As I mentioned in my first post, one of the reasons I moved to Vietnam six years ago was because I saw a whole new world of opportunities to start new businesses. Through my journey as both an entrepreneur and angel investor in Vietnam, I’ve come to realize that, while there are many opportunities to start new businesses in Vietnam, there are significant barriers to scaling up a new business. These barriers range from a socio-political system that may necessitate use of “under the table” money, to inefficient banking and distribution systems, to a limited total market size. While some of these factors may change over time, it may take years or even decades to see significant improvements.
The key question then is, given these constraints, how can entrepreneurs in Vietnam become successful? Of course, there are no one-size-fits-all answers, so to begin answering this question, we need to start unpacking two fundamental concepts about how entrepreneurs start new businesses.
First, successful entrepreneurs, in any country or cultural context, start businesses based on their individual strengths or “means.” More specifically, every entrepreneur has three means when starting any new venture, these are: individual talent/skills/abilities or Human Capital (who they are), intellectual capital (what they know), and social capital (who they know). By understanding this key concept, you will see that the potential opportunities to start a new business that one entrepreneur sees will look very different from the opportunities of another entrepreneur with different means. For more information on the concept of entrepreneurs’ means, I recommend reading Saras Sarasvathy’s work on effectuation.
Second, it’s important to make a clear distinction between two separate activities within what we commonly think of as entrepreneurship. These activities are 1) starting a new business (essentially, finding customers who will buy or use your product or service), and 2) growing a business (often referred to as “scaling up a business”). These activities can be mapped to the stages of development of a business, for a more detailed description of one perspective on these distinct stages of business development, I recommend Steve Blank’s blog and book “Four Steps to the Epiphany.”
A common mistake made by both first-time and even previously successful entrepreneurs is that they create a grand vision of their future business, write a detailed business plan to raise huge amounts of funding, and try to scale up without validating whether they actually have customers who will use their product or service. A great example of this was Webvan, which envisioned a future where everyone would order groceries from on-line and have them delivered conveniently to their homes. They invested over $800 million into warehouses, delivery trucks, and personnel to execute on this vision, and once they launched, they only received about 1/3 of the expected orders, and went bankrupt shortly thereafter.
This distinction between the two phases of a start-up is important because “macro” factors (such as demographics/market size, government, banking, and distribution systems) have a greater affect on an entrepreneur’s ability to grow a business, and less on an entrepreneur’s ability to start a business. As a result, in most developing countries like Vietnam, we see many more small “mom and pop” businesses, and very few large privately held companies. The largest companies in these countries tend to be state-owned or have some very strong political connections that give them a competitive advantage (or protection) when it comes to the second phase (i.e. scaling the business).
Now, if we look again at the first point, an entrepreneur’s means will determine their ability to both start and scale a business. Because these are two fundamentally different activities, they require two different sets of skills, knowledge, and relationships. Typically, entrepreneurs who are good at the first activity of starting and validating a new business are not the same people who are good at scaling a business. A great example of this is the case of Starbucks Coffee, where the original founders were able to grow the business to six stores in the Seattle area, but a non-founding manager, Howard Schultz, was the person who took it to a global scale. Similarly, Roy Raymond founded a modestly successful chain of lingerie retail shops in California, creating value for thousands of customers, but Les Wexner of The Limited, with his family background and many years experience in fashion retailing, was able to grow Victoria’s Secret into a global brand, delivering value for millions.
This brings us to a second common mistake made by both first-time and experienced entrepreneurs, which is not bringing the right people on board at the right time. Entrepreneurship is a team sport, and all founders of great companies, both large and small, build core and extended teams that they rely on to help them start, scale, and sustain their businesses.
Ultimately, what determines the success of a start-up is its ability to create value for its customers, and the ability of its founders to capture some of that value creation as profits that will go to grow and sustain the new business. Understanding these two fundamental concepts will help entrepreneurs focus on doing the right things at the right time, and can also help to give mentors, advisors, and investors involved in developing new businesses to give the right advice at the right time.
So, to build better start-ups, entrepreneurial teams and those who support them with advice and investment must have an intense focus on value creation. If you are an aspiring entrepreneur, now you may ask, “How do I create value?” That will be the subject of future posts…
Photo by pachecopily (Creative Commons)