17 Jun 2002  Research & Ideas

A Litmus Test for Entrepreneurs

Are you cut out to conquer the challenges facing today's entrepreneur? HBS professor Walter Kuemmerle has developed a litmus test to help you decide. Two key questions: Do you have the patience to start small? Are you a closer?

 

Editor's Note— A few years ago anyone could become an entrepreneur. All you needed was a half-baked idea and a phone to hear offers from salivating venture capitalists. Now the environment is much more difficult. Question: Do you have what it takes to be an entrepreneur in this new era?

HBS professor Walter Kuemmerle, who has studied more than fifty start-ups in twenty countries, says entrepreneurs today should take a litmus test of five questions (See sidebar). In this excerpt from Harvard Business Review, Kuemmerle discusses two of the questions: Do you have the patience to start small? Are you a closer?

In 1999, Tom Herman and Kaleil Isaza Tuzman, best friends since childhood, quit their comfortable jobs to start govWorks, with millions of VC dollars to back them up. Their goal was nothing if not grandiose: to use Internet payment systems to transform the way federal, regional, state, and local governments worldwide collected fees and taxes. To use the company's own phrase, govWorks was about "all payments for all governments." (The film Startup.com featured the company.)

Soon after Herman and Tuzman set up shop, they approached a venture capitalist for additional funding and for advice. He suggested that the company test and refine its business model by initially focusing on one payment operation, for parking tickets, in one U.S. city. The entrepreneurs almost bit off his head. "The leader in this market space is going to be a multibillion-dollar company," Tuzman declared. He believed that by winning the support of umbrella organizations that represent many municipalities, such as the U.S. Conference of Mayors, govWorks could quickly go nationwide. But it didn't work out that way. Tuzman and his partner underestimated how little the cities actually trusted the endorsements of the umbrella organizations. The big contracts did not come as quickly as the founders had expected, and in early 2001, the company was no longer in business.

GovWorks's failure is a textbook example of the perils of grandiosity. Smart entrepreneurs recognize that start-ups cannot afford to pass on any opportunity, no matter how small. They see business much like a game of PacMan—you can bag big fish only by learning to swallow small ones. The best entrepreneurs also recognize that trying out a business model on a small scale helps them find out what their industry is about and lets them make mistakes at those times when they can still afford it. Growth, when it comes, is all the more sustainable as a result.

GovWorks's failure is a textbook example of the perils of grandiosity.
— Walter Kuemmerle

Back in 1987, Leopoldo Fernandez Pujals, a corporate veteran with twenty years of experience at the likes of Procter & Gamble and Johnson & Johnson, decided to set himself up as Spain's first pizza magnate and founded TelePizza. He believed that customers in Spain—and, indeed, throughout Europe—would respond enthusiastically to a branded chain that offered home delivery, as Domino's does in the United States. Pujals recognized, however, that he knew little about making pizza or delivering fast food, let alone how such a business might function in the Spanish market. So he decided to start small, with a single shop in Madrid. In this way, he reasoned, he would be able to experiment with the economics and logistics of a pizza business and gain firsthand experience of his customers as well.

The outlet was an instant hit, but Pujals resisted the temptation to immediately replicate it. He waited a year before opening a second shop, and the delay paid off, because he had a much clearer idea about what would and would not work after his initial experience. During that first year, for instance, he found that Spanish customers felt more comfortable ordering takeout pizza once they had consumed one on the premises. So, in contrast to the setup at Domino's, Pujals included an eating space in his store and experimented with the dining area's size and décor. Ultimately, he discovered that a small, spartan dining room was good enough. Pujals also found it was usually the children's idea to order pizza from home. As a result, TelePizza has consistently marketed its products as family food, targeting its messages to children as well as adults.

Expanding slowly also gave Pujals the chance to work out and test his business model. He was able to determine exactly what sort of investments he could expect future franchisees to make and how large an area of geographic exclusivity he needed to offer them. On the cost front, he found that to tap cheap student labor, franchisees would have to supply delivery personnel with mopeds, because most Spanish students, unlike their American counterparts, did not own motorcycles or cars.

As a result of Pujals's initial caution, growth when it came was both fast and steady. When he sold the company in 1999 to the Spanish food conglomerate Campofrio, TelePizza spanned six countries with more than 600 outlets selling some $250 million worth of pizza a year. He had turned an equity investment of $100,000 into a fortune of more than $300 million in just twelve years.

Although many aspects of entrepreneurship favor the young, patience does not. Here, more seasoned businesspeople have the edge. The impatience and idealism of the young often lead them astray, pushing them to blindly adopt a get-big-fast philosophy— "going for scale," as the dot-commers put it. This approach makes sense in certain contexts, especially for businesses like on-line recruitment sites, because their competitive advantage lies in the size of their networks. But it does not work for most start-ups. Among the unsuccessful ventures I've studied, many simply burned up their capital by trying to expand too soon. Entrepreneurs should be greedy, but they need to be patient as well.

Are you a closer?

Successful entrepreneurs know how to seal deals. They possess an almost uncanny ability to come in, often at the last moment, and elbow their rivals aside. However tough the market or small the transaction, they know exactly what they must give up—and what they can get away with—while finalizing deals under pressure.

N. R. Narayana Murthy, the man who cofounded the Indian software company Infosys Technologies in 1981, was nothing if not a closer. His company had to break into international software markets because the local one was virtually nonexistent. To succeed, Infosys needed to build a track record, which meant closing deals quickly.

One entrepreneur I studied had had to make 150 key decisions before he was ready to do business.
— Walter Kuemmerle

Murthy took charge of sales, landing Infosys's first contract with a U.S. company—a six-year deal to upgrade the computer system at a large, New York-based textile distribution company. The upgrade—from a 16-bit processor to a 32-bit one—was quite involved, requiring that much software be rewritten. Over the next twenty years, Murthy spent little time at home. In 1990, he lived in France for three months, closing just one deal. His efforts paid off. Today Infosys is a serious contender in the customized software market in the United States and Europe, with $400 million in revenues and a market capitalization of around $8 billion.

Being a closer involves more than a willingness to go the distance in negotiating deals. You also have to be comfortable repeatedly making life-or-death decisions in the dark. Most executives-turned-entrepreneurs don't realize how big the gap is between making decisions in established corporations and making them in start-ups. And that's one of the main reasons many first-rate executives find it hard to adjust to the entrepreneur's world. Not only are decisions in a start-up more important—even small errors can kill the business—but they are of an entirely different nature.

In a corporation, managers are usually making the same sorts of decisions every day and are surrounded by other people making similar choices. While corporate managers obviously have to operate with a degree of uncertainty—they may not have all the information required—the environment is familiar, and that fosters self-confidence. In a start-up, however, managers don't have those comfort layers. If they can't trust their gut, they'll freeze.

In one case I studied, a senior investment banker had left a prestigious Wall Street company to join a start-up established by a former colleague. Wall Street traders are not known for their indecision, and this one had been a star, staking millions of dollars on his trading instincts and closing dozens of securities deals daily. But his killer instincts deserted him once he left the familiar environment of the trading floor. He even had trouble choosing which office supply vendor to go with. As he put it: "I felt I needed more and more information every time I tried to make a decision.''

Real entrepreneurs know that using their time to gather extensive information is a luxury they sometimes cannot afford. They are more concerned that a decision be made than that it be the best possible choice. One entrepreneur I studied estimated that he had had to make around 150 key decisions before he was ready to do business—from naming his company to hiring his first employee. If he hadn't been able to trust himself to make those decisions quickly, he might have never launched the company.

HBS professor Walter Kuemmerle says any aspiring entrepreneur must ask themselves the following questions:

  • Are you comfortable stretching the rules?
  • Are you prepared to make powerful enemies?
  • Do you have the patience to start small?
  • Are you willing to shift strategies quickly?
  • Are you a closer?

As Kuemmerle concludes, "Being an entrepreneur isn't for everyone, and even those who have the right stuff find the path to success much rougher and, usually, much longer than they had anticipated. But if you start your journey with a clear sense of your own capabilities and the gaps in them, you'll be much more likely to succeed in your venture."

Excerpted with permission from "A Test for the Fainthearted," Harvard Business Review, Vol. 80, No. 5, May 2002.

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