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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

Is There A Coworking Space Bubble?

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An annual growth rate of nearly 100%, almost five years in a row? More than 60 coworking spaces in a city like Berlin? Are these the characteristics of a bubble? Nope, these are characteristics of a lasting change in our world of work, which has been further catalyzed by the recent economic crises in many countries. But what makes this change different to a bubble? We’ve summarized some arguments of why the coworking movement is based on a sustainable change. However, that doesn’t mean it’s an easy job to open a good working coworking space.

Five reasons why the growth of coworking spaces is based on organic and sustainable growth: 

1. Coworking spaces invest their own money and create real wealth

Already, there is a convincing argument supporting why coworking spaces are not developing in a bubble: the fact that they create real wealth.

Whether referring to the dotcom bubble a decade ago or the real estate crisis in Spain or the United States, the crisis originated in a glut of cheap money, in an environment in which the sender and the recipient were unacquainted. From funds and banks, money flowed in steady streams to investments which offered little resistance and the most promising returns – which only a little while later turned into delusions and ruined investments.

Redistributed risks create illusions. Those people who distributed the money rarely wore the risk of investment decisions. The risk was mainly taken by small shareholders or people who bought parts of those investments. This was because either both parties’ (better) judgement was drowned out by the noise of the market, or because shareholders were unaware of the risk, and were at the mercy of banks and funds for reliable information.

Another fundamental condition for the creation of bubbles are the sheer amounts of money that flow from various locations globally and are concentrated, by comparison, in much fewer places.

Most coworking spaces, however, receive their funding from local or nearby sources and do not operate within this financial system. In fact, the founders mainly inject the bulk of the required investment, and turn to friends or relatives for additional support. They wear the full brunt of the risks that are involved in small-time investment.

They have access to much more information, because it is their own project, rather than a foreign one thousands of miles away. This also includes failures and mistakes that are encountered along the way, but the risk is less redistributed, thereby decreasing the probability of failures.

2. Labor market changes demand on certain office types lastingly

Most users of coworking spaces are self-employed. The proportion of employees is also on the rise, in many cases simply because they work for small companies that increasingly opt to conduct their business in coworking spaces rather than in traditional offices. The industry of almost all coworkers fall within the Internet-based creative industries.

With flexibilisation of work markets, new mobile technologies that are changing work patterns, and the increase of external services purchasing from large and medium-sized enterprises (outsourcing), the labor market has changed radically in many parts of the world.

The long-term financial and emotional security of becoming an employee no longer exists, especially for younger generations of workers. Bigger companies are quicker to fire than hire, and precarious short-term contracts are on the rise. Promising options on the labor market are more often recuded to freelancer careers and starting your own company.

And that’s possible with less money to invest. All you need is a laptop, a brain and a good network. For years, the number of independent workers and small businesses has been growing worldwide – particularly in internet-based creative industries. Anyone who has sufficient specialized skills and the willingness to take risks may adapt more quickly to market conditions if they own a small business or are self employed; more so than if they were to work in a dependent position in an equally volatile market.

Coworking spaces provide an environment in which to do this. Once they have joined a (suitable) coworking space, these factors become apparent to coworkers, who will remain in their space for years to come.

Furthermore, independent workers rarely fire themselves in crises, and even small companies are less likely to give their employees the boot – compared to their large counterparts. This combination enables more sustainable business models – and less business models à la Groupon.

3. Coworking spaces don’t live on crises

Global economic growth is waning while the number of coworking spaces is continually growing. Do coworking spaces thus benefit from this crisis?

The current crises accelerate the formation and growth of coworking spaces, because they offer solutions and space for the resulting problems. Coworking spaces are therefore not a result of a crisis, but the product of change that pre-dates their existence. A crisis is simply the most visible expression of change.

The first coworking spaces emerged in the late 1990s; the movement’s strong growth started six years ago – before the onset of economic downturns in many countries.

4. Coworking spaces depend on the needs of their members

Most coworking spaces are rarely full. Does this mean they are unsuccessful? On average, only half of all desks are occupied. But the average occupancy rate of 50% refers only to a specific date.

In fact, coworking spaces generally serve more members than they can seat at any given time, since members do not use the spaces simultaneously. Coworking spaces are places for independents who want to work on flexible terms. Smaller spaces rely more on permanent members. Larger spaces can respond more flexibilty to the working hours of its members, and, can rent desks several times over.

If a coworking space is always overcrowded or totally empty, the purpose of said space would be defeated. Firstly, it is rather impossible to work in an overcrowded room. Second, it’s impossible to cowork in an empty room. Given the nature of flexible memberships, a coworking space only can survive if they fit the needs of their members. Members would otherwise be quick to leave, and membership would be much more transient.

5. The coworking market is far from saturation

Less than 2% of all self-employed – and even fewer employees – currently work in coworking spaces. Reporting on coworking may increase, but inflated reporting on the coworking movement in the mainstream media is still far away.

Coverage of coworking space are most likely to be found in the career or local sections in larger publications – front cover coverage remains the dream of many space operators. This is because the whole coworking movement can’t be photographed in one picture. What appears to be a disadvantage, however, is actually a beneficial truth: niche coverage allows the industry to grow organically, and avoid over inflation.

Conclusion

Coworking spaces don’t operate in parallel universes – like the financial market. Demand and supply are almost exclusively organic and operate in the real world economy.

For the same reason, there is no guarantee that opening a coworking spaces will be automaticly successful. Anyone who fails to learn how to deal with potential customers in their market, or is unfamiliar with how coworking communities function, will have a difficult time of making one work. In the same way that business people in other industries will fail if they do not understand their market.

Those who simply tack on the word ‘coworking’ to their space’s facade will need to work harder. The structure of most coworking spaces is based on real work, calculated risk, and real-world supply and demand.

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About the Author

This article was produced by Deskmag. Deskmag is the magazine about the new type of work and their places, how they look, how they function, how they could be improved and how we work in them. They especially focus on coworking spaces which are home to the new breed of independent workers and small companies. see more.

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Callum Connects

Dextre Teh, Founder of Rebirth Academy

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Dextre Teh is a consultant and marketing guru, helping F&B businesses to tighten their operations and grow their businesses.

What’s your story?
I help frustrated F&B business owners stuck in day to day operation transform from a glorified operator into a real business owner. I’m a 27 year old Singaporean second generation restaurant owner and a F&B business consultant. Entering the industry at 13 years old, I have always been obsessed with operations and systemisation. At the age of 25, I joined the insurance industry and earned a six figure yearly income. However, I left the high pay behind because it was not my passion and returned to the F&B industry. Now I help other F&B companies to tighten operations and grow their businesses with my consulting and marketing services.

What excites you most about your industry?
The food. I’m a big lover of food and even have a YouTube show on food in development. But that aside, it is really about impacting people through food. Creating moments and memories for people, be it a dating couple or families or friends. Providing that refuge from the daily grind of life. So in educating my consulting clients and training their staff to provide a better experience for their customers, I aim to shift the industry in the direction of creating memories instead of just selling food.

What’s your connection to Asia?
I was born and bred in Singapore. I love the culture, the food and travelling in Asia.

Favourite city in Asia for business and why?
Singapore hands down. The environment here is built for businesses to thrive. The government is pro business and the infrastructure is built around supporting business growth. Not to mention the numerous amount of grants available in helping people start and even grow business. If I’m not mistaken, the Singaporean government is the only government in the world that offers grants to home grown businesses for overseas expansion.

What’s the best piece of advice you ever received?
Learning to do things you do not intend to master is a BIG mistake in business. Focus on what you are good at and pay others to do the rest.

Many business owners including myself are so overwhelmed by the 10,000 things that they feel they need to do everyday. We try to do everything ourselves because we think it saves us money. The only thing that, that does for us is overload our schedules and give us mediocre results. Instead we should focus on what we do best and bring in support for the rest.

Who inspires you?
Christopher M Duncan.

At 29, Chris has built multiple 7 figure businesses. He opened me to the possibility of building a business on the thing that I loved and gave me a blueprint of how to do it. He also showed me that being young doesn’t mean you cannot do great things.

Imran Mohammad and Fazil Musa
They are my mentors and inspire me every single day to pursue my dreams, to focus on celebrating life and enjoying the process of getting to where I want to be.

What have you just learnt recently that blew you away?
Time is always more expensive than money. Money, you can earn over and over again but time, once you spend it, will never come back.

If you had your time again, what would you do differently?
I am a firm believer that your experiences shape who you are. I am grateful for every single moment of my life be it the highs or the lows, the successes and the failures because all these experiences have led me to become the person I am and brought me to the place that I’m at so I will probably do things the same way as everything was perfect in its time.

How do you unwind?
Chilling out in a live music bar with a drink in hand, listening to my favourite live band, 53A. Other than that I’m big on retail therapy, buying cool and geeky stuff.

Favourite Asian destination for relaxation? Why?
Bangkok. It feels like a home away from home where the cost of living is relatively low, the food is good and the people are friendly.

Everyone in business should read this book:
Everything you know about business is wrong by Alastair Dryburgh. It is a book that challenges commonly accepted business “truths” and inspires you to go against the grain, think different, take risks and stand your ground in the face of the challenges that will come your way as a business owner.

Shameless plug for your business:
I’m the creator of the world’s first Chilli Crab Challenge. It gained viral celebrity earlier this year with 3 major newspaper features and more than a dozen blog and online publications featuring it in the span of two weeks. In the span of the two weeks, the campaign reached well over a million people in exposure without a single cent spent in ads.

Now I help F&B companies to tighten operations, increase profits and grow their businesses with my consulting and marketing services. Chilli Crab Challenge (https://www.chillicrab.com/nationalday)

How can people connect with you?
You can connect with me on Facebook (www.facebook.com/djtehkh) or visit www.rebirthacademy.sg for more information or book a 10 minute call with me @ www.tinyurl.com/dexclar

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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