The Entrepreneur Dilemma: Should I develop my solution or go for funding?

Deciding correctly what to do at each moment along an innovation process is one of the most difficult things in both  innovation and entrepreneurship, and a determining success factor in these disciplines where normally resources are scarce, there is no control over external elements, reliable information and precise knowledge is little, and time is always short.

Shall I ride the best wave or all the waves?

Experience has shown us that progress in innovation and entrepreneurship goes in steps, but in an analogous way as in surf contests, where only the score on the best wave performed counts. This means that you can either go for all of the waves and finish so exhausted that when the good one comes you can hardly stand up on your board, or you can wait expectant analysing the speed, conformation and trajectory of each wave, waiting for the one that really fits your skills and style to meet you. The risk is that it might have taken a day off, and you might finish not scoring at all, and boring the crowd. But let’s go to the basics of this.

The Bird-in-Hand principle

Professor Saras Sarasvathy, named top 18 Entrepreneurship Professors by Fortune Small Business magazine, showed us the “Bird-in-Hand Principle”,  which tells us that successful entrepreneurs underpin their projects on their means,   by answering the three following questions: (1) Who am I? (2) What do I know? and (3) Whom do I know?

Replies to Who am I? relate to the entrepreneur’s identity, his accomplishments, principles, ambition and of course experience. All these aspects give the entrepreneur the confidence required to assure his leadership capabilities.

In What do I know? resides the knowledge base that will allow the entrepreneur to focus on a simple problem for which she sees an implementable solution—or even something that she simply believes would be fun to attempt—and go for it.

Finally,  Whom do I know?  includes means in terms of connections who can either help her validate the idea, provide the knowledge, skills or labour to complement her own, or simply give her access to resources not at her hand which can include funding.

When innovating, knowledge is king

For technology-based start-ups, the second means (knowledge) is not only the starting point, but actually knowledge generation towards the creation of value becomes the project’s main pursuit, definer of its roadmap and purpose for its resources. In other words, leadership and connections must be put to work for the sake of the advance of the innovation, which determines it all, and very especially at the project’s most initial stages or low TRLs (Technology Readiness Levels).

Entrepreneurship must build on (temporary) failure

At Strata, we know by heart that Innovation Management has two basic rules:

1.   Error is part of the process of moving forward in innovation, and just the result of not having predicted potential failures (risks)

2.       Failure is unacceptable; 

Consequently, any step forward in the development of the innovation must be taken at increments where failures are just errors that can be corrected. Each incremental step should position the start-up in a higher scale or platform from where to take the next step forward. Therefore, the funding required at each moment of the project will depend on the next step to be taken, which is conditioned by the level of risk.

In this sense, innovating is actually a process of gradually “scaling up”, understood as the action by which the start-up positions itself in a new state in which, with an increment in the inputs (resources) it will obtain proportionally much higher value.

An intelligent funding roadmap: a key ingredient for success

Often, entrepreneurs who focus too much on the funding side of the project, or that are too eager to arrive at the payback period do not correctly perceive the funding timing. This may result  in a loss of management resources or even in failure. Entrepreneurs should not dimension the steps according to the funding available but  to the scaling up achievable from the platform in which the innovation is standing.

The entrepreneurial process must go along with the innovation process, from the very first idea to the product-market fit, and funding should encompass its advance.

References


[1] Saras D. Sarasvathy and W. Forster (2013): “Entrepreneurial Decision Making” Academy of Management Annals.

[2] PÉREZ BREVA, Luis (2017): Innovating: A Doer’s Manifesto for Starting from a Hunch, Prototyping Problems, Scaling Up, and Learning to Be Productively Wrong, MIT Press

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