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by Michael Blanding
Entrepreneurs aren’t short on ideas for exciting new products or companies, but they are often short-sighted when it comes to finding ways to fund and build those projects.
“There is a huge amount of discussion about how you come up with a new entrepreneurial possibility, Yelp for dogs or Uber for cats, or whatever,” says Andy Wu, assistant professor of business administration in the Strategy unit of Harvard Business School. “What’s overlooked is a comprehensive framework for how you mobilize the resources—such as financing, employees, and partners—to bring the idea to life.”
Along with colleagues David R. Clough, Tommy Pan Fang, and Balagopal Vissa, Wu recently reviewed how the entrepreneurial community thinks about acquiring resources, publishing their work in the paper, Turning Lead Into Gold: How Do Entrepreneurs Mobilize Resources to Exploit Opportunities? in the Academy of Management Annals.
Their conclusion: Far too much focus is placed on raising money and signing formal contracts, but far too little attention on informal and non-financial resources that can make or break a new business.
“For example, [startup] accelerator programs dedicate a huge amount of programming on how to pitch to raise money, and these programs generally culminate in a ‘demo day’ presentation to venture capitalists,” Wu says. “We think that is totally the wrong mindset.”
While financial capital is important, generating human capital and social capital can be just as important, if not more so, and often gets short shrift. “We think there should be a ‘demo day’ for hiring employees or developing social connections as well,” Wu says. “The challenge to raising financial capital is often related to a lack of those other resources.”
Coming up short
Wu and his coauthors identified three areas in which most entrepreneurs come up short in the process of developing a new business venture: searching for resources outside one’s immediate connections; accessing non-market resources; and transferring resources through informal transactions.
Searching for resources outside one’s immediate connections. When it comes to hunting down resources, most startups naturally start with the people they know. “A lot of the existing research shows that entrepreneurs search very narrowly,” says David Clough, assistant professor at the University of British Columbia’s Sauder School of Business, and coauthor of the paper. “There is a tendency to go only to close friends and family members.”
Beyond that, entrepreneurs tend to network with a narrow set of investors who may be able to fund their ventures. Few academic papers have examined the efficacy of more proactive networking. In the 150 papers the researchers examined, only 30 looked at this strategy. Some behavior studies, however, have shown that entrepreneurs with an outward-looking mindset can be more successful in finding better partners outside of their immediate network.
Accessing non-market resources. Once entrepreneurs identify the people and networks that may help them succeed, far too much effort goes toward translating that into financial capital. A startup can benefit more from advice and mentorship from a successful person in their industry, or in-kind donations of legal or financial services, than they can from a mere infusion of cash.
Companies can procure those resources through narratives and storytelling, or by seeking out members of a common group. One company that has succeeded in this regard, says Wu, is Cotopaxi, a Salt Lake City–based creator of outdoor apparel that Wu explored in a case study for Harvard Business School. Its founder, Davis Smith, launched the business with a dual goal of creating excellent outdoor equipment and helping to relieve global poverty. In telling his story, Wu says, he was able to recruit employees and mentors who were inspired by the authenticity of his passion.
Having a social mission is not the only way that entrepreneurs can connect with potential investors and employees. Communities based around a sport or a common connection such as a university can also be a rich supply of financial and non-financial resources outside the traditional VC realm.
Transferring resources through informal transactions. Entrepreneurs tend to focus too much on formal contracts in order to transfer knowledge or other resources to their company, rather than less formal arrangements, the researchers learned. “With early stage tech companies, there is a huge emphasis on working with mentors,” Wu says, “but the entrepreneur often doesn’t know exactly what they need from a mentor. That process is really hard to write a contract for.”
Instead, entrepreneurs must rely on trust and mutual understanding, putting effort into building a strong relationship rather than drawing up a formal legal contract. Yet, those relationships are rarely studied by academic researchers and are often devalued by entrepreneurs themselves in favor of more formal arrangements.
The combination of these three attributes—proactive networking, non-market logics, and informal governance—can create a virtuous circle, the researchers say, with each step in the process opening up new opportunities beyond the traditional funding mechanisms.
By leveraging less traditional means of support, a company can ultimately do more with less, conserving valuable financial resources, and bootstrapping for longer until they are able to generate all of the resources they need to succeed.
“The path of least resistance is to use existing relationships, get supporters on board, and raise financial capital,” Clough says. “Instead, entrepreneurs should consider the full menu of resources that a company can acquire and employ.”
May 8, 2019 at 10:41AM
Forbes – Entrepreneurs