of "trust but verify."
26. Don't burn bridges. I just watched the Great British Baking Show and one baker threw out his Baked Alaska components is disgust when the ice cream piece melted. Don't throw away things in anger. Don't keep everything either, but pause before you discard your creation.
27. Be socially responsible.
28. Give something back. What comes around goes around.

Next week, I'll try to come up with something interesting to say about topics 21 to 24. Wish me luck. Perhaps I could add, "Don't be sarcastic." Too late.

---

Reference: Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.

Strategic Partnerships in an Ecosystem Model (630-4)

A collection of strategic partnerships is an excellent addition to a company and indeed essential. A standard partnership model focuses on elements of customer need directly related to your product and finding partners that enhance product benefits and address those needs. Partnerships serve to further the impression that one's product provides benefit and successfully addresses the need you are targeting.

Example Product Focused Strategic Partnerships
Chapter 14 of It’s a Jungle in There discusses the value of the strategic partnerships. Schussler provides an example of a "jungle" retail experience that is enhanced by partnering with company skilled in a process by which the customer (children and their parents) "produce" the product they buy, in that case, a plush dinosaur.

Collaboration with a non-profit such as with fundraising 5K and similar event can also be a valuable strategic partnership. For a health-related product such as one focused on providing dietary advice, an active experience offers access to an energetic audience seeking a healthful lifestyle.

Need fulfillment often requires strategic partnerships. Even the behemoth Amazon has a dependency on others to fulfill a need. Until Amazon has its own delivery service for 100% of its products, it must engage shipping companies to bring the product purchased to the customer, or return it if it isn't acceptable. The financial success of the shipping companies (UPS and the USPS in this case) is essential to Amazon's success.

However, this is an inadequate way of seeing the customer need. Customers have more complicated needs outside of the requirements your product addresses. Thus, your product only fulfills a small proportion of the consumer's needs.

Meeting the Broader Needs of the Customer
In fact, the need associated with your product is a subset of related demands to accomplish a customer's larger goal. An alternative strategy requires a broader investigation of one's product as a component of a more extensive customer experience.

For example, one does need a "sponge" from Amazon. One needs to keep one's home clean. This makes the logic of Amazon's Prime Pantry, and it's push for users to have scheduled and automatic deliveries more clear. All those items in the Prime Pantry are solving the more substantial need to keep my home clean by making sure that I list everything I might need and Amazon provides it, potentially without my asking for it. The Amazon approach to meeting broader needs is to expand and consume other companies related to that need. As an example, Amazon created AWS, its own cloud-based IT system, is developing its private distribution network with individual drivers and airplanes, and recently purchased Whole Foods after buying a slew of other online providers.

Amazon's strategy isn't always possible. As an example, you don't "need" a video from Netflix. You need entertainment for a few hours on Saturday night. A chain of elements, including an Internet service provider, and a seller of a TV are essential to your being able to watch a movie. Netflix must consider those aspects if it is going to succeed and it cannot incorporate those elements into its product. So for Netflix, involving other organizations is critical.

A strategy must then identify an entire chain of needs and efforts/purchases that the customer deploys to accomplish the greater need. And then form relationships as a part of a broader ecosystem of customers and providers including values outside of one's immediate product value. For the company, the main difference, as compared to strategic partnerships, is that the overall goal is to ensure that the chain of needs is met.

The Ecosystem also Affects Your Success

Companies are used to battling competitors who aim to steal their market by offering more value or a lower cost or both. But in a broader chain, your competitive disadvantage may not be due to your competitor. If in the case of Netflix, the need to "find a movie I want to see" may be determined by some other participant in the ecosystem. There is a chance that the customer identifies a movie that isn't available on Netflix but is available at a nearby Redbox. The ecosystem has just redirected the "get a movie" need away from Netflix. Netflix lost a customer to Redbox, not because of Redbox but because of someone's else's search engine. This lost sale potential explains why a recommendation engine is vital to Netflix; it ensures that the movie the customer decides to watch is determined by Netflix, not by someone else in the ecosystem.

The success of the company thus depends on

1. awareness of the complete customer experience including broader needs related to the specific product needs
2. the ability of the provider elements to meet the overall requirement of the customers  
3. your utility to satisfy a particular component need versus someone else in the ecosystem
4. attention to the broader ecosystem, so you reinforce the value of their product to meet a specific requirement in the chain.

Final Thought: Who to Engage?
An ecosystem model also provides guidance regarding the need for and extent of strategic partners. The chain of providers must have enough alliances to meet the overall demand, yet partnerships outside of that greater need are potentially unnecessary and a distraction. With each coalition, you may be enhancing profitability, but you may also be providing a competitor with the information they need to undermine your product. The strategy of identifying the broader need helps you optimize strategic partnerships to achieve the highest benefit regarding cost reduction and improved pricing.

References

• Choudary Sangeet Paul. Platform Scale: How an emerging business model helps startups build large empires with minimum investment. Vol First edition. Platform Thinking Labs. September 15, 2015.
• Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.

Photo Credit: Twisted link chain.jpg. Author KDS444. 20 June 2012. This file is licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

Education and Research in Entrepreneurship (630-3)

For someone who has been doing research for the past 30 years and who is married to a Southwest US archaeologist the topic of chapter 10 was too juicy for me to ignore. This section of the book stresses the value of research and development in entrepreneurial pursuits.

The first rule of research is garbage in garbage out. That is if the question you're trying to ask is poorly constructed and has no meaning then you won't find anything significant. The second rule of the research is that you must not bias your research toward your preconceived notion of what the correct answer is. That is you must be open to the possibility that your research will find a solution which is against what your expectations are. The book describes using research tools to refine and improve the restaurant implementation. The possibility that he should not actually have such a restaurant was never an option. This is more accurately iterative product development with input from the target audience. Valuable yes. Research no.

He highlights the need to obtain adequate knowledge to ask essential questions and accomplish research. I completely agree with the need for education. However, in one section he quotes the benefit of putting in a sand pit.

The book says, "For example, when we were designing our T-Rex restaurant, we brought in groups of youngsters to test the viability of our retail offerings and the 'fossil dig' (a special archaeological sand pit in one area of the restaurant) where kids could use shovels to unearth dinosaur bones and other prehistoric treasures."

Many folks do not see the importance of archaeology versus paleontology as a big issue. To them, the confusion may be irrelevant. However to the many scientists who get PhDs in either field the confusion over the difference is disturbing. Just to be clear, archaeology is focused on human behavior and is a component of anthropology and the study of cultures. Further, both fields are frustrated by the attitude of "get digging." For an excavation to be of any value, much work must be done before and while digging a site as well as analyzing the results afterwards.

The amazing Cliff Palace in Mesa Verde National Park is an archaeological treasure. The story of Anasazi is fascinating and inspiring. But alas there were no dinosaurs then.

Paleontology is associated with research which goes further back in time and is related to things such as dinosaurs. Someone who is building something that shows the value of jungle habitats and includes dinosaurs should understand this difference or even better ponder how the "learning experience" of this restaurant can educate the audience about this crucial distinction.

The point I am making is that education is fantastic, but self-education can trick us into believing that we understand something that we don't truly understand. That's the reason why we have structured training with professors and universities. We can't trust ourselves to self-assess our own understanding of an unfamiliar topic. Would you want to see a doctor who was "self-taught"? We need others to help us understand if we have achieved mastery or if there remain holes in our understanding which still need to be filled. I believe that every student is indeed responsible for their own education ("the harder I work the smarter I get"), but that doesn't mean that a student should be solely self-taught.

The chapter also highlights the value of focus groups. Focus groups provide a plethora of input regarding usability and satisfaction. That information can be collected both qualitatively and quantitatively through, respectively, interviews and more structured instruments. There are many different ways to implement focus groups;all require some kind of analysis of the results. Focus groups are an excellent topic to aid people in product design.

My point of bringing this up is to ensure that readers are not left with the false impression that one can "do a focus a group." A focus group must be carefully constructed, implemented, and analyzed with assistance from individuals skilled in performing focus groups.

So every entrepreneur should implement research and development in the process. But make sure you're starting that process without unwarranted assumptions, and with adequate understanding which has been vetted by others or achieved such that it represents an accurate understanding of the topic at hand. Have the tools in place to analyze the results and then use these results to guide your research, be they related to the market and the customer, or the more specific details of product development. And be willing to listen to the results, even if the answer isn't what you wanted to hear.

---

Reference: Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.

Photo Credit: Mesa Verde National Park Cliff Palace Right Part 2006 09 12.jpg. 12 September 2006. Andreas F. Borchert. This file is licensed under the Creative Commons Attribution-Share Alike 3.0 Germany license.

Multitasking is Really Task Switching and Doesn't Work (630-2)

Chapter 5 of It's a Jungle in There recommends that an entrepreneur be a multitasker. Some activities can be completed simultaneously such as listening to a podcast and exercising. However, for cognitive tasks, divided attention is merely task-switching. That is, the person is not actually accomplishing two things at once, but one is rapidly switching between two different activities. The high rate of accidents seen with individuals who are attempting to drive and text demonstrates the difficulty of accomplishing two cognitive tasks at the same time.

For example, when running, I watched a woman slowly drive toward the stop sign, then go slower and slower. I looked inside before deciding if I would run in front of her (by then) stopped car. She was, of course, texting/reading email or doing whatever with the phone. I ran behind the car (which is actually dangerous as well) because it was clear she didn't see me and would potentially hit the gas after she realized that she was looking at her phone and wasn't actually driving the car.

The human brain cannot "multitask" just as most computers cannot. [actually, multithreaded computers do process things at the same time, which is both wonderful and kind of scary]. Computers can task-switch really fast and pay no penalty as they switch, but apparently, people do.

The penalty for biologically based intelligence is attentional inertia. When we switch some of the attention is still focused on the older task. The time spent between task-switching can be relatively rapid and yield little loss of productivity if the cognitive load is small. Chess masters can play multiple games at the same time because, for them, each game is actually a relatively simple task.

As an example, for short-term task switching the delay can be up to 27 seconds for simple verbal actions when driving. Typical interruptions have long-term consequences. The exact figure is probably not obtainable, but the data is clear that we are not computers - we pay the price for distractions and task switching.

How about even more complicated cognitive tasks? Activities especially those requiring high cognitive activity take some significant time to return back to their previous level of efficiency. Since it takes time for human brains to recover from task switching/distraction, with each interruption, we lose time and focus, and it takes us time to recover. For more complicated tasks, some estimate 23 minutes and 15 seconds [not 16?] to recover from a distraction. Others identify 10-minute effort to get "back on track." Assume that with each one it takes 5 to 15 minutes to get back to where you were (full speed ahead, making progress). The more interruptions, the worse it gets. Eventually, we don't do either task very well. In reality, if they come more often than 10 minutes most likely one is actually never hitting full speed concerning focus. 

In other words, if one is pondering the future of the company and designing a mission statement, it is best to stay on that task and not multitask when phone rings, or someone else asks for your attention, or a new email shows up.

The author attributes his desire and interest in multitasking to undiagnosed or undiscovered attention deficit disorder. Whether that diagnosis is accurate or not, the point is that his approach to problems uniquely works for him. One might also argue that it not only works for him, but it works with the enterprise that he is trying to start. In contrast, the typical recommendation based on the above reality is to focus and pay careful attention to the task at hand. One must attempt to reach a conclusion before moving on to another action. As an aside, most treatment of ADHD stresses the need to have a thoughtful plan to guide activities and to decrease distractions to increase the ability to focus and improve productivity.

So stay focused, but don't get stuck on a single task. Switching a function to another one is the proper choice when one is not making progress or realizes that the task is far more difficult than initially anticipated. And, emergencies do arise where one has to stop one task and pick up another one. But again, one is not multitasking, one is redirecting attention based on priority. In this case, when the fire is put out, go back and address the more minor concern.

And when you are driving, please don't use that time to develop your mission statement.

References:

• Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.
• Attentional inertia and delayed orienting of spatial attention in task-switching. Longman, Cai S.; Lavric, Aureliu; Munteanu, Cristian; Monsell, Stephen Journal of Experimental Psychology: Human Perception and Performance, Vol 40(4), Aug 2014, 1580-1602. http://dx.doi.org/10.1037/a0036552 [full article]
• Gloria Mark,
  • Book: Multitasking in the Digital Age (Synthesis Lectures on Human-Centered Informatics)
  • Mark, G., Gonzalez, V., and Harris, J. No Task Left Behind? Examining the Nature of Fragmented Work. Proceedings of CHI’05, (2005), 113-120.
  • Gloria Mark, Daniela Gudith, and Ulrich Klocke. 2008. The Cost of Interrupted Work: More Speed and Stress. In Proceedings of the SIGCHI Conference on Human Factors in Computing Systems (CHI '08). ACM, New York, NY, USA, 107-110. DOI=http://dx.doi.org/10.1145/1357054.1357072
  • Video
  • Interviews:
    • Too Many Interruptions at Work?, 
    • Worker, Interrupted: The Cost of Task Switching
• Iqbal, S.T. and E. Horvitz, Disruption and recovery of computing tasks: Field study, analysis, and directions, Proceedings of CHI 2007, 677-686.
• Sanbonmatsu DM, Strayer DL, Medeiros-Ward N, Watson JM (2013) Who Multi-Tasks and Why? Multi-Tasking Ability, Perceived Multi-Tasking Ability, Impulsivity, and Sensation Seeking. PLoS ONE 8(1): e54402
• Articles:
  • Brain, Interrupted - a 20% drop in score from an interruption
  • How Frequent Task Switching is Ruining Your Productivity
  • The Science Behind Task Interruption and Time Management
  • The distraction economy: how technology downgraded attention - Tomas Chamorro-Premuzic
• Nicolas Carr: The Shallows: What the Internet Is Doing to Our Brains

Photo Credit: Airman Sadie Colbert Released 150802-F-MZ237-054.JPG. On official US Air Force Government Website

To Succeed You Need to Risk Everything and be Stubborn - NOT! (ENT 630-1)

Chapter 2 of It's a Jungle in There demonstrates the humor value of the book and explains the book's title. It also provides evidence of why the book offers poor and simplistic advice for the entrepreneur.

The author presents a story in which he intends to demonstrate to venture capitalists the idea of a restaurant with a jungle theme. His tactic is to convert his house into a jungle.  He proposes this as an example of why the entrepreneur must have sufficient passion and take necessary risks to succeed.

His strategy is a classic "throw in all the chips" type of gambling based risk-taking. One puts all one's effort into one potential solution and risks everything. Further, it demonstrates little planning regarding the overall business with the only emphasis focused on highlighting the desire to create something new based pm an inspiration. Overall, it is not surprising that the potential funder was dubious despite the fact that his family and friends thought the house was impressive. A house lit up for the holidays is similarly impressive, yet no sound investor would see such a home as evidence of a potential investment in a holiday-themed enterprise (or hasn't yet).

In the process, the author mortgaged his house and spent $400,000 on alterations to switch it into a jungle.He spent several years trying to convince others that a restaurant was a good idea using his house as a demonstration. It appears that only one fish caught this bait and it took 2 years to real it in.

In the process, he did not pay his gas bill and engaged in illegal activities associated with stealing access to the resources of the gas company to keep his house warm (and his jungle viable). It's unclear how many other code violations he could be accused of in the alterations of his home. But it's likely that his use of electricity violated the electrical code. He angered others around him by turning a residential neighborhood into a demonstration of a concept. With the jungle alterations probably placed other houses near him at risk of fire and likely decreased their value. Most communities would have shut him down, causing him to lose the entire investment.

The money he used to alter his home was most certainly wasted and would not add value in the long-term. Also, all the alterations would need to be reversed yielding additional expense.

Further, many advisors do not recommend mortgaging one's house to obtain capital to engage in an entrepreneurial pursuit. There are several good reasons. In addition to the reality that if one loses, then one has lost a place to live, there is the more logical question if this is a good strategy. In fact, the additional stress of knowing that failure means losing a roof over one's head may cause someone to take less risk because the repercussions are so grave. In his case, such reckless behavior was not an issue as he apparently was going to accept any risk to achieve the goal obtaining the venture capitalist interest and achieve his passion. However, such reckless abandon is not typical behavior even for entrepreneurs.

The author presents his approach as the only solution in which he could have launched his entrepreneurial pursuit. He does not describe getting input from any other person before embarking on this extreme strategy. Had he asked for input (say a potential customer) a more efficient way to spend to $400,000 would be to set up a coffee shop with a jungle theme. Although the coffee shop might not have been quite as extensive as he proposed, it may have been sufficient to demonstrate the value of his concept. The coffee shop could have provided a potential revenue-generating example of his jungle themed restaurant. Customers could guide steady growth by asking about interest in decor changes, menu additions, meal preferences, and pricing. If successful, he might not have needed to seek venture capital funding to grow the coffee shop to a more extensive restaurant. Bootstrapping this process may have been a far more efficient and effective way of achieving his results without engaging in illegal and reckless behavior.

To summarize, Chapter 2 violates any good advice one might give an entrepreneur. Actually, perhaps it provides excellent advice - do the opposite!

Reference:
Schussler Steven, Karlins Marvin. It’s a Jungle in There: Inspiring Lessons, Hard-Won Insights, and Other Acts of Entrepreneurial Daring. Vol Reprint edition. New York: Sterling. February 7, 2012.

Photo Credit: Bengal tiger in jungle-1920x1080.jpg. Author Hineshvalayil. 7 June 2016. This file is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.

What do you want money or power? (650-7)

Entrepreneurs are often told that the founder must struggle with a "control versus wealth" dichotomy. So we ask budding entrepreneurs, "Do you want to become rich or do you want to be in charge?" If the assumption is that the entrepreneur is solely seeking capital appreciation , we may advise the Founder CEO to give up control as fast as possible, if a faster runner comes along you should give the baton to them, right? The more folks rowing your boat the faster it will go.

In fact, this is an artificial construct that mirrors the assumption that monetary wealth is the only way to measure value. Many folks decide that because they can't measure it it doesn't exist. Are you captive to that false assumption? If so, then a single yardstick, capital appreciation, can fool you (and prior economists) to determine that that yardstick is sufficient proxy for value.

Craigslist, Wikipedia, Apache, Linux, MySQL, LibreOffice, and Firefox are all enormously valuable yet their success did not translate to capital appreciation.Today's entrepreneurs are not the Robber Barons of old; it is rare that only motivation is money. Most folks have a sense of fairness, ethical behavior, environmental sustainability, equity, and positive impact. At some time these other values will challenge a steadfast emphasis on monetary gain. As one replaces "wealth" with "value" the dichotomy falls apart.

Control and value are not dichotomous. Tight control can yield or destroy value, as can lose control. For example, a lack of control by the founder can generate a lack of value placed on social responsibility and subsequent production of a company with minimal or negative social impact. In fact, that choice may lead to destroying monetary value as well if the customers also value social impact. Do folks really think that one can launch a successful company that sells a product that kills people (e.g., the tobacco industry)?

If the personal definition of value is more nuanced and a non-monetary reason for a desire for control is defined, a simple function won't do. To be fair to the entrepreneur and guide them in the choices they need to make we must develop a more broad definition of the tradeoffs associated with value creation.

The first step is to define the personal value of control. 

• Do you want control because you have a vision of something that is truly unique? 
• Do you want control because otherwise you have no clue what you do with your time?
• Is the purpose of control to ensure that you and only you tell you what to do? 
• Do you want to be invcontrol because you get bored doing the same thing? 
• Do you seek out flexibility to engage in opportunities you didn't foresee?

Alternatively, are you tired and would rather be a spectator than a player?

Value too can vary. All these models of control seeking and avoiding can achieve different types of value.

• Where does social responsibility fit in? 
• Do you care about externalities? 
• Is compensation parity an issue?

The control vs. value debate is thus not a battle or a tradeoff, but the start of an internal and external conversation, and an exploration of how the two relate for you. That isn't as simple as a dichotomous model, but our brains are pretty sophisticated. Reducing motivation to two options was inevitably simplistic.

• How much control over the direction of the startup do you want and what are the personal and external motivations? 
• What value do you want to create? Assuming there are multiple components, how do you rank them in importance or weigh them?
• If it turns out that you cannot achieve all your potential values, which one is more flexible for you. What value will you give up?
• Most importantly how does your being in control map to obtaining value? In other words, without your efforts would the value still be realized?

Answer the questions now and write them down. Later when an investor asks you to change your control or the direction of the company, you'll have an answer and a guide for what direction to go. Over time, one's desire for control changes as does what we value. Be prepared to ask the questions again; the answers might not be the same.

To summarize, the vision of an entrepreneur as someone who wants to become fabulously rich or powerful is pervasive. And we expect that to achieve the goal they need to tirelessly work 80+ hours a week and demonstrate to third-party investors on a daily basis that they are willing to forgo everything to make money for them. Instead perhaps entrepreneurs are people with new ideas who want to work with others to launch them. Entrepreneurship in America is actually decreasing, despite all the resources that are available here versus elsewhere in the world. Perhaps in 2017 we should stop focusing on burning out entrepreneurs by locking them into a treadmill assuming that value equals money, and instead focus on capturing their creativity and energy.

Photo Credit: Omnidirectional treadmill immersive simulator.JPG Author: David Carmein Licensing: Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License,

Should Entrepreneurial Finance Calculations include Non-Monetary Impact? (650-6)

We all have assumptions that we don't question. In the Venture Capital world the assumption is that most new startups will fail, a few will have middling performance which basically returns the initial investment, and a few will be "superstars". The latter will return the bulk of the capital that's invested by the venture capitalist. This expectation assumes an emphasis on capital appreciation is the only goal of funding; that is, the goal is to extract capital from the very few "winners" and to discard the "loser" companies. 

Alternatively, I would argue that is it possible that discarded companies failed because the venture capitalists in their focus on capital potentially destroyed what was unique in the company through their manipulation and overemphasis on money. Had they showed more respect for the company's desire for social responsibility and corporate culture then the start up would have retained its value and grown. Perhaps not as quickly but potentially in a long-term way. 

Admittedly, such an emphasis may mean that the bright stars of their funding do not burn so brightly. So they end up earning less of return on their investment. And potentially VCs have already done this calculation and made the decision to stay with the status quo.

However change tends to happen whether you do not accept it or not and eventually this model may fail. How could that happen? The goal of capital appreciation assumes that it is aligned with the goals of others. If staff and officers develop other priorities (e.g., B Corporations) then the model that emphasizes accumulating cash-based wealth will be too simplistic and miss other means to obtain value. The venture capitalist will need to adapt to a model that values more than just capital appreciation and return on investment. 

That may sound fanciful (or naive) but we already see in the sharing economy that people need less. For many the phone is the only device they need and will soon be the only computer. The foldable screen will even remove the tablet. Ride sharing is eliminating cars and autonomous cars will further that. Even housing is migrating to less expensive model requiring fewer "things." Just in time delivery of things is reducing the need for personal inventory and VR allows one to explore and connect at lower cost. So needs are changing and capital is just one of many needs.

So today's business plan is full of money in, money out, buyers, sellers, income and expenses. My guess is that tomorrows business plan will also include non-monetary value in/out. It will also identify externalities, that is negative impacts on society that won't show up on the balance sheet but will be a cost to society. And investors will shy away from business plans that suck in value but provide little non-monetary value in return. And companies that create enormous value by passing on the negative value to society will fail to get funding. 

Photo Credit: Author: Greenberg, Arthur, Environmental Protection Agency. (12/02/1970 - ) Title: HUGH STRIP MINING MACHINERY IN OPERATION NEAR DUNFERMLINE IN FULTON COUNTY. FULTON COUNTY HAS BEEN, AND IS, A CENTER FOR STRIP MINING IN THE STATE, April 1973, This media is available in the holdings of the National Archives and Records Administration, cataloged under the National Archives Identifier (NAID) 552417.

Startup Scaling Issues (600-7)

The founder might ask "am I a Bill Gates or a Mark Zuckerberg?". In other words, "Will I be the leader of my company many many years from now?" "Will I retain the powerful position of CEO forever?"

Leaving aside the unique talents and skills of those two individuals, carefully look at their businesses. Microsoft entered the software business for PCs when it didn't exist. Its major potential competitor became its supplier of business, that is IBM. IBM did not see the value in software and allowed Microsoft to control that market. This unique situation that will never happen again. IBM's foolish mistake is a lesson for the history book. Further, in a connected world, there will never be an opportunity for a company which can grow in isolation for so long and allow an individual to develop the necessary CEO skills at a slow and methodological pace, as Bill Gates was able to. Look at the autonomous car market. Can you imagine a few companies that are make cars and one recently created company writing the software to drive them?

Regarding Facebook there were multiple other social media platforms before Facebook so time was moving more rapidly then it did for Bill Gates. Still, Mark Zukerberg was able to grow his idea slowly and incrementally and reach a very specific audience with a successful product. But this all happened before Facebook was created. In today's highly connected world a new idea with potential would become immediately available, probably via Facebook. If the CEO does not grow the idea rapidly it will be easily copied. Today, it will be easily copied by Facebook or Google or Apple or Amazon. Look at what happened with Snapchat and Instagram's rapid copying of its core features. There simply is no room for growing slowly anymore in today's startup culture.

So Founder CEOs must assume from the beginning that they will likely not be able to adapt or acquire the skills required to grow the company at the incredibly rapid pace required in today's business climate. As a visual analogy, the season change too quickly now. for a tree to adapt and survive.

The question then becomes how can the CEO founder prepare for the inevitable?

As always burying your head in the sand is probably not the right strategy. Proactive Founder CEOs will seek out feedback on their performance from the board and self assess their skills and talents on a regular basis. Are they accomplishing their goals? Do they perceive that a new challenge is coming which will be outside the skills they need? If so, the Founder CEO must be proactive and initiate the search for a new CEO since finding the right CEO is not necessarily an easy or rapid process.

By initiating the change in CEO, the Founder CEO actually increases the likelihood of continued involvement in the company at a management or board level. In resisting the change they guarantee that eventually they will be pushed out and there will be an unpleasant transition. In the worst case scenario, that transition tanks the company and the Founder CEO has lost everything they hoped to gain in terms of both financial wealth as well as the ego support for the creation of their company.

As the startup grows this is a significant problem for other founders as well. It is unlikely that they are still the best person for the job they were given and the titles they received. They too must self-assess and be ready to yield to a person who has more talent to handle either the existing challenges or the coming challenges of a rapidly growing company. If they don't see it, then making them see it is the job of the CEO. And a Founder CEO struggling with this decision  proves yet again to the board that the Founder CEO isn't the right person for the job.

Similarly, there are likely to be non-founder initial hires who've been elevated to higher positions than they their skills justify. They may also be paid more then should be based on their skills and talents. The founder and supervisors of such staff must be able to accept the potential replacement of such individuals even if they are family members. Resisting that replacement merely delays the day of their replacement. And again proves that there are leadership problems at a higher level. The positions of the initial hires are not guaranteed. New leadership will inevitably proceed with staff changes that are required based on company growth.

The message above is not one of hopelessness but the need to acknowledge that the company is growing and in today's business market change will come quickly. With growth comes change and every founder in every position should recognize the high likelihood that over time a more qualified person should take over their position.

Reference:

1. Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 10.
2. Solomon Glenn. Transitioning from a startup to growth-stage company. Fortune. February 11, 2013.

Photo Credit: Four Seasons - Longbridge Road. joiseyshowaa Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0). See a blog about this tree.

Investor Dilemmas of the Life Scientist (600-6)

So where are you going to get the money to start up?

For the life scientist, this is a relatively straightforward question. The life science startup requires enormous capital. And the process of approving a device or a pharmaceutical is a long and torturous one. The company will inevitably need venture capital and lots of it. Patent law and the ease of creating "me-too" solutions that don't infringe on your IP will demand speed on your part. If you are trying to launch a tech company your prospect of slow growth is equally dim. In today' hyper-connected, competitive world ideas need to be quickly transformed from "innovative" to "done".

To achieve VC funding, SBIR or angel funding is most likely the first step unless you already have made substantial progress and can capture the enthusiasm of venture capital. When you find an angel they will probably self-select for your field. Even so, money from someone who lacks expertise in the life sciences has less value due to limited social connections and the quality of their guidance. You don't need the angel to understand your technology, but you will likely need their help to fill officer positions. So make sure that they understand and have expertise in a life science organization.

Funding issues also impact the makeup of the board. When you obtain VC funds, the VC will want a board filled with the representatives of the investors, not dominated by the founders. The venture capitalists will likely replace the representation of angels on the board. And some of the founders will go too. This is an outcome which should be not rejected but embraced. The skills to sell the company are going to be paramount going forward, and it is unlikely that the life science founders have the connections or skills to exit the business via a sale.

I say "sell the company" because the economics of device and pharmaceuticals is such that it is incredibly unlikely that a small start-up can grow to compete against huge established pharmaceutical companies or device manufacturers. Nor is it likely that the startup will have access to the marketing budgets required to bring a new product to market. Public market funding (IPO) is rare, so you are left with a sale. Not only is the need for money predetermined, but the likely exit plan is set as well.

These limitations are actually helpful. In other startup models, at the earliest stage many founders extract funds from family and friends. Although such money is easier to come by (for some), such money can lead to subsequent problems when the company runs into trouble. It's hard to walk away from a parent, family member and friend with a quick "it didn't work out, sorry." Self-funding too has issues. Self-funding similarly tends to receive less scrutiny than investor finding due to entrepreneur enthusiasm and subsequently lead to a greater chance of failure. With failure comes family stress, blaming, and self-regret. It's better that a failed startup wasted some of your time and energy than it puts your home at risk. Lastly the need for cash and the typical lack of personal capital limits debt financing, including SBA financing. That's probably just as well because that debt too will likely be backed up by your own holdings, again putting your home at risk.

So the life science entrepreneurship can actually welcome the limitations on funding in their enterprise. The limitation is an opportunity to focus on other details. There are plenty of other challenges facing the entrepreneur and demanding attention. In fact, the need for VC will lead to a more complete and thoughtful investigation of the idea and careful tracking of progress made. Such diligence is key to success. But don't get caught up too much in the details, the clock is ticking!

Reference:

1. Wasserman Noam. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. Princeton University Press. March 25, 2012, ch 9

Photo Credit: Many dollar banknotes. Date 19 February 2009. Author Jericho. This file is licensed under the Creative Commons Attribution 3.0 Unported license.