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Caveat lector: There are many approaches to entrepreneurship available today. Many of them are different ways of saying the same things. Many different descriptions of the entrepreneurial process may reflect differences in tastes for words. Some may reflect differences in substance. Entrepreneurial success comes from careful thought, common sense, and persistent execution. This Manual is one outline of the entrepreneurial process. It is intended to capture the general principles of entrepreneurship and to apply to all forms of new venture creation. Two basic principles lie at the heart of this approach (expressed as the first two laws of entrepreneurship below). The first is that entrepreneurship begins with the recognition of a real need. Entrepreneurs can change the world, but not by imposing their will. Rather, they change the world by tapping into an unmet need and devise a creative compelling solution. The second is that successful entrepreneurship requires finding a resource efficient path to a viable model — a path that involves continual learning and adapting to new information.
We define entrepreneurship as
the social process of realizing an innovation by means of a new venture.
This definition includes the types of start-ups that we normally associate with innovation-baed entrepreneurship whether they are medical device, technology, consumer-oriented, or energy ventures. The definition also encompasses what we think of as social ventures if their goal is to realize an innovation designed to create a social good. The definition does not include ventures that are purely imitative. Nor does it include so-called intrapreneurial projects within a larger firm, nor solo efforts to create, for example, a new consulting business. Many of the ideas described here are applicable to those ventures but the focus of this manual is ventures that fit the more classic notion of an innovation-based new venture realized as a team effort.
Our definition of entrepreneurship has important implications for entrepreneurial action.
To explain the process of entrepreneurship, it is useful to think about the three elements of entrepreneurial action. (This model, of course, applies to human action more broadly.)
The cycle of entrepreneurial action
Naturally, there are many details underneath this simple model. But, if the entrepreneurial team is to be focused and have the greatest chance of success, it is important to be clear about the guiding objective of each part of this model.
The overriding question to be answered through the learning process is whether the basic idea of the venture is an opportunity worth pursuing. Understanding what constitutes a viable opportunity for entrepreneurship guides the learning process. Planning is deciding what to do and when to do it. Understanding the basic choices that a new venture will make provides a framework for entrepreneurial action. These basic choices fall under the notion of strategy. Finally, the doing part of entrepreneurial action is guided by the fact that resources are highly constrained and must be used as efficiently and effectively as possible. These guiding ideas are summarized in this table.
The fundamental question to be answered is whether the team’s idea represents an opportunity worth pursuing via an entrepreneurial venture. There are five core questions that need to be answered to validate an opportunity. We represent these questions in a simple graphic.
The five dimensions of validating an entrepreneurial opportunity
These basic questions are summarized here but explained in greater detail on the learning page.
1. Is there a market need? This is the fundamental question of any venture. Entrepreneurial ventures are founded on the premise that there is a need in the world that the team can satisfy uniquely or in a dramatically superior way to any other alternatives. Two important concepts related to the need are how severe it is and how pervasive it is. This is the most important question as unless there is a real need in the world, there is no possibility of success — no venture.
2. Does the team have a viable solution? In order to answer this question, the team will need to have a full grasp of all the aspects that will make a solution acceptable to the intended customer, and ensure that they all can be addressed in a satisfactory fashion.
3. How will the proposed solution compare to the customers’ alternatives? Answering this question involves understanding all of the customers’ alternatives and how the proposed solution compares on the dimensions that matter to the customer. The objective is to find a unique and defensible position, where competitive advantage is sustainable.
4. Can the right skills be assembled to execute successfully on this business idea? Answering this question involves first addressing why the founding team is the right set of people to pursue this business idea. Then, the founding team has to identify what additional skills and capabilities are necessary for successful execution and how they will be recruited.
5. Is the venture worth the investment? Assuming money and other resources are required to pursue the venture, is the potential return worth incurring the risk associated with the venture? A positive answer to this question is required if the venture is to be sustainable.
These questions reflect the perspective usually taken by investors and others in evaluating an idea. Often these questions are summarized by four key questions: 1) Is there a market? 2) Do we have a unique and compelling product? 3) Can we win? And 4) Is it worth it (meaning financially)? Our questions 1 and 2 are slight expansions on the questions of market and product. We have broken the question of winning into an analysis of the skills and capabilities of the team on the one hand and an analysis of the customers’ alternatives on the other hand. Our questions 3 and 4 convey a more comprehensive perspective on what is required. And our question 5 is basically the question of whether the venture is “worth it.”
A critical aspect of the learning process is to decide where to start. Which question should we try to answer first and how should we proceed? Moreover, what is a good answer to a question? What is enough evidence to give us confidence in proceeding? Understanding these things helps the entrepreneur create a roadmap for the early phases of creating a new venture. This first answer to this question is that we always begin by validating the need. This is our First Law of Entrepreneurship:
First law: Always start with the need.
We use a model where the choices a new venture must make fall under four headings, depicted in this picture.
The four dimensions of entrepreneurial strategy
The core idea is that the foundation of any new venture is a match between and market need and a solution. We refer to this as the market/product fit or match.
As the entrepreneurial team explores the market side of this relationship, they discover that customers are different. Although at a high level, many potential customers have the same need, the circumstances, context, and specific details of the need will vary. It is vital that these differences are understood and reflected in the team’s product and “go-to-market” strategy. The team will go through an iterative process of segmenting the market and defining or specifying the target customer. (Sometimes this is referred to as the “beachhead customer” at the outset.)
The term business model is used to denote many different but related concepts in entrepreneurial strategy, including sometimes to refer to the entire plan of the new venture. We use it here to refer to the product or production side of the venture. The target customer refers to the choice of who the venture will serve and the business model refers to how the venture will serve that customer:
· What will be the product or service,
· How it will be produced,
· How it will be described and how demand will be created,
· How demand will be fulfilled,
· What will be the price and other business terms,
Sustainable competitive advantage refers to the choices or investments that the venture makes so that it can reap the rewards of exploiting the opportunity it has identified (rather than some other start-up or incumbent firm). Many entrepreneurs immediately leap to a matrix of competitive products as the answer to this question. Although a differentiated product often plays an important role in competitive advantage, it is never enough to create sustainable competitive advantage. Our framework for sustainable competitive advantage uses the VRIN criteria: a set of capabilities and assets constitutes sustainable competitive advantage they are valuable, rare, inimitable, and nonsubstitutable.
Finally, building a roadmap is making the decisions of what to do when. We think of this process as
managing uncertainty in a resource-constrained environment.
The uncertainty stems from the fact that the entrepreneur is making a large number of assumptions at the outset. The learning process can be viewed as validating these assumptions. But as the team learns, some of these assumptions need to be scrapped or revised. This learning will cause the team to change direction (“pivot”) slightly or dramatically. The resources of the team, initially their time and energy and possibly some money, are very limited. If changes in direction cause the team to have to undo or redo significant amounts of work, they quickly exhaust available resources. Planning in a way that minimizes the wasted work and gives the team the greatest chance of success is captured in our Second Law of Entrepreneurship:
Second law: Make no investment before its time.
Entrepreneurs sometimes ask when is the right time to begin execution, and the answer is almost immediately. Entrepreneurship is about engaging with the world and trying to effect change. But, following the second law, we try to focus on doing the right things at the right time.
As we move to thinking about execution, we use an oversimplified model of execution to clarify the basic ideas. In this model, we have exploration — those activities whose goal is learning — and production — those activities whose goal is to allow customers to use the venture’s product or service. These are clearly different kinds of activity, but the are often going on simultaneously and are interrelated.
The two sides of execution
Exploration: Learning occurs through three basic mechanisms: observation, asking questions, and testing. The foundation is observation. Successful entrepreneurs are critical observers. They see things others don’t — opportunities for improvement, connections between ideas, etc. The dig deep into the world around them.
Entrepreneurs also question and ask questions. They learn by talking to people and asking the right questions. The process of direct engagement with prospective customers may begin quite casually. But it needs to become quite disciplined. Entrepreneurs must be thoughtful about what information they can actually get by asking questions, either in direct conversations or via surveys. There are many important questions that people can not answer. For example, would you use this product? is a question that people usually cannot answer until they try to product. However, there is a great deal of important information that can be gained through the process of asking questions.
Testing is the most reliable way of determining whether there is a real need and whether a solution is viable. Good testing involves a clear learning objective and carefully designed experiments.
Production: There are two basic functions of a firm: making things and selling them. Building or making things involves design and development activities, manufacturing, delivering service, etc. — all of the things that the customer is paying for. Selling comprises all of the activities involved in creating awareness, stimulating demand, fulfilling the demand, and supporting the customer through the engagement with the customer. Obviously, there is not a sharp line between building and selling, but the distinction is very useful as the entrepreneurial team thinks about key activities, roles and responsibilities.
It may seem that the entrepreneurial team engages in a long period of exploration, and then transitions to the production side of doing. However, these two sides of execution go hand-in-hand. As the venture matures, there is a shift of emphasis to the production side, but the exploration side is always present (or should be). Similarly, even when the goal is primarily learning, the production side activities are always involved: communicating ideas in a compelling way, articulating solutions, and creating vehicles for testing (prototypes, etc.).
It is helpful to think of the phases of entrepreneurial action and how the focus of the team changes as the venture develops. We illustrate these phases with a simple picture.
Phases of entrepreneurship
Although we should not interpret these phases rigidly, they are a useful guide to thinking about the appropriate focus.
Nucleation: This is the phase of exploration, brain-storming, observing, thinking, and discussing. The goal is to come up with a rough idea that seems to be worth taking seriously and investing some energy to develop further. The core idea is a rough hypothesis about an unmet need.
Early planning: After forming an initial idea, the team begins to explore and develop the idea in a more disciplined way. The objective of this phase is both the validate the idea and to develop an initial strategy. This is a period of formulating and testing hypotheses and of frequent adjustments and revisions of the basic idea and the venture’s approach.
Early revenue: Once the team is comfortable that they have validated the idea and have a reasonable plan to pursue their idea, they form a company and begin to offer the product or service to the market. At this point, the team is still open to revisions to their business model, but changes should be smaller and less frequent than in the earlier planning phase. The venture will now be building the various components of a company.
Growth: Assuming it has achieved traction in the marketplace, the company will expand its operations and focus on growth.
We summarize the approach to entrepreneurship we advocate by these two simple “laws.” This manual will help the entrepreneurial team follow this process and give themselves the greatest chance of success.
Always start with the need
Make no investment before its time
Analyze assumptions: comprehensive and distinct
Sequence: according to impact, probability, and cost