Chapter 2. BeginningsEstablishing a Venture

Chapter 2. Beginnings—Establishing a Venture

CHAPTER OVERVIEW

This chapter reviews the various issues that require careful attention in the preliminary stages, before the company is established: a close scrutiny of the idea, its necessity and feasibility, forming the team, and incorporating the company.

The Price of Success and Failure

Every entrepreneur should know that the vast majority of startup companies fail. In most cases, the bulk of the returns on the venture capital investment portfolio is yielded by very few investments, whereas most of the portfolio is expunged. There is a high probability that the entrepreneur's company will comprise part of that component of the investment portfolio.

In addition, as an entrepreneur, one should be prepared for the fact that the financing of any particular stage of an investment does not guarantee an investment in future stages. The road to success is paved with obstacles, and the foundation of a new company often implies the dedication of nights and days, long periods of uncertainty, and severe fluctuation between moments of stress and joy. The price of failure may be relatively small (loss of time and some funds), but may also entail the loss of savings, of alternative promising employment, etc., as well as tension within the family. However, despite the possible high cost, many find that no career satisfaction is greater than establishing and developing a company.

With the increasing recognition that startup failures result from a variety of reasons, many of which are independent of the entrepreneurs, the latter are decreasingly deterred from re-embarking on new ventures, after the failure of ventures in which they took part. Furthermore, society no longer labels entrepreneurs whose ventures failed as "failures."

It is always important to keep in mind that many entrepreneurs who have failed once are later successful. In many cases, entrepreneurs choose to reinvest their human capital, while assuming that the probabilities of success and failure may work in their favor on one of such attempts, especially since prior experience is greatly helpful in improving the success-failure ratio.

The Idea

Not every idea or technology is feasible, and even if it is, it does not necessarily follow that there is a need for it. Sometimes an idea comes along which is both needed and feasible, but is nevertheless an inappropriate basis for founding a company. The idea must be a product or a process that improves on something that exists in the market, and whose financial value will yield a positive return on the investment. First, there are two basic tests which an idea must pass: the test of need and the test of technology.

  • Need— There are many ideas that, although innovative, are entirely unnecessary. Moreover, many entrepreneurs believe that the key to success lies in recognizing a current market need and developing an idea to meet it. However, in many cases, a technologically feasible idea that meets a current market need is insufficient. It is highly likely that, if the need is genuine and visible, or the topic is "hot," dozens of other people will be addressing it at the same time. The best ideas are those that predict a need a few years down the line, and aim to meet such need.

  • Technology— Even if a product is needed or is expected to be needed, its technological feasibility has to be verified. Technological feasibility should be checked at the practical, not the theoretical, level. A project that will cost vast amounts of money, will take long to develop, and end in a product that is not economical to produce, is inappropriate for the free market in general, and startup companies in particular will find it hard to finance. For instance, the development of an ability to fly to the moon, and even a satellite telephone system such as the Iridium (the failed satellite communications project that consumed more than 5 billion dollars), were proven to be technologically feasible, but uneconomical.

In addition, even if a project addresses a need and is feasible both technologically and economically, it does not necessarily justify an investment, given the limited amount of resources directed at venture capital investments. It is important to remember that, although the volume of resources allocated in recent years to this area has considerably increased, so has the number of projects seeking financing. The preference of one project over another depends on several factors that are not necessarily related to the technology. In the technological context, it is important to note that there are usually several solutions to the same problem (for instance, there are several protocols for the transmission of data on optic fibers, and there are several solutions for broadband connections). The company which anticipates the standard that will evolve in the market or, alternatively, develops the method most likely to become the standard, is the one that will gain the financing and reap success.

However, it is important to understand that a mere idea is insufficient, and that its execution is at least as important as the actual idea. Furthermore, over and above the need for perseverance and an ability to perform, an entrepreneur should assume that entrepreneurs with similar ideas have also started working on similar projects at the same time, and that therefore the manner of execution of the idea and its time to market are, in many cases, highly significant components of success.

In the next section, we focus on the most significant component determining the ability to execute the idea: the management team.