The Hindu Business Line : `Don't take VC money too early'

`Healthy conflict within a culture is key to innovation and creativity, two key drivers to entrepreneurial growth,' says Verne Harnish. Read on for more gyan.

It is not surprising that one of Verne Harnish's hobbies is magic. The founder of two world-renowned entrepreneurship organisations — the Young Entrepreneurs' Organisation (YEO) and the Association of Collegiate Entrepreneurs (ACE) — Harnish has been helping thousands of entrepreneurs network and benefit from one another's experiences, which is nothing short of magic.

And as CEO of Gazelles Inc, an "outsourced corporate university for mid-sized firms," he helps executive teams of such firms affordably receive the kind of development that top executives at major firms get. Coming from someone who has been closely associated with entrepreneurs for two decades, many of Harnish's statements make for radical and unsettling reading. Like, when he says, that one surprising commonality of all good entrepreneurs is "an avoidance of risk taking. Yes, the best entrepreneurs are actually risk averse - they do things that appear risky to others but they always have a plan B or C (back door), which they can use to mitigate the risk. Pure risk takers are just gamblers. Great entrepreneurs are very methodical about how they do things." Or when he says that cradles of enterprise and innovation such as Silicon Valley get built when people get tired of working for a company or entrepreneur "that is able to amass a significant talent pool, and then drive them all away!" He cites the examples of Fairchild and Oracle, which succeeded in attracting outstanding talent and then caused most of them to leave and start up their own firms. "Look at all the companies launched by ex-Oracle executives who just couldn't stand working anymore for (Larry) Ellison! This is how it really happens. A lot of Government initiatives meant to spur creativity, innovation and enterprise are a waste of resources and time."

Is there, then, nothing that the Government can do, other than get out of the way? "Keep taxes low, ensure a judicial system that creates an environment respective of contracts and provide sufficient infrastructure."

While Governments may differ in their approach, there isn't much difference, in general, among entrepreneurs from different cultures, according to Harnish. "The main difference is the propensity to do business outside their own market. In the US, we have such a huge market that there has been no need to venture beyond our borders. In contrast, entrepreneurs in New Zealand have to go global early on if they want to build a substantial business. The other difference is how open the culture is to conflict. Healthy conflict within a culture is key to innovation and creativity, two key drivers to entrepreneurial growth." He adds that it is important that a top business leader starts a networking organisation locally so that entrepreneurs, investors and support service people can meet and get to know each other. "That's why I launched YEO. Get a critical mass of entrepreneurs together — they tend to be loners — and great stuff will happen."

YEO's first chapters were launched in 1990. Today it has over 6,400 members in 41 countries across five continents. The combined sales of members' companies are $85 billion. Most interestingly, the average age of members is 38. Does age play a crucial role in the success and growth of an entrepreneur? Harnish believes young entrepreneurs can build huge organisations early. He cites the examples of Steve Jobs, "who took Apple to almost $2 billion by age 29; Gates took Microsoft to $256 million before age 30; and Michael Dell smashed both of their under 30 records." So there is no correct age for someone to take the entrepreneurial plunge?

"Entrepreneurs come in all ages and start at all points in life. And all traits are both nurture- and nature-driven." However, he adds, what they do have in common are a "thirst for learning and a bias for acting quickly on what they learn — these are the two traits I look for in CEO students that have participated in my programs over 25 years. And without exception, there's a direct correlation." As for the choice between new and old industries, he says: "Newer industries do provide a natural benefit to younger entrepreneurs. But more broadly, what young people bring to any industry, young or old, is new thinking. There are no old industries, just old thinking." How does YEO help entrepreneurs grow from good to great? "We provide monthly local education events and various international educational events that help entrepreneurs `keep up' with the growth of their organisations." YEO also organises a monthly gathering of 8-12 members who provide a highly confidential environment to discuss issues facing the entrepreneur and the company. "It is this essential `talk time' that is crucial. You can't sit around and think your way out of a problem as quickly as if you get some talk time with a group of informed friends."

At Gazelles he is able to provide such education for the rest of the executive team. "There are lots of organisations for the top leader, but how do the rest of the executives keep up? We have been filling this gap, which is why we encourage entrepreneurs to bring their entire executive team to our workshops." According to Harnish, the primary reason companies hit a wall is when the business, market or opportunity outgrows the entrepreneur and/or the team. "Whoever learns faster wins. And YEO helps its members learn faster than the competition."

He outlines two important lessons that small companies need to learn in order to break out of their league. "The first is picking a big enough `sandbox' to play in - a market that is large with the wind to your back. The second key is discovering what I call the `X' factor - a 10-30 times advantage over competitors which you can protect." That's how small business grows rapidly, often from millions to billions in a remarkably short span. "Another key driver is growing leaders fast enough to keep up with the growth; you must have processes in place to choose and educate the middle management layers of a growing firm. They will be your biggest asset or hindrance to growth." Many mid-sized companies now take the inorganic route to grow bigger in a short span, but have to contend with clash in company culture. How healthy is this trend? "There has to be a strong foundation company that understands there is no such thing as a `merger,' only an `acquisition.' In fact, we should eliminate the term `merger' from our language - there is no such thing." There he goes again, against the grain. "The acquiring firm must essentially and quickly crush the culture of the acquisition and assimilate the acquisition into their own culture. This necessitates that 75 per cent of the middle and upper management of the acquisition will be gone in less than 12 months." That's not all. He has more shockers in store. "And in many acquisitions, 75 per cent of all employees will be gone in 12 months. Just know that this will be the case and have HR systems in place to replace those people with people that fit the culture of the acquiring firm."

According to Harnish, the only focus of the acquisition should be to "keep the handful of top producing sales people that have the key relationships and the handful of people that serve as the heart and soul of the product or service." Though venture capital money is much more easily available than ever before, Harnish thinks it is critical not to take VC money too early. "A venture must wait until it has nailed down its strategy and has a clear idea of its X factor and then use outside funds to serve as an accelerator." According to him, less than a fraction of one per cent of start-ups should even consider venture capital, and that includes most technology-based start-ups). "So, for 99.9 per cent of small firms, it's not a viable route. These firms shouldn't waste their time trying to secure venture capital. Friends, family and fools, along with credit card debt, are still the most viable routes for funding start-ups."

As an afterthought, he adds: "The biggest mistake entrepreneurs make in their second ventures, especially if they made lots of money in their first, is pouring too much money too early into the new venture. Companies, like children, have several necessary developmental steps they must go through to be healthy and viable over the long term. Short-circuiting these steps is often disastrous. Of course there are exceptions, but I prefer to go where the odds are highest." But how many entrepreneurs even get the chance to get up after their first one fails? "Having a culture tolerant of failure is key! It is one of the most important aspects of the US culture — we are forgiving of failure, which allows entrepreneurs to pick up the pieces and try, try, try again. The media plays a big part in how the culture responds to failure."

As a parting shot, Harnish says: "I have observed over the years that young people who first work for a large company and then launch their business tend to build bigger companies faster. The key is building your network, learning how big companies operate (also makes it easier to learn how to sell to large firms) and making mistakes with other people's money!'

dmurali@thehindu.co.in

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