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By AL BERRIOS
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Which
one is the institution?
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In a pioneering new
study, the 1st annual al berrios & co. entrepreneur survey (
1),
published last month, we segmented entrepreneurs and their businesses into
something more descriptive than small, medium, and big. We categorized businesses
by their position on a staged progression of levels. Each level articulates
where an entrepreneur has strategically taken their business in its development
and growth and highlights critical challenges and opportunities. By understanding
the levels of strategic business progression rather than a business' size,
we are better able to understand what a business needs to succeed.
This revolution in how to think about a business is critical for senior managers, sales professionals, and prospective employees because a business' size doesn't always provide a clear picture of the viability of a business, or its potential. After all, how do you know if you're a small, mid-size, or large business? Is it based on the money your business makes? Your headcount? What a commercial sales person refers to you as? Concurrently, what advice, insights, and information are most important considering yours or your client's business level? How can you make your sales process more effective without any other criteria than size? And for an executive, how would you know if that big company that's about to hire you won't lay you off next week?
Alarmingly, under the common understanding of "small, medium, and large" business, insurers, bankers, lawyers, and accountants enjoy claiming to be able to help grow a business when in fact all they can do is sell their products and services in one functional area, which if there is no business strategy to guide, can't really help a business progress through Levels much.
Here are the Levels elaborated based on the qualitative analysis of our survey (note that there are no prerequisites to be categorized in any of these levels, and an entrepreneur or idea can effectively start and stop at any of them):
Level 1
At this level, budding entrepreneurs are "exploring the possibility
that they could be entrepreneurs". This is the point when an idea for
a possible business is usually conceived, (and usually from a void an entrepreneur
recognized and desires to have filled, a solution to an angering problem
that excites an entrepreneur to solve, or even a hobby the entrepreneur
was making money from but previously hadn't recognized as a viable business
endeavor because of the ingrained mis-association between fun with work)
but not even remotely possible to launch, given any number of circumstances.
Whether through a third-party or his/her own will, the entrepreneur is just becoming motivated about this idea and in turn, giving the idea what it needs to be born. (Note that the idea can also be simply becoming an entrepreneur.) Thus, the idea is nurtured for days, weeks, or even years. And the sustenance fed to the idea the entire time is information and advice sought out by Level 1 entrepreneurs, typically from internet searches, friends, family, and various government and non-profit programs that exist to support entrepreneurs.
Because an entrepreneur is still not yet certain that they have the ambition necessary to give birth to their idea (assuming they can even pinpoint their lack of ambition) they won't typically want to pay for information or advice. This is not indicative of future business behavior and in fact, is an ideal opportunity to offer samples of services or products. After all, by disassociating the entrepreneur from the idea, an advisor can come to recognize that once an entrepreneur launches the idea, another manager will eventually take it to the next level (forgive the pun). Thus, the right motivation provided by the right sampling of information or advice, may lead to the birth of a new business.
Level 2
At Level 2, an entrepreneur is more seriously exploring the idea conceived
in Level 1 and will assess his/her interest, skills, and resources, whether
currently possessed or potentially acquired. The occurrence that triggered
this accelerated thinking about entrepreneurship was probably a perceived
or real slight at work, a substantial life change, such as loss of job or
relative, change in life risks (for which the need for medical insurance
provided by an employer no longer became absolutely crucial) or even simply
having reached a point where an entrepreneur has acquired enough information
and advice from their exploration (during Level 1) to recognize some value
in their idea worth commercializing. At this Level, an entrepreneur's questions
about what it would take to give birth to the idea become more specific
and the launch process prioritized.
Luckily, being at this Level at this moment in history, an entrepreneur is more aware of and willing to exploit his/her resources and choices than any previous entrepreneur in the history of commerce. This is typically because Level 2 entrepreneurs will either be employed full-time or in between jobs and the possibility of launching the idea as a business appears less risky.
Level 3
At Level 3, an entrepreneur will demonstrate some commitment to launching
the business idea by initiating the processing of all the information s/he
has acquired up to this point. But the analysis isn't fully structured and
often directionless because the entrepreneur is unaware of what the idea
looks like before it's launched and already making money. Using that abstract
projection of a wildly successful business as a benchmark, an entrepreneur
may overlook many of the pre-launch and post-launch stages that are critical
to a business' survival. (This is why research [2]
shows that the entrepreneurs that survive past the 2nd year are typically
older, more experienced or have even started a prior business.)
One of the most oft-suggested actions an entrepreneur takes to start a business is to write a business plan (and if an entrepreneur is putting one together, that's the indication of their being in Level 3; sometimes Level 3 is where many entrepreneurs are grouped into by so-called advisors, which is often why in our survey, many of the entrepreneurs who had previously received advice didn't feel it was relevant to what they needed). Interestingly, not every entrepreneur wants to put a business plan together, again, due to any number of circumstances. But without undergoing the process of putting one together, it is challenging for the entrepreneur and many of their future lenders, employees, vendors and customers to get a clear picture of what the business' product/service really is.
An effective bypass
to the business plan is to model the business. For example, every business
is consistent in that there's a manufacturing phase, an intermediate (distribution
or marketing) phase, and a selling phase. Depending on the sector and industry,
the manner in which these phases pan out change, but never lose their fundamental
order or objective. Thus, in the sell phase, a service or product can be
sold via catalogues, stores, or with door-to-door salesmen (and women).
And depending on the sales approach selected, hundreds of iterations can
subsequently follow, such as the revenue capturing approach (memberships,
one-offs, plans) or how the customer takes possession of their product/service
(they pick up, you drop off). (3)
Consequently, this is one of the most critical Levels for an idea, during which great advice is needed. However, because an entrepreneur isn't aware of the value of advice at this critical point (after all, how often does an entrepreneur at this Level receive advice specifically tailored to get them past this Level?) Because the one tangible product Level 3 entrepreneurs recognize and will more likely purchase (because they're told at every opportunity that they need one) is a business plan (which further explains the proliferation of business plan services and how-to articles).
Level 4
By Level 4, entrepreneurs have completed the planning and modeling of the
idea into a robust business concept. Interestingly, "entrepreneurs
at Level 4 have resources available to them (possibly the result of having
passed through all of the prior levels and accumulating what they needed
to get to Level 4)" so it is not uncommon for Level 4 entrepreneurs
to have given birth to the business in some sort of "beta", "pre-launch",
"soft", or "quiet" version, so that s/he can have something
to show for those investing money and time into the newborn business. And
so, Level 4 marks the beginning of the hunt for money to give full birth
to the idea and take care of the business until it's able to take care of
itself.
With 2 distinct ways of funding a business (loans and equity), both of which can be accessed via as many as 12 distinct channels (savings, friends and family, banks, non-bank lenders, creditors, guarantors, angels, venture capitalists, hedge funds, in-kind support, [former] employer, and clients), all options available in the midst of today's global glut of money seeking investment opportunities, it's boggling how uninformed many entrepreneurs are about their options and worse, how challenging it becomes for them to access their options. But try they do and it's at this Level that most entrepreneurs progressing through Levels may decide to abort their hard-to-finance idea, whether partially birthed or not.
Level 5
Despite being a significant milestone, the launch or "full birth"
of the idea into a business, the event that occurs at Level 5, is quite
mediocre. It's handling that first order that's the real milestone; the
vindication that an idea has value. And since a good portion of businesses
have already handled their first customers by the time they've officially
launched, the real progression into Level 5 is totally a matter of scheduling,
without any significance other than an entrepreneur - who's title officially
changes to "founder" - being able to follow through on a schedule.
(Another important reason for the mediocrity of passing into Level 5 is
that sometimes, a founder may not have properly funded the business in Level
4 and chose to launch despite the lack of funding. It should come as no
surprise here either that when an idea is powerful enough, it is difficult
for an entrepreneur to not launch it, with or without intellectual, ideological,
or financial support from his/her networks.)
Level 6
After several months or years, the business that was once an idea requires
full-time attention from the founder, regardless of how much income or profitability
the idea is producing. In fact, many of the processes put in place at inception
have become routine for the founder, never having been changed because the
founder was too busy "running the business" to actually think
about anything else. It can be said that the business is even running on
"auto-pilot" since it can sometimes operate without the founder's
presence for a prolonged period of time.
Consequently, an entrepreneur will first feel worn-out and begin agitation for some kind of change. This agitation will often manifest in a "dusting off" of a business plan, rekindling of interest in information and advice, and even acknowledgement that in order to grow beyond the monotony of taking care of the business, the founder may have to (gulp!) pay for products and professional services.
And upon receiving the advice, the founder may come to realize that s/he doesn't have the time or resources to execute the advice. And if the founder did have the time and resources, s/he may find that because s/he had only the free advice from his/her earliest days to benchmark this new advice, the founder was unable to effectively plan, manage, nor utilize what s/he got for his/her money.
"Auto-pilot" operations is sometimes the consequence of the founder still committing to another employer a full-time schedule, which will require the founder to figure out ways to permit his/her business to run while s/he is often at their "other job". The business is not a "hustle" or "side-business", but rather an unprofitable one, despite all of the time and resources being committed; and the other job's income is what's keeping the founder's bills under control and business in operation.
Despite the sound strategic advice of focusing 100% of an entrepreneur's attention into a single commitment (preferably the business), the advisor may overlook that the founder is not the business, and the founder, who would gladly give the business s/he birthed as much attention as the business needs, can have his/her options limited due to any number of circumstances unrelated to the business.
There's validity in having a third-party advisor make the argument of focusing on the business; it certainly offers evidence that the entrepreneur is already being disassociated from the business. But it's also an indication that suggest that an advisor isn't taking into consideration the founder as an (emotional) human operating a business and may not have a full grasp of the options and potential of a founder, rendering their formal recommendation potentially useless to the founder (but not, however, to the business).
Level 7
Having acquired the strategic advice and having learned to manage executions
of advice, a business can now start thinking beyond the founder, including
hiring management not related to or friendly with the founder and empowering
that new management with resources and authority to grow the business in
new ways and new directions not always explicitly articulated by the founder.
This is often extremely difficult for founders to embrace because it's only
when the business is successful that a founder realizes what a great idea
it was to launch the business, and with such hardships; they relish the
acknowledgement of their brilliant business acumen and sacrifices; and they
will not take kindly to having their authority denuded and rewards stolen,
since, after all, that became one of the reasons the founder went into business
in the first place.
Regrettably, the founder fails to acknowledge (or may never have been told) that this is the natural order of a business idea in a capitalistic system: the idea, when born, belongs to employees, clients, shareholders, and everyone it touchs, not just the founder. It's at this Level that the founder may (hopefully, usually, finally) start to recognize this fact and may either choose to step back, retiring from daily operations of the business or worse, be evicted by the business. This struggle will then either weaken and embitter the founder or embolden him/her until s/he is back in full control of the business, with a subsequent eviction of the mutinous parties (including partners). In any event, whether or not the founder makes it to Level 7, the business most likely will. Here again, it's important to note that from conception, the idea and business is a distinct entity from the entrepreneur.
Level 8
Having survived the "growing pains" of Level 7, a business will
finally seek to explore corporate-level strategy, including ways to entrench
a founder who succeeded in staying on through Level 8 or entrench management
who, recognizing what they did to the founder, don't want the same to happen
to them. This sort of strategic thinking is also important because as they
invest their resources into new areas and affect a larger number of people,
the business becomes an entity which can have a reputation, face legal challenges,
and take care of or harm hundreds of thousands of families merely through
their ongoing operations. Interestingly, at this Level, it's extremely hard
for a business to fail, since many parties have an interest in its survival
(not least of which are the governments in which a business conducts its
affairs in). And even if the business does fail, the idea where it was born
from has already been emulated and sometimes improved upon by countless
others, so that the business will ultimately become an industry. And as
an industry, its impact is felt much more widely and deeply than any entrepreneur
would have ever thought possible when s/he was just thinking about whether
or not it would even work.
You Are Not a Small, Medium, or Large Business
In light of the insights
from our entrepreneur survey it is practically a fatal strategic mistake
to assess your business health and/or make strategic decisions (which always
require some financial investment) based on size. By utilizing the Levels
Lens Analysis to evaluate a business, innovations in sales, marketing, business
development, operations, legal, accounting, and finance are now possible.
Footnotes
(1) al berrios & co.'s 1st Annual Entrepreneur Survey: Making Behavioral Economic Sense of Entrepreneur Classes, Levels, and Needs, http://www.alberrios.com/c/0507research.html
(2) Research Paper: "Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs" by Paul Gompers, Anna Kovner, Josh Lerner, and David Scharfstein, July 2006
(3) The al berrios
& co. Business Model Anthology: http://www.alberrios.com/who/bma/
Al Berrios is Managing Director of al berrios & co., a pure strategy consulting firm, specializing in advising organizations + entrepreneurs on managing their enterprises in a service economy. Write or Subscribe to Consumer Strategies Report.
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