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. What’s overlooked is a comprehensive framework for how you mobilize the resources to bring the idea to life,” says Andy Wu.
Wu and colleagues recently conducted a review to examine how the entrepreneurial community thinks about acquiring resources. 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.
“ENTREPRENEURS ARE MORE SUCCESSFUL WHEN THEY CAN LEVERAGE NON-MARKET, NON-PECUNIARY RESOURCES.”
“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. “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 identified areas in which most entrepreneurs come up short in the process of developing a new business venture. Such include, 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.
“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. “Often, entrepreneurs are more successful when they can leverage non-market, non-pecuniary resources,” Wu says.
For example, 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, is Cotopaxi. Its founder, Davis Smith, was inspired by a young boy he met begging for money during a trip to Peru. “That experience authentically changed how he and his wife viewed the world,” Wu says.
He 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.
Besides, financial and non-financial resources are not mutually exclusive. In Cotopaxi’s case the social mission resonated with for-profit investors, who became more likely to invest in a company with a social impact mission.
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.
“The vast number of angel investors have non-financial motivations,” Wu says. “For many, it’s a way to feel engaged with young entrepreneurs and tied to a community, rather than a way to make lots of money.
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, with each step in the process opening up new opportunities beyond the traditional funding mechanisms.
YOU HAVE TO GO OUT AND MAKE YOUR OWN NETWORK HAPPEN.Andy Wu
Once you have that network, you have to engage with people not by offering more money; but by offering a common connection or larger goal, through a relationship based on trust.”
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.David Clough.
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Culled from: Harvard Business School.