This is the next installment from my eavesdropping on a fascinating conversation—in the after-hours of the first evening of a recent entrepreneurship conference—between Dr. Abraham, a world-weary experienced entrepreneur, and a young, energetic hot venture capitalist named Doug.
The first part of the conversation covered the fact that 80 to 90 percent of startups fail, despite anyone’s best efforts. Next, it went through exactly why they fail; it became very obvious that despite statements to the contrary, not everyone is cut out to be an entrepreneur. After that, Dr. Abraham elaborated on the first vital element of a startup business. Then, they argued over the difference between entrepreneurship and management.
Now the talk turned to what might be the most crucial ingredient for an entrepreneurship, aside from its product or service: the money for its operation.
Interestingly, it seemed to be the first time during the whole evening that Doug was successfully challenging Dr. Abraham. “Well, you’ve given me a lot to think about tonight, surely,” Doug said. “You’ve shared a lot of lofty ideals. The actual talents and responsibilities it takes to become a real entrepreneur. You’ve put forth the theory that entrepreneurship—they way you have described and the way you seem to know it—is actually dead, simply because there aren’t that many people who can really pull it off. And statistically, you’re right, there aren’t that many.
“But let’s take a little time-out, and come back down to Earth for a moment. Let’s take a look around this conference. The actual fact is, a good number of startups will be funded from this conference. It’s what keeps the hopefuls coming back. An entrepreneur gets an idea, then seeks out an angel or seed investor, or a series a, b, c or so on.”
“What’s your point?” Dr. Abraham asked.
“My point is, that’s how it’s done. Today—and as far as I can see, well into the future—that’s how startups are created. A whole industry has now grown up around this operation. And it’s keeping new businesses coming up, all over the world! So something has to be working.”
“All right,” Dr. Abraham said. “But what you’re describing still isn’t true entrepreneurship. Which is why such a high percentage of those startups you fund will indeed fail.”
“Now, why isn’t that true entrepreneurship?”
“Because real entrepreneurship is, as I said before, the taking of one’s own risk. Financially, it is the investing of one’s own money—for a risk the entrepreneur is very familiar with, for a real opportunity that the entrepreneur has isolated.
“An entrepreneur understands the crucial value of liquidity. The employees of that entrepreneur don’t care at all where the money comes from, as long as they get paid. And get paid they must, if they’re going to stay there. In a similar way the rent and utilities must get paid, restocking or manufacturing fees, and so on.
“In order to achieve that liquidity, an entrepreneur will often make many sacrifices, including their own salaries and trimming to all but the most vital of living and operating expenses. Real entrepreneurship is knowing the real risk if that liquidity runs out.
“So, my friend, you’re right—the whole industry is heading the way you say it is. But I will continue to maintain that is the wrong direction—simply because an entrepreneur, if he or she isn’t playing with their own money, loses touch with the reality of what it takes to start and run a business.”
“But,” Doug argued, “Money is money, isn’t it? It’s all going for the same purpose!”
“Not so,” Dr. Abraham said. “A person will normally act very differently when risking their own money as opposed to risking someone else’s.
“There was a very interesting study done a few years back regarding automobiles, by Mercedes. They sampled a group of businesspeople utilizing their own cars for work, and compared them to a group that was provided company cars, leased by the company for them to drive. After 1 year, it was found that the owned cars were in near-perfect condition. Whereas the cars that were simply provided to employees had an average of 10 years of wear on them, within that 1-year period. The provided cars weren’t the property of the people they were provided to—hence the people took far less responsibility for them.
“It’s the same with money. It’s the power of intrinsic capitalism. If you are only managing the capital of others, it’s not your capital and it’s a rare person indeed that would take the same responsibility as if it was theirs.”
Doug nodded thoughtfully. “Okay, then. So what if an entrepreneur has a great idea, but doesn’t have enough money to start it up?”
“Very good question. If that is the case, then the question becomes: Who are you financially getting in bed with? Because right at the beginning, if that’s the way you’re going to go, it had sure better be the right person or people. Right at the beginning if you partner with someone simply out of desperation, in the long run it could ruin the company.”
Dr. Abraham reached down for his briefcase, pulled it up onto the table and opened it. He retrieved a well-worn paperback book, and held it up for Doug to see: Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel. He placed the briefcase back under the table.
“Yes, I’m very familiar with that book,” Doug said.
“Very good,” Dr. Abraham said, now leafing through the paperback. “There are some very applicable quotes to our discussion in here.” He stopped at one point and read aloud: “A startup messed up at its foundation cannot be fixed.”
He flipped more pages, stopped once again, and read: ”Companies are like countries in this way. Bad decisions made early on—if you choose the wrong partners or hire the wrong people, for example—are very hard to correct after they are made. It may take a crisis on the order of bankruptcy before anyone will even try to correct them. As a founder, your first job is to get the first things right, because you cannot build a great company on a flawed foundation.”
Dr. Abraham flipped to another section of the book, and read: “The founding moment of a company, however, really does happen just once: only at the very start to you have the opportunity to set the rules that will align people toward the creation of value in the future.”
“I understand,” Doug said. “It all makes perfect sense. But how do you find the right partner or partners?”
“That is the crucial point,” Dr. Abraham answered. “I have a friend that I mentioned earlier that took a great risk coming to America to found a company. Very fortunately he has found long-term partners that understand his vision and thinks the way he does. One of them has been a partner for over 10 years.”
“But not everyone will find the right person, at least not right away.”
“Very true. In such a case, maybe it would be wiser for the entrepreneur to wait, rather than blindly rushing forward. In an example outside of finance, if you for some reason desperately wanted children, would you marry the first woman you could find, that would marry you, just so you could have babies, without any consideration for compatibility or things in common?”
“Never!”
“Well, in that a business is much like a child that you have and then rear, it’s a fair example. You need a partner that will truly believe in you and work with you to raise that child.”
Doug nodded. Then he asked, “All right. Anything else you think I should know?”
Dr. Abraham said, “Yes—there is one final, very important point.”
Join us next week to see how the conversation concluded.
