I am constantly speaking with entrepreneurs, and they all seem to share the same obstacle: securing funding. Sometimes, bootstrapping isn’t a viable option and traditional lenders won’t approve a business loan, resulting in the need for venture capital (VC) money.
Reality check: Less than one percent of U.S. companies have raised capital from VCs. VC money is essentially unicorn money.
I have been fortunate enough to interact with a few VCs over the past several years. One of those venture capitalists is Burak Başel, of Basel Holdings. I asked Başel to lay out the important factors he looks for before investing, which are below.
I am constantly speaking with entrepreneurs, and they all seem to share the same obstacle: securing funding. Sometimes, bootstrapping isn’t a viable option and traditional lenders won’t approve a business loan, resulting in the need for venture capital (VC) money.
Reality check: Less than one percent of U.S. companies have raised capital from VCs. VC money is essentially unicorn money.
I have been fortunate enough to interact with a few VCs over the past several years. One of those venture capitalists is Burak Başel, of Basel Holdings. I asked Başel to lay out the important factors he looks for before investing, which are below.
1. Character of the business partners
The people behind an idea or company and, more importantly, their character is extremely important. You could have the best idea in the world, but it might never get off the ground with the wrong team in place.
“Their reliability, honesty, potential for a long-term relationship and work ethic all come into play. A team who understands their roles and performs them with love and enthusiasm is very hard to beat. I have to feel completely confident in the abilities as well as the character of the team before investing,” says Başel.
You can’t just fill startup roles for the sake of creating a team and launching. You need to make sure each person is highly qualified and possesses the ability to take the business to the next level. For example, a CFO with limited financial experience is a disaster waiting to happen, while a CMO with limited marketing experience is a severe handicap.
“There has to be a capable team with potential to grow the business and to carry it to high levels of success,” explains Başel. Experience and past track records play a major role in providing a little more confidence. Building the right founding team greatly increases the odds of securing VC money.
There has to be a capable team with potential to grow the business and to carry it to high levels of success,” explains Başel. Experience and past track records play a major role in providing a little more confidence. Building the right founding team greatly increases the odds of securing VC money.
3. Innovative idea
Every new startup is the Uber of something, and it’s played out.
With less than 1 percent of all U.S. companies ever receiving VC money, you need to stand out, and the way to do that is by having something truly innovative and unique. You are only going to attract initial interest if your idea is something that the VC hasn’t been pitched several times already.
Başel elaborates, “It needs to be new and something that no one has ever tried before, or succeeded at before. Something innovative with extensive research and development will pique my interest enough for me to at least look at the pitch.”
Startups come and go, and while nobody has an exact percentage, most people put the startup failure rate between 80 and 90 percent. The few startups that experience massive success all solve a problem.
Uber made commuting much easier. Snapchat made communication easier. Airbnb made travel easier. You get the point.
“I like startups that bring value to the community and to humanity in general. Do they solve a large-scale problem? Do they provide a benefit that a large percent of the population will desire to utilize? If the answer to those questions is yes, then they have a much greater chance of attracting interest,” offers Başel.
5. Long-term sustainability
“It has to be something with longevity to make it worthwhile from an investor standpoint. A short-term idea might still be viable and profitable, but not typically from a VC point of view,” suggests Başel.
Venture capitalists deploy millions of dollars, wanting multiple times return on that investment. That is why VCs focus heavily on the long-term sustainability of an idea. If they don’t believe the shelf life is large enough, they simply won’t invest.
VCs invest to make money. There is no other reason. It’s a business.
Başel is no different from other VCs, stating, “The last thing I look at is the financial outlook of the business, determining when it will start becoming profitable.” The deal needs to make financial sense and not tie up money too long. The goal is to recoup the initial investment and re-invest in another project.
It had been assumed that, if Africa was to see the development of a local digital currencies scene, that this would be based primarily around payments.
Given the failure of traditional banking methods, the high cost of sending and receiving money via established services like Western Union and MoneyGram, and the proven willingness of Africans to utilise alternative financial platforms like M-Pesa, a number of companies decided to bet on a role for bitcoin in the payments space.
This seemed to make sense, with more than 30 million diaspora Africans sending home billions of dollars each year. But it hasn’t quite turned out that way. Kenyan startup BitPesa is well-funded and seen good traction, but companies like Nigeria’s Bitstake and Ghana’s Beam launched amid much fanfare but quietly died.
G-J van Rooyen, whose South African startup Custos Media Technologies uses bitcoin and blockchain technology to cut down on digital piracy, told Disrupt Africa the digital currencies space in Africa was moving away from the payments narrative.
In this regard, he said, it is not too dissimilar to the evolution of the internet.
“The early internet mimicked traditional publishing: early news sites looked and functioned a lot like daily newspapers. We used the new technology to create improved versions of the communications paradigms we were familiar with,” van Rooyen said.
“Over time, the internet became more interactive, connected and social. It would have been very difficult to conceive something like Snapscan or Pinterest in the 1990s-era internet. These innovations emerged after we started to figure out the new ways in which technology could be used, that had no pre-internet equivalents.”
He believes we will witness a similar evolution when it comes to blockchain technology, where “better payment” is the first-order “killer app” for the blockchain.
“Over time, new use cases will emerge that would have been difficult to conceive initially,” he said.
Van Rooyen is certain cryptocurrencies like bitcoin will find their role in Africa, as they are “programmable money” that makes various existing fintech applications more efficient.
“Many innovators work on such applications, which include remittances, microloans, fundraising, microjobs, and other ways of moving money around in faster and more flexible ways than were possible before,” he said.
However, cryptocurrencies also enable concepts that just weren’t possible in the past. One of these, used by Custos, is that it is now possible to embed digital cash directly into other files. The cash is replicated in all copies of the file, but only the first person to claim it gets to keep it.
Custos uses this novel aspect of cryptocurrencies to implement a “finders fee” for copies of pirated media. This would simply not have been possible without the unique properties of blockchain-based digital currencies.
Van Rooyen believes bitcoin offers two very distinct advantages in Africa.
“Firstly, it is very useful as a remittance currency. Africa has a large number of countries and territories, with a mobile workforce that often migrates between territories for jobs and business. I think we’ll see an increase in the use of bitcoin as a currency held for brief periods just to remit between countries,” he said.
“Secondly, bitcoin is emerging as as a separate asset class, and is increasingly referred to as “digital gold”. Like gold, Bitcoin is scarce, is valuable, and can be exchange for fiat currency in most countries. Unlike gold, bitcoin is very easy to purchase and transmit. Bitcoin and other cryptocurrencies are likely to become a common component of a balanced investment portfolio, especially as a hedge against currency volatility in emerging markets.”
There are still hindrances to the uptake of digital currencies in Africa, such as the fact obtaiining them is still a cumbersome process.
“It’s difficult to get your first bitcoin without having a bank account that you can use at an exchange,” said van Rooyen.
“A significant step in digital currency adoption will be the ability to earn such currencies directly. Custos pays our anonymous bounty hunters directly in bitcoin; companies like 21.co facilitate cryptocurrency payments for knowledge tasks. I’d love to see a new Money4Jam, or a pan-African TaskRabbit, that allows direct digital currency payments for microjobs.”
Arguably, very few goals are accomplished by you and you alone. No person is an island, as the saying goes.
On your journey to success, there are four different types of people you will need. These people are the ones who will aid you in your endeavors. But if you don’t know to look for them, they might just pass you by. So, who are the people who can help you with your personal success?
1. The Coach / Mentor
As Joseph Cambell famously points out with The Hero’s Journey, all great heroes have a mentor. Luke Skywalker had Yoda. The Karate Kid had Mr. Miyagi. Katniss Everdeen had Haymitch Abernathy.
A mentor is someone who has been there, done that and got the T-shirt. He or she is someone you can turn to, ask questions and get advice. If you want to grow your business, align yourself with someone who has succeeded with a similar business model. If you want to lose weight, you could get a personal trainer or you could reach out to a friend who has already succeeded in his or her weight loss journey.
Identify who has already walked the path you’re on. Build or strengthen a relationship with them. Your mentors will help you achieve your goals in less time than it would take to figure it all out on your own.
2. The mark
In my coaching and speeches, I refer to “a mark” as a shorthand way of saying “the person you want to influence.” A mark is the person you want to hear “yes” from. Everyone has marks. Your husband could be your mark while you convince him to take a vacation at a ski resort. Your co-worker could be a mark while you motivate them during a project.
Your mark is the one who can say “yes” and make your dreams come true, or they could say “no” and all efforts could feel lost. For your goals, who do you need to hear “yes” from? A big-name client? An investor? Your co-founder?
Get clear about your mark. How can you make your idea most appealing to him or her?
We all need sidekicks. Batman is better with Robin (or Alfred, depending on how you look at it). Neo needed Trinity. Doctor Who isn’t himself without a companion. (Am I getting too nerdy for you?)
The point is, we all need someone on the sidelines to cheer us on. But if you haven’t identified who will be your supporter for when you hit the bumps in the road, then you won’t know who to turn to when they happen. Identify your sidekicks, reach out to them today and give them appreciation now for being and staying in your corner.
Also, don’t forget to consider sidekick groups. Group settings can be just as empowering. If you’re wanting to lose weight, then become a regular in gym class. If you need to clear out some mental baggage, support groups can be a safe haven for exactly that. If you want to express your artistry, sign up for a weekly painting class.
So who will you bring on your team? Who will keep you accountable?
4. The connector
This is, by far, the most overlooked “who” in the goal-setting process.
You have a goal and you know you need to hear a “yes” from a mark, but you give up when you realize you don’t have direct access to that mark. How can you get a “yes” when you can’t even get a “hello”?
It’s not over yet.
If you run into this realization, then your next question is, “Who do I know who is connected to that person?” Our world is flatter than ever. Our marks are often just a LinkedIn connection away. The connector is the person who can introduce you to your mark. He or she makes the connection so you can make magic happen.
Remember the persuasive process — observe, connect, influence. In this instance, you will go through the process twice — once for the connector and once more for mark.
As you create your goals, remember to include the people who will help you on your climb up. Goal setting isn’t a one-person show. Success is always achieved in numbers.
If you are unemployed, underemployed or unhappily employed, the idea of taking control and becoming your own boss might be sounding pretty sexy right about now. Plus, the past decade has shown us that jobs aren’t quite as dependable as perhaps we previously thought.
However, the success rates for new business are quite scary too, with the majority of all new businesses failing in just a few years’ time. While there is never going to be a “sure thing,” if you are thinking of leaving your job to hang out your own shingle, there are significant benefits to preparing before you take the leap.
Here are nine ways to make sure that you are prepared before you start your own business, so that you can give yourself the best chances to succeed. These are adapted from my bestselling book, The Entrepreneur Equation.
1. Define and evaluate your goals.
You can’t figure out a path to get somewhere if you don’t know where it is you want to get to. Plus, once you have that goal, you need to know if your path is the most direct route to achieving what you want.
Ask yourself tough questions about why you really want to start a business. Are you looking to get rich quick? Do you want to showcase your talent, new product idea or service? Are you tired of your boss taking credit for what you do?
These kinds of goals might lead you down the wrong path. On the other hand, if you love the idea of running an entity, if you like creating systems and procedures, adore servicing customers and if you thrive on wearing many different hats and balancing responsibilities, then entrepreneurship could be the perfect path for you.
2. Stash some cash.
The cost of starting a business in many industries has come down substantially. However, that is only part of the story. Businesses often take a few years to gain a solid foundation, so you need to have enough money to start the business, operate it while it stabilizes and also be able to live.
If you don’t have the money yourself, identify whether you have credible access to capital. The downturn has made it more difficult to secure financing and you don’t want to be three months into a business and have to decide whether to keep the business open or pay your rent or mortgage — that’s a losing proposition.
3. Get relevant experience.
Being able to manage employees and vendors is the type of skill you’ll need to acquire before starting your own business. You’ll also need to know your industry inside and out, including aspects that you may not be familiar with or even like, including marketing, accounting and more.
Don’t have the experience? Spend time working in a similar company, shadow a business owner in your industry or take a job on nights and weekends in a comparable business. Test the waters first with a trial run before you start your own company.
4. Build your network.
Business sometimes comes down to not what you know, but whom you know. If you don’t know many people or if you just haven’t warmed up your contacts in a while, now is the time to focus on building a solid network.
Strong connections can provide valuable business advice and provide introductions to get you more favorable financing, prices, terms and conditions from business suppliers and professional services. Connections are your best source of marketing and customer referrals, which is critical for a new business.
5. Know yourself.
Do you prefer the “status quo” and like to avoid the unexpected? Can you handle a life of highs and lows — including financial highs and lows? Could your savings and bank account handle financial lows as well?
If you are a person who likes stability and control, or if you prefer when things go as planned, the roller-coaster ride of a new business may not be right for you. Be honest about your personality before you take the leap.
6. Visit your lawyer.
If you are going to go into a business that competes (directly or even indirectly) with your current employer or if you plan to call on prior customers or contacts, you may find yourself in a legal bind, depending on the paperwork that you have signed with you current (or previous) employer.
Check with your lawyer to make sure that you are in the clear or to find out what you need to do to avoid any sticky legal situations.
7. Stalk the competition.
Before you leap into entrepreneurship, take a hard look at the marketplace and your competition. Is your market saturated with successful businesses? Is your industry littered with so many bad businesses that it’s developed a bad reputation?
Both good and bad competitors will influence just how successful your business will be. You will need to market and brand your business to shine above the good competitors and to make up for the bad ones.
8. Test your idea’s scalability.
The most successful businesses rely on automation and delegation. Will other employees be able to do your work? If not, can you teach others what to do in an easy-to-follow format?
If your business relies on your skills, and your skills alone, you might have a successful job, but it may not be that business opportunity you are looking for.
9. Sell first!
Too many entrepreneurs spend time and money building out retail stores, manufacturing products or developing service offerings without truly assessing the viability of the market. See if you can garner interest (in the form of purchase orders, deposits, etc.) before you invest too much capital.
If you have a lot of interest in your offering, there will be less risk in pursuing it full time. If you don’t get any bites, you may want to rejigger your offering, pricing or business model before investing your full time and effort.
Putting in the time and effort up front to stack the odds in your favor will help you avoid having one of those businesses that ends up in that percentage of failures.
What are the biggest economic challenges facing the world in 2016? The question was recently put to four winners of the Nobel Memorial Prize in Economic Sciences, all of whom will be attending this year’s Annual Meeting in Davos. Here’s what they had to say.
Robert J. Shiller, Sterling Professor of Economics, Yale University, USA. Awarded the Nobel Memorial Prize for Economic Sciences in 2013.
The theme of this year’s World Economic Forum’s Annual Meeting in Davos is “Mastering the Fourth Industrial Revolution“. This revolution has been designated as one of “cyber-physical systems,” or, roughly speaking, advanced robots, driverless cars, the Internet of Things, and the like.
I commend the Forum for choosing this theme, for it is indeed the biggest issue facing the world today.
It does seem that such a revolution is coming, someday, but it also seems presumptive that democratic society can “master” it. Such a revolution portends great changes in economic status for individuals and changes in the political power of various groups in society.
I would prefer that we make as an objective that we do what we can to “risk manage” it. By this I mean that we set in place a plan today to deal with the possible dislocations caused by this revolution. We do not know yet who will benefit and who will suffer from the Fourth Industrial Revolution. In a sense, it is good that we do not yet know, for this means that we can use the tools of risk management to manage it. You cannot wait until a house burns down to buy fire insurance on it. We cannot wait until there are massive dislocations in our society to prepare for the Fourth Industrial Revolution.
One concrete proposal that I have made, in my 2012 book, Finance and the Good Societyand elsewhere, is that we should legislate now a long-term tax and benefits plan to deal with a possible huge increase in economic inequality, should the Fourth Industrial Revolution lead to this. If the revolution turns out to be benign, then we will have lost virtually nothing. Should the revolution turn out not to be benign, we will be glad we did this.
One way to view this is as using modern financial principles to manage risk. Another way to view it is as developing a moral consensus now, from the Rawlsian original position, on what should be done if this revolution has unpleasant consequences.
Professor Edmund S. Phelps, The Center on Capitalism and Society, Columbia University, USA. Awarded in 2006.
The “modern project” to innovate began in Britain and America around 1820, then reached Germany and France around 1880. Their dynamic economies provided rising productivity and expanding trade around the world. The passion to participate, the fascination with the unknown, and the “rage for the new” set an example to the world of what working lives could be. The way was clear for men and women to prosper and to flourish. Yet, despite the digital and internet revolutions, aggregate innovation wound down in the mid-1900s. Total factor productivity, which grew at better than 2% a year for decades, has grown at 1% after the ‘60s.
Nothing has been the same since. With productivity slower, capital goods output fell to a lower growth path and the male labour force fell in parallel. Tax revenues slowed alongside productivity while politicians, deploring “austerity,” plan on permanent fiscal deficits – as if they were sustainable in a near-zero growth economy. Thus the West has been in a crisis. The Asian and Latin American nations need all the more to find their own dynamism.
The difficulty is that standard economics – both neo-classical, Keynesian and supply-side economics – is unsuited to find the cure. The economy is not a machine that can be cranked up to the best possible performance level: a functioning modern economy is a living organism made up of all the individuals participating in it. Their initiatives are sparked by imagination, encouraged by values and assisted by their personal knowledge.
A. Michael Spence, William R. Berkley Professor in Economics and Business, NYU Stern School of Business, Italy. Awarded in 2001.
One of the biggest economic challenges for 2016 is to reverse the deteriorating pattern of global growth. All kinds of trouble awaits if the present trend continues. Fiscal distress, persistent unemployment, rising inequality, and the loss of political and social cohesion to name just a few.
A key element is beginning to deal with the shortage of aggregate demand that is constraining the growth, trade, inflation, and exacerbating fiscal distress. The combination of low growth and inflation below target (also in part a product of the aggregate demand problem) significantly increases the difficulty of reducing excess sovereign indebtedness without deflates or the equivalent. That in turn constrains counter cyclical space and public sector investment, which contributes to lower aggregate demand and reduces future growth via the negative impact on private sector investment returns.
Other measures to increase private investment would help. They vary from country to country. Reforms targeted at reducing structural rigidities in a number of advanced and developing countries are needed. Tax reform in the US and a more serious addressing of deteriorating income distributions would also help. Avoiding competitive currency devaluations on the negative side is important, as it does not solve the global growth issue. Unblocking intermediation channels between large pools of savings and public and urban investment needs would measurably improve overall economic performance.
This multi-dimension growth challenge cannot be met in a single year, or even 3-4 years. But it should be a central focus of the G20 economic agenda in China. The challenge is not made easier by the fact that major structural changes and adjustments of a secular nature caused primarily by digital technologies are ongoing and may accelerate in middle and high income countries.
Monetary policy has done what it can do. It needs to be complimented by a host of complementary growth-oriented measures, none of which are part of the monetary policy toolkit, measures that thus far have been notably absent. Staying on the present course will leave the global economy largely unarmed with respect to future shocks. And long term repression of the returns on savings has its own very substantial costs.
Alvin Roth, Professor, Department of Economics, Stanford University, USA. Awarded in 2012.
One important challenge for 2016 and beyond will be thinking about refugee (and other migrant) resettlement.
Refugee relocation is a matching problem, in the sense that how a refugee thrives can depend on which country they go to. Determining who should go where, and not just how many go to each country, should be a major goal of relocation policy.
This will be important not just because we want refugees and other migrants to do well, but because it’s hard to keep them where they don’t want to be. In the U.S., where immigrants may relocate at will once they have entered the country, this is especially clear. So the information and preferences of the refugees themselves about where they could thrive shouldn’t be ignored.
Game theory can be described as the mathematical study of decision-making, of conflict and strategy in social situations.
The “game” is the interaction between two or more parties, and relies on people acting rationally, knowing the boundaries of the “game”, and knowing that the other party is equally cognisant of the rules. These strategic interactions form the crux of game theory. “Sometimes we use it knowingly, sometimes we do it intuitively,”
The theory has entered popular culture, perhaps most notably through Russell Crowe’s portrayal of Nobel laureate John Nash in the film A Beautiful Mind.
A pioneer of the theory, John D Williams, wrote a 1954 study – The Compleat Strategyst – which attempted to bring it to the masses. He said society “would benefit from having more persons informed regarding its nature; and that the knowledge would benefit the persons”.
Now it’s used by many different people across a broad spectrum of interests. “The major reason for the success was that in a variety of settings people began to realise they had to think formally and systematically about strategic interactions,” explains Rakesh Vohra, an economics professor at the University of Pennsylvania and senior member of the Game Theory Society. “Game theory revolutionised the study of economics.”
Auctions for infrastructure projects or Premier League TV rights deploy game theory. Dating applications and services rely on it. Companies selling consumer goods use game theory to predict how their competitors – and customers – would react in a price war.
Away from the decisions made by retailers, commercial negotiators and so on, quiz shows often use game theory. The Weakest Link is a notable example, where partnerships are formed and strategic decisions are made about who to cut from the team.
Some of the first codified uses of game theory were in war. Both the British and American military used early computers to run models that would utilise game theory to help commanders decide whether, where and when to attack the enemy.
Since then, the concept has evolved. As Vohra explains, “when game theory was first born, there was a group of people who thought that if we build a model large and complex enough and we crank that handle we will know what to do.”
That was seen as too ambitious, and the theory has changed. “Instead what we’re trying to do is inform judgement,” says Vohra. “We cannot tell you what to do, except in very limited circumstances. But what we can do is tell you the important things you have to make a judgement about. In a complex world where there are many things you have to pay attention to, this is still enormously useful in terms of focusing your attention.”
The concept is not solely based in conflict and combat, though – it can also help co-operation. “In a zero-sum game, you can think about chess, where one person’s win means immediately another player loses,” argues Schweinzer. “There are other games like joint production. If the two of us write something together, we can both gain from that. There’s no winner and no loser, but the act of playing together generates something we can both benefit from – a win-win game.”
Ethicist Carissa Veliz, of the Oxford Uehiro Centre for Practical Ethics, agrees. “While game theory may appear to be essentially about situations involving opposed self-interests, it needn’t be.
“Selfishness need not be among the assumptions of game theory. In the classical Prisoner’s Dilemma, it is often assumed that each prisoner only values his or her own well-being. But we can imagine the case where both prisoners are genuinely disinterested activists, and each wants to leave prison as soon as possible because they sincerely believe they will do the most good in the world by furthering the respective cause they are committed to.”
The negotiations currently taking place between Greece and its creditors are a prime place to deploy game theory – not least because of Varoufakis’s past as a theorist in the field. “If you think about the renegotiation of the loans to Greece, this is a very good example of where you have a tension between competition and co-operation,” says Vohra.
Not everybody agrees. Sean Hargreaves Heap, a professor of political economy at King’s College London, who co-authored a critical introduction to game theory in the 1990s, believes that game theory is of little use to Greece’s financial negotiations.
“If you think the talks are like a game of chicken, it’s a case of who’s going to blink first – the Greek government or the Germans? That’s useful, but game theory merely tells you there are three different things you should expect in such a game of chicken,” he says.
“One is the Germans blink, the other is the Greeks blink, the third is that both sides toss a coin as to whether they blink or not. Game theory is a useful way of characterising the problem, but in terms of telling you what someone is going to do in a game of chicken, it’s completely hopeless.”
Hargreaves Heap wrote his book on game theory with a young academic born in Athens and educated in Essex and Birmingham. His co-author’s name? Yanis Varoufakis.
In biology, game theory has been used as a model to understand many different phenomena. It was first used to explain the evolution (and stability) of the approximate 1:1 sex ratios. (Fisher 1930) suggested that the 1:1 sex ratios are a result of evolutionary forces acting on individuals who could be seen as trying to maximize their number of grandchildren.
Additionally, biologists have used evolutionary game theory and the ESS to explain the emergence of animal communication. The analysis of signalling games and other communication games has provided insight into the evolution of communication among animals. For example, the mobbing behaviour of many species, in which a large number of prey animals attack a larger predator, seems to be an example of spontaneous emergent organization. Ants have also been shown to exhibit feed-forward behaviour akin to fashion (see Paul Ormerod’s Butterfly Economics).
Biologists have used the game of chicken to analyse fighting behaviour and territoriality.
According to Maynard Smith, in the preface to Evolution and the Theory of Games, “paradoxically, it has turned out that game theory is more readily applied to biology than to the field of economic behaviour for which it was originally designed”. Evolutionary game theory has been used to explain many seemingly incongruous phenomena in nature.
One such phenomenon is known as biological altruism. This is a situation in which an organism appears to act in a way that benefits other organisms and is detrimental to itself. This is distinct from traditional notions of altruism because such actions are not conscious, but appear to be evolutionary adaptations to increase overall fitness. Examples can be found in species ranging from vampire bats that regurgitate blood they have obtained from a night’s hunting and give it to group members who have failed to feed, to worker bees that care for the queen bee for their entire lives and never mate, to Vervet monkeys that warn group members of a predator’s approach, even when it endangers that individual’s chance of survival.[28] All of these actions increase the overall fitness of a group, but occur at a cost to the individual.
Evolutionary game theory explains this altruism with the idea of kin selection. Altruists discriminate between the individuals they help and favour relatives. Hamilton’s rule explains the evolutionary rationale behind this selection with the equation c<b*r where the cost (c) to the altruist must be less than the benefit (b) to the recipient multiplied by the coefficient of relatedness (r). The more closely related two organisms are causes the incidences of altruism to increase because they share many of the same alleles. This means that the altruistic individual, by ensuring that the alleles of its close relative are passed on, (through survival of its offspring) can forgo the option of having offspring itself because the same number of alleles are passed on. Helping a sibling for example (in diploid animals), has a coefficient of ½, because (on average) an individual shares ½ of the alleles in its sibling’s offspring. Ensuring that enough of a sibling’s offspring survive to adulthood precludes the necessity of the altruistic individual producing offspring.[28] The coefficient values depend heavily on the scope of the playing field; for example if the choice of whom to favor includes all genetic living things, not just all relatives, we assume the discrepancy between all humans only accounts for approximately 1% of the diversity in the playing field, a co-efficient that was ½ in the smaller field becomes 0.995. Similarly if it is considered that information other than that of a genetic nature (e.g. epigenetic, religion, science, etc.) persisted through time the playing field becomes larger still, and the discrepancies smaller.
What’s the greatest challenge to any entrepreneur? It’s not lack of funding, or customers or other business issues.
It’s maintaining the mindset of an entrepreneur.
In its early days, a new venture makes its own energy. Every entrepreneur can tell you startup tales: a band of enthusiastic innovators, setting out on this great adventure. Who cares if workspace is small and the food is terrible and the hours are constant. It is exciting. Adventure always is.
When the new business evolves into a true, steady business, that sense of adventure can fade. Now, that same group, joined by many more, is not really on an adventure. They are a group of people who come to work every day. It’s not an adventure any more; it’s a job.
That perhaps is the biggest danger to any business – mine or anyone’s.
How can you keep the entrepreneurial mindset even when the early days are past?
Manage for it: At Rakuten we created tools that encourage entrepreneurial behavior. We want all employees to deliver value to the company. This can be done in many ways: identifying new merchants and categories for Rakuten Ichiba; finding new technologies or companies we can invest in; or proposing ways the company can be more efficient, even by changing light bulbs to save on energy costs. So our assessments look closely at results. People who are not creating real value for the company may not have a future here.
Talk about it: I talk about getting “back to venture” all the time. It’s the subject of my weekly address to the company. It comes up in meetings. It’s a topic of my speeches. I stop employees when walking through the halls or during lunch and ask them what they’re doing and what they’re seeing that’s new. How can we innovate? How can we maintain the startup feel at Rakuten? It’s amazing how employees are unafraid to share their ideas.
The greatest challenge of being an entrepreneur is staying an entrepreneur – even when your company gets big. It’s the challenge facing us all. By making entrepreneurship a part of everyday workplace conversation, you’ll never lose the mindset.
This article is published in collaboration with LinkedIn.
Entrepreneurship is glorified in our society today. I have enough experience under my belt to remember the “before” picture of entrepreneurship and it wasn’t always this way.
When I came out of school in the 80s, you were almost a misfit if you started your own company. Sentiment toward entrepreneurs at the time was like brackish water; they weren’t disdained but they weren’t heroes either.
However, in the mid-80s, during Ronald Reagan’s presidency, there was a very specific period of time when you had the emergence of companies like Microsoft, Apple, Oracle, Adobe and MYOB. And during that time, entrepreneurship went from the refuge of the misfits who couldn’t find a job to something that became more accepted. By the 1990s, entrepreneurship had become accepted by the mainstream and today entrepreneurs are rock stars.
The purpose of this article is not to give you the history of entrepreneurship but to share a realistic picture of being an entrepreneur that’s outside of the conversation in the popular media—the real story. The ugly parts. Because the truth is that not everyone is meant to be an astronaut, not everyone is meant to be a doctor, not everyone is meant to be a sandwich maker and, certainly, not everyone is meant to be an entrepreneur.
Below I’ve outlined what I consider to be some of the most difficult parts of being an entrepreneur, the underbelly of entrepreneurship in an age when entrepreneurs are celebrities. I say this not to discourage would-be entrepreneurs, but to paint a realistic picture.
1) There is a sense of isolation that is really profound. We’re all used to being part of a reference group. When you’re an employee of an established business, you have your colleagues. When you’re in college, you have your classmates. And when you get involved in the community, you have fellow organization members. But when you start a business, you are truly on your own. If you’re lucky, you may have a partner or a co-founder, but that’s it. There is a tremendous sense of isolation and loneliness that comes with not having this reference group. Not a lot of people like to talk about it, whether out of embarrassment or because it doesn’t fit with the perceived personality type of a successful entrepreneur, but the sense of isolation is real.
2) Most businesses provide a lifestyle and a job, but they don’t provide wealth. For example, most restaurant owners probably take home an income that is not much greater than that made by a restaurant manager at a popular chain. That’s important to understand because we think of entrepreneurs as wealthy when the truth is that most entrepreneurs have a job and a very difficult job at that. This is another important misconception that’s not often discussed.
3) It usually takes many years to build a business. I’ve run three businesses in my lifetime: a very simple business, a moderately simple business and a very complicated business. In the first business, the “simple” one, it took me a year to make profits. In the second business, the moderately simple one, it took me about three years to become profitable. To make the third and most complicated business profitable and scalable, it took us about six years of grinding, stretching and pushing. It even took Facebook 5 years to become profitable. It is not common for a business to skyrocket to revenue and profitability. For most entrepreneurs, it takes many years to build a real company.
4) You have to manage people. When you’re running a business, you’re constantly managing, not just employees but vendors and customers as well. You’re always the bad guy, you’re making difficult decisions, and, in many ways, you’re alone with your decisions. I had a friend who ran a business and he used to refer to himself as the Grim Reaper: He was always the guy with the bad news, always the guy to find the problem that really needed to be addressed. Managing people is not easy, and it doesn’t come naturally to many people. However, it’s a critical part of being a successful business leader and entrepreneur.
If you love what you’re doing and you like business, being an entrepreneur could be a great thing. It’s certainly good for the country, but recognize that it might not live up to the picture painted in the popular media.
While many of Ray Fraser’s peers were working in retail and living at home because they had to, he was choosing to take another path..the educational path.
Fraser, 26, said he had three career-level job offers at graduation, two from companies where he had interned: United Technologies Corp. as a business analyst and Saks Fifth Avenue as a retail buyer.
But he had a dream of building his own company.
Ray Fraser, a young college grad, has founded a company that makes coffee cup sleeves. He’s retooled the product since the founding, and hopes to get nationwide distribution soon.
Your company is ready to make a big purchase — a fleet of cars, a piece of manufacturing equipment, a new computer system. But before anyone writes a check, you need to calculate the return on investment (ROI) by comparing the expected benefits with the costs. Analyzing ROI isn’t always as simple as it sounds and there’s one mistake that many managers make: confusing cash and profit.
This is an important distinction because if you mistake profit for cash in your ROI calculations, you’re likely to show a far better return that you can expect in reality. So keep in mind: Profit is not the same thing as cash.
Sure, you may know this already, but people who haven’t studied finance often find this statement confusing. If a company earns a $500,000 profit in a calendar year, shouldn’t it have $500,000 more in the bank on December 31 than it did on January 1 of that year?
The answer is no, not necessarily. Profit and cash are really two different animals. Profit appears on a company’s income statement. It indicates what is left after all costs and expenses are subtracted from the company’s revenue. But it isn’t directly related to cash.
For example, “revenue” isn’t a cash-based number: A company can record revenue whenever it ships a good or delivers a service to a customer, whether or not the customer has paid the bill. Some of those costs and expenses aren’t cash-based, either. Income statements almost always include an allowance for depreciation of capital assets.
Cash transactions, meanwhile, show up on the cash flow statement. That statement records cash generated by a company’s operations and cash spent on those operations; cash spent on capital assets (and cash generated by the sale of capital assets); and cash received from, or paid to, lenders and shareholders.
A common mistake in ROI analysis is comparing the initial investment, which is always in cash, with returns as measured by profit or (in some cases) revenue. The correct approach is always to use cash flow — the actual amount of cash moving in and out of a business over a period of time.
Let’s look at an example: A midsize manufacturing company wants to know whether to invest in a new $10 million facility. The plant would generate an additional $10 million in revenue and $3 million in profit per year. At first glance the return looks great: 30% every year. But profit is not cash flow. Once the plant starts operating, for instance, you might need to spend an additional $2 million on inventory. You might also find that your accounts receivable (A/R) — what customers owe you for services rendered or products delivered — rises by $1 million. These two variables alone would consume the entire $3 million in profit, so your incremental cash flow in the first year would actually be $0.
Investments in inventory and A/R are shown on a company’s balance sheet (a “snapshot” of a company’s financial position at a point in time) and are included in working capital — funds used in the operation of a business, often defined as current assets minus current liabilities. Working capital requirements are typically built into an Excel model you’ll use to calculate ROI, so you don’t need to worry about them. But you do need to understand the importance of comparing cash returns with cash outlays. Apples to apples, and all that.
Occasionally companies analyze investments in terms of their effect on revenue. That’s because many young companies focus on hitting certain revenue targets to satisfy their investors. But revenue figures say nothing about profitability, let alone cash flow. True ROI analysis has to convert revenue to profit, and profit to cash.
Once you grasp the cash vs. profit distinction you can better understand the four basic steps of ROI analysis.
Determine the initial cash outlay. Usually this is the simplest part of the analysis. You just add up all the costs of the investment. This includes items such as equipment costs, shipping costs, installation costs, start-up costs, training for the people involved, and so on. Everything that goes into getting the project up and running has to be part of your initial cash outlays.
If you’re just buying a new machine, it’s pretty easy to estimate all the costs. A project or initiative that is likely to take several months will be harder.
Forecast the cash flows from the investment. This step is the toughest part. You need to estimate the net cash the investment will generate, allowing for variables such as increased working capital, changes in taxes, adjustments for noncash expenses, and so on. Putting the cash flows on a calendar will allow you to estimate returns year by year or even month by month. Most of your time will be spent on this step. It’s where your company’s finance department will ask the toughest questions and scrutinize your estimates and assumptions most carefully.
Determine the minimum return required by your company. The minimum rate of return is often called a hurdle rate, and it is determined by your company’s finance department. Companies may have more than one hurdle rate depending on the risk involved in proposed investments. The finance people determine hurdle rates by looking at the company’s cost of capital, at the risk involved in a given project, and at the opportunity cost of forgoing other investments.
Evaluate the investment. This is the final step. You can use one or more of four ROI calculation methods: payback, net present value, internal rate of return, and profitability index. The results will tell you whether the proposed investment offers a return more or less than the company’s hurdle rate. Some of the calculations will also help you compare this investment with alternative investment possibilities.
While these are the basic steps, there is a lot more to getting it right. You have to account for the time value of money. You have to estimate returns based on cash flow rather than on profit. You must know your company’s hurdle rates, and you must determine which method of calculating ROI is the best one for your project.
CoachRNC 