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How an Entrepreneur’s Passion Can Destroy a Startup

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Call it the paradox of entrepreneurship: The very thing it takes to start a business often ends up destroying it.

I’ve spent the past 15 years researching people who start companies, and there’s a consistent theme among the 16,000 founders I’ve analyzed. It’s passion. Founders believe in their ideas so strongly they throw aside comfortable jobs and risk their life savings to chase their dreams. They have such contagious enthusiasm they can convince others to sign on, whether it’s co-founders or venture investors or early-adopting customers.

But that’s the positive side of passion. Another constant I’ve seen is that if there’s anything that can sink a new business, it’s passion. It blinds entrepreneurs, leading them to get overconfident and make bad choices at the worst times—potentially dooming even the most promising startups. Only then do founders appreciate that the origin of the word “passion” is the Latin word for “suffer.”

Passionate entrepreneurs are so impatient to move forward with their brilliant new idea that they get too optimistic about how would-be customers and investors will see it. Since founders are so committed to the enterprise, they end up blindsided when key team members lose interest and drop out. They don’t realize they lack the skills and support they need to get a business on its feet. And they can’t imagine that investors will want to replace them with a more-seasoned CEO.

Here’s a road map of four critical junctures where founders often let passion cloud their judgment—and strategies for staying clear-eyed.

THE LAUNCH: Let’s Do It ASAP!

The first time passion can cause problems is when aspiring entrepreneurs are deciding whether or not to launch a startup. They can get blinded into believing all the factors are favorable for starting a company, making them much more likely to take undue risks.

Let’s break that down. There are three major areas prospective founders need to take into account when they’re thinking about launching—their market circumstances, their career circumstances and their personal circumstances.

In the market realm, a founder who’s passionate about an idea is more likely to misread whether a large potential customer base for their venture exists. Obsessed with their own ideas, founders are at risk of believing that “I would love to buy this product, so there must be a lot of others who would, too.”

For instance, almost 800 founders took a predictive test that evaluated their startup ideas, then received recommendations about the next steps they ought to take. Thomas Astebro and his colleagues found that a sizable percentage of founders who received a recommendation to halt progress on their startups because the idea wasn’t commercially viable kept going anyway—29% of this group kept spending money, and 51% kept spending time, developing their idea. On average, they doubled their losses before giving up on pursuing their idea. To explain why a significant proportion of founders kept going after receiving negative feedback, the study’s authors point to optimism (as well as to the sunk-cost effect, the tendency people have not to abandon something after they’ve sunk money into it).

When it comes to career circumstances, passion often blinds founders into thinking they have all the skills they need to build their business, when in fact they’re poorly prepared—and may not be able to fill in the gaps on the fly. Likewise, passionate founders may not realize they don’t have the connections they need to help find co-founders, employees or investors.

I recently surveyed 100 Harvard Business School graduates who had become founders over the past decade. Their reflections indicated that the biggest thing they lacked at the time of founding was sales experience, followed by technical/scientific experience and management experience. Next came connections: Their fourth and sixth biggest holes were contacts with investors and with potential customers.

Finally, in the personal realm, aspiring entrepreneurs may discount the toll that a startup will take on their family, and they are more likely to sell a significant other on rosy scenarios in order to gain their support.

Serial entrepreneur Steve Blank describes four lies that entrepreneurs tell themselves and their spouses. Lies they tell themselves include “I’m only doing it for my family” and “my spouse ‘understands.’ ” Lies that are also told to spouses are “all I need is one startup to ‘hit’ and then I can slow down or retire” and “I’ll make it up by spending ‘quality time’ with my wife/kids.”

Steve admits that he told himself each of these things, and “none of these were true.”

Down the road, fragile early support from a spouse is likely to crack as the venture hits bumps—and strong emotional backing is most needed.

THE BUSINESS PLAN: The Bigger the Better!

Next, passion can wreak havoc with founders’ judgment when they’re crafting their early business plans. They focus on rosy scenarios, assuming they’ll get up and running quickly and build sales without a hitch.

When researcher Arnold C. Cooper and colleagues asked 3,000 small-business owners about the odds of success for their own businesses, they ranked their own chances as being an average of 8.1 out of 10. When asked about the odds of success for businesses similar to their own, they ranked them as being much lower: 5.9 out of 10.

Needless to say, the rosy projections rarely pan out. Back to my survey of Harvard Business School founder-alums. When asked how their actual execution compared with their early plans, the largest percentage—41%—said that their ventures ultimately ended up taking at least “twice as long and twice as much capital” as they had planned. For a total of 79%, execution was slower than planned. Only 4% of the plans were on target.

For another perspective, consider research from Keith M. Hmieleski and Robert A. Baron. They found that optimism at startups—”the tendency to expect positive outcomes even when such expectations are not rationally justified”—was associated with a 20% decrease in revenue growth and a 25% decrease in employment growth over the subsequent two years. The more fast-moving and quickly evolving the startup’s environment, the stronger this effect was.

The authors point out that optimism isn’t always a negative when building a business, but founders should find effective ways of tempering that rosy view with a dose of realism.

DIVIDING EQUITY: We’re All in This Together!

When a passionate entrepreneur brings together a team to help run a startup, it’s easy to get caught up in the enthusiasm of the project and assume the best. Everyone will be a great fit and have the skills the company needs as it grows, the entrepreneur thinks, and will maintain the same level of commitment over the long haul. The Three Musketeers forever.

All too often, founders craft agreements and contracts in that frame of mind. And it comes back to haunt the team down the road. Things change, often dramatically.

As the company grows and evolves, one partner’s strengths are needed more than anticipated, so he ends up taking a larger role. Another partner loses interest with the venture and stops contributing as much. Another has family problems and needs to drop out for extended stretches.

But all of them are still working under the contracts that they crafted during the early Three Musketeers days. My data show that 73% of teams split the equity ownership within that enthusiastic first month of founding, and a majority of those teams engrave their ownership percentages in stone; their initial split will remain, no matter what develops.

That inflexibility in the face of change leads to tension. Over time, my research shows, unhappiness with the initial equity split nearly triples. And undoing a bad early split is hard to do.

THE CEO CHAIR: I’ll Run the Show Forever!

The final big juncture comes when the startup has gotten off the ground.

Passionate entrepreneurs have led their enterprise past some big milestones and are getting more confident in their abilities. They get so confident, they figure they can keep the reins forever. And very often they’re shocked when a big investor or the board of directors wants to replace them with a new CEO.

My data show that by the time startups raise the third round of outside financing, 52% of founders have been replaced as CEO. Three-quarters of the time, the founder didn’t want to go.

There are good reasons for replacing a founder at the top. The skills it takes to build an excellent product and go from no sales to $1 million aren’t the same ones needed to hit $10 million or $100 million. But even the most rational arguments for a change at the top often fall on deaf ears.

When founders are blindsided, the transition to a new CEO may instead harm value and heighten risks. After all, if the “fearless leader” is furious about being fired, distraction and turnover are likely to increase for early employees and loyalists. And when founders insist on retaining the throne, they usually scare off the investors and hires whose capital and contributions can help build the company’s value.

Avoiding all of these traps isn’t easy.

Even after seeing the statistics on entrepreneurial missteps, many passionate founders tend to believe, “That won’t be me; I’ll avoid those problems.” Culturally, founders are celebrated for following their natural inclinations and their intuition.

However, as Steve Jobs warned, “Follow your heart, but check it with your head.” Founders should educate themselves about the decisions and hurdles they are likely to face.

Even in the idea stage, entrepreneurs must recognize that their passion may be blinding them, and they need to take steps to get the skills and support they need—not just assume they will “find a way.” A mentor who excels at being a devil’s advocate, for instance, can help come up with worst-case scenarios for the business and then help prepare plans to avoid them.

Potential founders also need to take a clear, critical look at themselves and figure out their points of weakness—do they lack skills in a certain area? Will they be able to withstand an extra year without a salary? Do they have the contacts that they’ll need to land customers?—and then address those holes through proactive planning, training and networking.

Likewise, founders need to assume their relationships with their partners will change, as will each co-founder’s suitability and commitment, and develop agreements that are flexible enough to adjust.

Then there’s the question of how to prepare to be replaced as CEO. As they embark on their journeys, founders should reflect on what they want for themselves.

Do they want to see their “baby” grow as large as possible? In that case, they should ready themselves to step aside and figure out what kind of secondary role will satisfy them. Or do they want to remain in charge at all costs? Then they must prepare themselves to lead a company that won’t attract as much talent and investor interest. They’ll still be king or queen, but over a much smaller kingdom.

By identifying common pitfalls and proactively taking action to avoid unwanted outcomes, founders are much more likely to build the type of company they seek and to achieve the impact on the world that we all need them to have.

This article was written by Stephen Webster  from Wall Street Journal

Mr. Wasserman, a professor at Harvard Business School and a visiting professor at the Stanford School of Engineering, is the author of “The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.” He can be reached at[email protected].

Entrepreneurship

Women on Top in Tech – Daphne Ng, CEO of JEDTrade

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(Women on Top in Tech is a series about Women Founders, CEOs, and Leaders in technology. It aims to amplify and bring to the fore diversity in leadership in technology.)

Daphne Ng is the CEO of JEDTrade, a blockchain technology company focused on trade, supply chain, and financial inclusion projects in ASEAN. She is also the Scretary-General at ACCESS and Exco. of Singapore Fintech Association

What makes you do what you do?
I was introduced to blockchain technology in 2016 after I left my corporate banking career after 10 years. It was my mentor who first got me interested in this technology, which I then went on to delve further into, on its potential applications in the lending and trade finance space – domains where I came from.

How did you rise in the industry you are in?
Being in the space for 2 years and actively involved in the ecosystem, I was able to bring on the projects, network and a good degree of thought leadership in this vertical. Early on in the startup journey, our team faced many challenges. And to me, the key to rising above failures are two essential factors – resilience and support. While resilience is innate, I received a lot of help be it in terms of connections or advice. ‘Nobody succeeds without help’ rings very true for me.

Why did you take on this role/start this startup especially since this is perhaps a stretch or challenge for you (or viewed as one since you are not the usual leadership demographics)?
From the start, I focused on my domain expertise in trade finance and the application construct of how blockchain and DLT can be applied to these use cases. Also, my strategy from the start was to build a technology company made up of 80% tech and engineers, which is also our key competitive advantage today. At the end of the day, deliverables are about strategy and execution, which includes building and leading an ‘A’ team.

Do you have a mentor that you look up to in your industries or did you look for one or how did that work?
I have many mentors, which includes our company advisors (all of whom are well-known in this industry) and mostly informal mentors I meet via my connections, and on various occasions and circumstances. Creating opportunities also means putting myself in the right place, at the right time. And in my case, these were mostly organic and genuine friendships formed from the initial connection.

How did you make a match if you and how did you end up being mentored by him?
To me, a match in values is very important. It also takes humility to ask for help and be willing to listen to advice, which is important in order for mentorships to be successful – be it formal or informal.

Now as a leader how do you spot, develop, keep, grow and support your talent?
I love this question! I am passionate about building strong teams and helping my people grow. I abide by the 3Rs when identifying talents: resourcefulness, resilience and right values. And then I invest in the ‘potential’ and this means giving them room to lead, make decisions and take risks.

Do you consciously or unconsciously support diversity and why?
My support of diverse talents, skillsets and characters can be seen in the make-up of our core team – all helming specific roles and each bringing their own value to the table. We need the sum of all parts to build a great company.

What is your take on what it takes to be a great leader in your industry and as a general rule of thumb?
Great leaders emerge in times of failures and challenges, never abandoning the team, and always putting the team’s interests before her own. And I consciously live by these mottos every day.

Advice for others?
My advice to other entrepreneurs: be resolute and dare to be different. If you are going to follow others, then you will end up on the same path as them. No right or wrong; but I would rather chart my own path. This June, we are officially launching our blockchain project, Jupiter Chain (www.jupiterchain.tech), which have garnered much interest in the industry, even before we made it public. We believe this project is the epitome of marrying innovation with practical implementation, and we want to be the first to truly operationalize blockchain for our ecosystem projects in this region.


If you’d like to get in touch with Daphne Ng, please feel free to reach out to her on LinkedIn: https://www.linkedin.com/in/daphne-ng-%E9%BB%84%E7%91%9E%E7%8E%B2/

To learn more about JEDTrade, please click here.

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Callum Connects

Jace Koh, Founder of U Ventures

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Jace Koh believes cash flow is the lifeblood of your business. Understanding it will enhance your ability to run and manage your business.

What’s your story?
My name is Jace Koh and I am the Founder of U Ventures. I’ve always been inclined towards investment and entrepreneurship. I’ve played a hand in starting businesses across these industries – professional services, cloud integration, software and music. I believe that succeeding in business is tough, but that’s what makes the rewards even sweeter.

What excites you most about your industry?
Everything excites me. These are my beliefs:

  • Why is accounting important?
    The accounting department is the heart. Cash flow is like blood stream, it pumps blood to various parts of the body like cash flow is pumped to various departments and/or functions in a business. It is vital to the life and death of the business.
  • Is accounting boring?
    Accountants are artists too. They paint the numbers the way they want them to be.
  • What makes a good accountant?
    A good accountant can tell you a story about the business by looking at the numbers.
  • Why is budgeting and projection important?
    Accountants are like fortune tellers, they can predict the numbers and if you wish to understand your business and make informed decisions, feel free to speak to our friendly consultants to secure a meeting.

What’s your connection to Asia?
I was born and raised in Singapore, and here’s where I want to be.

Favourite city in Asia for business and why?
Singapore is my favourite city. We have great legal systems in place, good security and people with integrity. Most importantly, we have a government that fosters a good environment for doing business. I recently went for a cultural exchange programme in Hong Kong to learn more about their startups. I found out that the Hong Kong government generally only supports local business owners in terms of grants. They’ve recently been more lenient and changed the eligibility to include all businesses that have at least 50% local shareholding. But comparing that to Singapore, the government only requires a 30% local shareholding to obtain government support. In the early days of starting a business, all the support you can get is precious. It’s great that we have a government that understands that.

What’s the best piece of advice you ever received?
The best time ever to plant a tree was 10 years ago as the tree would have grown so big to provide you with shelter and all. When is the next best time to plant a tree? It is today. Because in 10 years time, the tree would have grown big enough to provide you shelter and all.

Who inspires you?
Jack Ma. His journey to success is one of the most inspiring as it proves that with determination and great foresight, even the poorest can turn their lives around. I personally relate to his story a lot, and this is my favourite quote from him, “If you don’t give up, you still have a chance. Giving up is the greatest failure.”

What have you just learnt recently that blew you away?
I’ve faced multiple rejections throughout my business journey, and recently came across a fact on Jack Ma about how he was once rejected for 32 different jobs. It resonated very deeply and taught me the importance of tenacity, especially during tough times.

If you had your time again, what would you do differently?
Nothing. I live a life with no regrets. Everything I do, regardless of whether it is right or wrong, happy or sad, and regardless of outcome, it’s a lesson with something to take away.

How do you unwind?
I love to pamper myself through retail therapy and going for spas. I also make a conscious effort to take time off work to have a break outside to unwind as well as to uncloud my mind. This moment of reflection from time to time helps me see more clearly on how I can improve myself.

Favourite Asian destination for relaxation? Why?
Taiwan! Good food with no language barriers and the people are great!

Everyone in business should read this book:
I don’t really read books. Mostly, I learn from my daily life and interactions with hundreds of other business owners. To me, people tell the most interesting stories.

Shameless plug for your business:
We’re not just corporate secretaries, we’re “business doctors.”
U Ventures is a Xero certified advisory firm that goes beyond traditional accounting services to provide solutions for your business. You can reach us on our website: http://uventures.com.sg/

How can people connect with you?
Converse to connect. You can reach me via email at [email protected] or alternatively, on LinkedIn here: https://www.linkedin.com/in/jacekoh/

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started,
built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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