Leadership

Strategic Entrepreneurism in the New Economy

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There’s an old saying that if you don’t know where you’re going, you’ll probably never going to get there. This applies to starting up a company in more ways than you might realize.

If you’re going to start a software company, you’re probably going to think big. That’s what I did when I started Bharosa. And when the company was acquired by Oracle, it was not by accident.

Today’s founders need to think differently when they start a company. I call this new-economy approach “Strategic Entrepreneurism.” Launching a company today is more risky than ever. Following the new laws of Strategic Entrepreneurism can improve your chances of success.

What is “Strategic Entrepreneurism?”

The ultimate dream of every entrepreneur is to create the next big success story. Whether you want to create a company that sells a specific product (such as Apple’s iPhone) or provides a unique service (such as Google’s search engine), the one key to starting up any company is that you must make money so your company can grow, thrive, and ultimately dominate its market.

If you try to hit home runs every time you step up to bat, you’re going to strike out nearly as often as you hit a home run. In the world of sports, you can strike out and step up to the plate over and over again. In the world of business, one or two strikeouts can wipe you out financially so you may never get another chance to correct your mistakes and succeed.

By following the old rules of starting up a company, you have to shoot for that one-in-a-million shot if you want to succeed, even though the odds may be stacked heavily against you. If you can free yourself from the blinders of these old rules, you’ll find that you always have other options for starting up a company. This new way of starting up a company, which I call Strategic Entrepreneurism (SE), can maximize your chance of success while minimizing your risks.

How SE Works

The basic idea behind Strategic Entrepreneurism is to refocus your goal. Instead of trying to become the one dominant company in your market, Strategic Entrepreneurism says that you want to be the one company that a larger, and more dominant company, wants to acquire.

From day one, create and design your company to become an attractive acquisition candidate. Identify the companies that you believe would most benefit from acquiring your company. Of course, you can never control what another company does, but by understanding which company may acquire you and what their own needs may be, you can steer your company in their direction as an acquisition target. Then when your company gets acquired by this larger corporation, everyone will remark on how lucky you are, not knowing that this was your goal from the beginning.

When I created Bharosa, I designed the entire company to be acquired for the maximum amount of money in the shortest amount of time. Oracle didn’t suddenly discover Bharosa and decide that my company would be a natural fit. Instead, I designed Bharosa to fit right into a company like Oracle from the beginning. Everything Bharosa did from day one was aimed at making the company an attractive acquisition target.

Practicing strategic entrepreneurism can actually involve more discipline than trying to build a company towards an IPO.

First, you must rely on far less investment capital to guard against dilution. The more money you accept to startup your company, the more you’ll have to pay back to these initial investors before you can make any money yourself.

Second, you must build your company’s products so that they can seamlessly integrate with a potential acquirer in mind. This can be as simple as making sure your product doesn’t compete directly with a potential acquirer’s product to courting the right analysts to say and print just the right things about your company.

If I could make only a single bet on my entire company, I would bet on the right strategic customer (and the right team to serve that customer) of maximum strategic interest to a potential acquirer.

To find a niche for your company, look for a crucial problem that needs solving and then provide that solution for a Fortune 500 customer that a Fortune 100 company would want to do business with or is already doing business with. By solving the problem of a Fortune 500 customer, your company will most likely be profitable as a result of this customer. By developing a solution for a Fortune 500 company, you make your company a desirable acquisition target by a Fortune 100 company.

How SE Differs from the Traditional Model

By making the correct decisions right from the start, anyone can increase their chances of success for their company. However, to fully understand the advantages of strategic entrepreneurism, you must first understand what being an entrepreneur is all about.

While every startup is different, the path for each startup consists of several distinct phases as shown in Figure 1-1.

First, the entrepreneur dreams up an idea for a business. Second, the entrepreneur assembles a team to help create and market the product. With a team in place, the entrepreneur may need to raise seed money to get the company started. This money can be the team’s own money, money from friends and relatives, or money from outside investors.

Figure 1-1: The lifecycle of a typical startup

As the company grows, it may go through additional rounds of funding, which provides money necessary for the company to continue growing. Ideally, the profits generated by the company can provide the additional money necessary to continue growing, but if profits are trickling in, you may need this additional funding to move the company forward much faster. For example, you may need additional funding to pay for expanding your sales force or purchasing additional equipment.

Many companies make the mistake of using additional funding to pay their bills and keep the company alive. What inevitably happens is that the company continues losing money and once outside funding dries up, the company is forced to declare bankruptcy. As a general rule, startups should only use each round of additional funding to help it move forward, not to delay bankruptcy. During this period, a startup remains a private corporation.

After several rounds of funding, a startup may decide to offer an IPO, which essentially allows anyone to buy shares in the company and become part owners. This is the time where a company becomes public. A successful IPO is generally considered a major milestone, although it’s really just another form of additional funding.

In the traditional model, a startup’s success relies on offering an IPO. However, the long path towards reaching an IPO can take years. During the dot-com bust of the 90′s, many companies issued IPOs prematurely, watched their stock price skyrocket, and then plummet into nothing.

In Strategic Entrepreneurism, the goal isn’t to reach an IPO but to sell out to an acquiring company much earlier. The drawback is that the potential valuation is much less, but the major advantage is that it takes less time, which also increases the chance of success, as shown in Figure 1-2.

Figure 1-2: Strategic Entrepreneurism focuses a startup into being acquired early in its life

The typical business model for a startup assumes that the longer a company stays in business, the higher its valuation will become – but that’s not always true for two reasons. First, the longer a company stays in business, the greater the chance of failure, either through changing market conditions or growing competition. Second, the more funding your startup receives, the greater the dilution of ownership for the entrepreneur. The longer you hold on to a company, the greater the risk that your valuation may decrease.

Strategic Entrepreneurism helps founders avoid this risk and ensure the financial success of their ventures through an early acquisition by a strategic partner.

Jon B. Fisher served as Bharosa, Inc.’s CEO until its successful acquisition by Oracle Corporation in July 2007. Jon became Oracle’s Vice President Product Management assisting with the release of Oracle Adaptive Access Manager 10g. Jon completed his engagement with Oracle in November 2007 and now serves as an adjunct faculty member at the University of San Francisco’s school of business. An entrepreneurship aficionado, Jon lectures frequently at university business schools. Named Ernst & Young’s 2007 Entrepreneur of the Year in California, Jon has served as CEO of three software companies in the Silicon Valley over the past 15 years.

 

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