Entrepreneurial Behavior

Surround yourself only with people who are going to lift you higher. Oprah Winfrey Media proprietor, actress, producer, and philanthropist.

Entrepreneurial mindset and motivation can only translate into action if entrepreneurial behaviors exist. This is where thinking transitions into seeing and acting. While there are many behaviors that may be described as entrepreneurial, focus on the behaviors most critical to entrepreneurial opportunity analysis and action. This chapter examines confidence, interpersonal skills, social capital, and risk tolerance.

Retrieved from: The Opportunity Analysis Canvas - Edition 2.0

Do you have the confidence to attempt the difficult?

     There are many statistics on the failure rates of startups. You may hear that 10% of new companies survive. Perhaps it's a 20% survival rate for second-time entrepreneurs. For entrepreneurs who have raised venture capital for their startups in the past, their success rate on future ventures may be 30%.

     While the statistics are debatable, we recognize that in a startup, nothing is going to happen unless the entrepreneur tries to make it happen.

     When we examine confidence, it's the belief in oneself or one's powers or abilities. Self-confidence, self-reliance, and self-assurance are related concepts. Confidence differs from self-efficacy in that self-efficacy relates to an individual activity. Confidence is a broader measure that generally applies to all tasks.

     While we're aware of self-confidence as a concept, we may be unfamiliar with the signs of low self-confidence. Shy body language, a hesitancy to speak up, and avoiding interaction are overt signs of low self-confidence. Internal signs are being indecisive, fearing failure, resisting trust, and seeking external validation for our actions.

     Entrepreneurs need to have confidence in their own judgement, particularly when things are difficult or when decisions are unpopular. Entrepreneurial opportunity discovery is constrained if there's limited confidence or discomfort with making decisions that are out of the norm.

     In summary, self-confidence is an important tool within entrepreneurial behavior. You will miss every opportunity that you don't try. And while taking the advice of others, or going with the mainstream thinking, is the popular and easy thing to go, a high degree of personal confidence is required to be innovative.

     Your confidence is critical to influencing others to participate in your startup as an investor, employee, partner, or customer. You need a high level of confidence when talking with investors, for recruiting prospective partners or co-founders, for bringing employees on board, and for communicating your product's benefits to customers.

What is your risk tolerance?

     Risk is a concept that's commonly discussed in startup conversations. We're going to talk about the impact of risk tolerance on the success of new ventures. 

     To define risk in our context, it's the potential for loss. It's loss of money. It's loss of time. There is also a risk in losing entrepreneurial opportunities. While loss of opportunity is a subjective assessment, the decision not to start a venture, or not to launch a product, is a decision that involves risk of lost profit or lost success. 

Do entrepreneurs prefer risk?

     Do entrepreneurs by definition show a higher natural tendency to take risk? The short answer is "no." There's no significant difference between the risk tolerance of entrepreneurs and non-entrepreneurs. Non-entrepreneurs being those individuals that are working within corporations or established organizations.

     Why do select individuals pursue new ventures? What's different about the risk that they see versus non-entrepreneurs? We all see risk differently. Our perceptions differ, and the risk perceptions differ between entrepreneurs and non-entrepreneurs. We may have a common risk tolerance, but what we see as risky differs. Risk is in the eye of the beholder. It's conceptualized based on our assessment of the uncertainty, and our own consideration of the benefits and costs of an opportunity.

     If you're seeking a high income, if you're seeking significant freedom over how you spend your time, if you're seeking high autonomy or control over products or services, you're probably not going to have that within an established company. And if you do, it's probably going to be years or decades away. That wait and hope may be a risky proposition. 

     If you're seeking a reliable income, if you're seeking a well-defined product or customer, and desire job security, you're probably not going to find that in startups. A startup would be risky if those are the goals that you're guided by.

     If you want to have the opportunity for significant income, if you want to have reasonable flexibility, and autonomy, and control, then a startup could be a good fit. A startup would actually be a less risky proposition to pursue those elements than would a traditional employment relationship. It all depends on your goals, your perception of risk, and your assessment of the benefits and costs associated with a startup.

What do venture capitalists avoid?

     While the failure rate of startups is difficult to accurately measure, we do know that of the startups that raise money from venture capitalists, over 80% survive. Survive does not necessarily mean that they are wildly successful or grow to millions of dollars in revenues. It simply means tha they operate for more than five years as a company.

     Why is the survival rate of venture-funded startups dramatically higher than startups without venture capital funding? If you can secure sufficient financial capital to create and launch your venture, and bring a product to market to generate sales for the company, your probability of success increases significantly.

     A second reason for the success of venture-funded companies is buy-in. In order to secure funding, you've had to convince those early investors that you have a concept that's worth funding. They've bought in on your concept and your team to the point that they're willing to put in money. Not only is the money there, but there's also a validation by professional investors in startups that you have and idea with great potential.

     Even if you do not plan to pursue investment from venture capitalist, it's valuable to note the types of firms that venture capital don't invest in, and how risk tolerance influences their decision making.

     Venture capitalists typically avoid restaurants. Restaurants are problematic for venture capitalists for a number of reasons. One is a very high failure rate of up to 60%. Another is very high capital costs that are in large part unrecoverable. By the time you pay a lease, do renovations, hire a staff, do a reasonable amount of marketing, buy food-all of those are large, unrecoverable costs. Hundreds of thousands, perhaps even millions of dollars are invested before you open the doors to see if any customers are interested in your offering.

     Retail stores are also commonly avoided by venture capitalists. Eighty percent of new retail stores close within the first five years. Why? It's a question of limited uniqueness and low barriers to entry. If you're selling products developed elsewhere, and those same products are available in other places, there's no uniqueness with your products. Your uniqueness may be limited to your location or additional services you can provide. A further challenge with retail is online competitors. It's difficult to successfully compete selling the products of others face-to-face if those products are also available online, and often at a lower price.

     If restaurants, bricks-and-mortar retailers, and other minimally-differentiated businesses are removed from the startup failure rate equation, the success rates of startups dramatically improve. This is why I ecourage you to seek entrepreneurial opportunities that are innovative and differentiated.

How can entrepreneurs minimize their risk?

     Successful entrepreneurs find that they can manage risk and reduce risk by doing a number of things, and we'll talk about three of those. We'll talk about their search for information, minimizing their investment, and maximizing their flexibility.

How does searching for information mitigate risk?

     For the first element of searching for information, many entrepreneurs who are unsuccessful start doing things. They fire before they aim. Instead, be planful. We still want to take action, but we want to think about what we're doing before we act.

     As you explore ideas for new products, go into a retailer and see what's available, and think about what you may introduce that will still be competitive in six months. It may take you three months or six months to get your product to market, and many of the products that are in that retailer today are going to change over time. You have to think ahead-three months out, six months out, even years out-to what's going to be competitive then. You have to ask what new patents are being issued, and what new products are being demonstrated at trade shows. What new research is going to inspire new products?

     Think about what's missing in the world and write that down, examine it, explore it, and begin to talk to other people about it.

     The business model canvas is a risk management tool that we will discuss later. We'll also talk about business plan development, and while authoring a business plan doesn't guarantee your success, and while you may have many things wrong in the beginning, a key value of it is that it puts your thoughts and your ideas to paper. It forces you to connect disparate themes of thinking about what is my product, who is my customer, and what's my market? How am I going to finance it? What level of funding do I need? What team am I going to build? This aligns your ideas with your goals, a timeline for implementation, and quantitative measures to assess your progress. It puts you on path to doing research, analyzing markets, and understanding customers-and doing it all within a cohesive document. It's that search process, and that process of thinking, that is more valuable than the document itself.

How does minimizing your investment mitigate risk?

     Customer discovery and customer validation are critical to product development and company building. Using lean startup principles, build a simple version of your product or service, a minimum viable product (MVP). Build a basic prototype, deploy it, and solicit feedback. A prototype in a very basic sense may be with paper, it may be with wood, it may be simply drawing what a website, an app, or a service may look like in a Word document or in PowerPoint. This is a very basic rendition before you're down the path of building something that's sellable.

     Share this basic prototype with prospective customers to get their feedback before you invest the time and energy in building the real product. What would they change? What would they pay? Maybe you think you need five features, and maybe the customers only care about three. Maybe they're only willing to pay for two. Well, that lets you now not to spend the time or money to build that five feature product, because the customers don't want it and they're not willing to pay for it. You can discover which two features are important, and that's where you can focus your energy and your money. Learn from this, refine the product, and built it again. In this way, you're able to move through multiple iterations of product development with real customer feedback. From an alpha, a beta, a version one, etc. The basic premise is to start with something simple. Get it to market as soon as possible. Get feedback, and then iterate.

How does maximizing flexibility mitigate risk?

     The third element of risk reduction is maximizing flexibility. This lets you make those pivots and adaptations to your product or service at a lower cost. It lets you test different market segments and find out where you fit and how poeple are going to respond to what you're offering, and gives you the opportunity to adapt that or change that if needed. Simple ways to do this are trying to use off-the-shelf products rather than custom products. If you have a software concept, see if there is a white label solution out there.Use Squarespace or other tools to build the early versions of your product. This is a critical step in the customer validation process.

     Startups should not start with websites, logos, and business cards. Start with validating the concept, thinking about the specific feature set, and testing that with customers to get their feedback.

     In summary, entrepreneurs are not inherently risk-seekers. We simply seek risk differently than non-entrepreneurs, and make an effort to mitigate it and put that into practice. Have that idea. Build a version-a simple version. Try it. Test it. Measure feedback. Look at your data. Learn from your data. Build it a second time. Iterate through these cycles as fast as possible to get to something that's sellable. Search for information as you're working through these steps. Minimize your investment and maintain your flexibility along the way.

Are your interpersonal skills well developed?

     In spite of popular opinion that entrepreneurship is a solo sport, it's a team activity. Entrepreneurs spend their time with co-founders, partners, and employees. There's time spent with customers and investors. There's time spent with the press. In all of these elements, strong interpersonal skills are an asset for entrepreneurs.

     While interpersonal skills may be innate to select individuals, we can all improve our interpersonal skills through study and practice. Questions to consider as we assess our interpersonal skills may include:

• Do we isolate ourselves?
• Do we have difficulty expressing our feelings?
• Do we feel that others take advantage of us?
• Do we try and guess how we should act within a group?
• Do we take relationships seriously?
• Do we have problems developing intimate relationships?
• Do we ever feel guilty?

     Based on a recent survey, there is a great divide in the interpersonal skills of today's workplace, particularly with millennials. When we look at how millennials describe themselves, we see that nearly 70% feel their interpersonal skills to be well developed. When we look at how experienced co-workers describe millennials, we see an entirely different story with less than 30% of millennials described as having well developed interpersonal skills.

     Without seeing all of the data and studying the survey, I am unable to attest to the accuracy of it. I can say that this is a good representation that shows how we see ourselves may not be how others see us. And that's not only true with interpersonal skills; it's true of all of the behavoirs that we will examine.

How can we understand and improve our interpersonal skills?

     When we define interpersonal skills, we're addressing the skills related to relationships between people. This includes building relationships with new people, as well as renewing, maintaining, and enhancing our existing relationships. This requires effective communication, assertiveness, conflict resolution, and anger management.

     With communication skills, listening is very important. We all listen with a filter based on our assumptions and beliefs. This filter influences our perceptions, for better or for worse. We should respond thoughtfully, and not simply react. Most importantly, we need to focus on understanding what's being said and clarify, to make sure we understand what's being expressed. 

     To improve your assertiveness, be specific and ask for what you want. Be direct. Deliver the message to whom it's intended. Own that message. Do not be fearful of communicating your needs and wants. 

     From a conflict resolution standpoint, focus on the problem, the root problem, and not the individual. Be direct, specific, and timely, while being positive and ackowledging and validating others' concerns. Seek alternative solutions, discuss next steps, and follow up.

     From an anger management perspective, be aware of what you're feeling and notice the signs of anger building. We need to understand what's really angering us and not displace anger. We may need to de-escalate and take a break. We want to examine our options and visualize how we may respond. Think multiple steps ahead. What may I do? What will be their response? What will I do next? How will they respond? What will I do next? You can also develop activities that help you cope with anger.

     What are the benefits of strong interpersonal skills. It certainly improves the quantity and the quality of the relationships and friendships that you can form. It also improves our ability to access entrepreneurial opportunities. If you are known and liked, your awareness of opportunities and your ability to act on them is dramatically higher. 

     Building and maintaining relationships is the key. Knowing key skateholders opens doors. It opens access to information and resources. It gives you the opportunity to facilitate new relationships. You may be able to bypass the normal communication streams. If you have friends in different organizations whom you can contact, you don't need to call the front desk. You don't need to send an email  to info@, and you don't need to cold call anyone. You can leverage your relationships for introductions to bridge these paths.

    This is a timely point to mention Dale Carnegie, who over 70 years ago published How to Win Friends and Influence People, which addressed fundamental ideas that are still valuable today. What are the tools and techniques to become a friendlier person? What are the proven ways to win people to your way of thinking? His book provides a reminder of things we know, and things to do that we may not have considered.

     In summary, we know that others' perceptions of us are a truer measure of many of our internal behaviors, than our self-view. To improve your interpersonal skills, think about communication, assertiveness, conflict resolution, and anger management. We also want to focus on building and maintaining relationships. I emphasize maintaining the most. It's easier to keep a relationship and to keep in touch with a friend or a contact than to make a new one. With today's online tools-LinkedIn, Facebook, etc.-it's very easy to stay connected. I encourage you to use those types of tools to stay connected to your networks, and connect to new networks. 

Are you rich in social capital?

     Are you rich? Not rich in the traditional monetary sense, but are you rich in social capital. 

     To explore capital, we understand financial capital-money. We understand manufactured capital-something that's built or made. There's human capital-individuals and their talents and capabilities. There's intellectual capital, which includes patents, trademarks, and copyrights.

     For entrepreneurs, social capital is incredibly valuable. It gives you tremendous access and tremendous relationshipsthat either can't be bought, or would be expensive to buy or attain over time.

     I'd like you to do a brief activity. I'd like you to start by listing up to five individuals per group among three different groups. First, list by name your most trusted friends. Next, do a new grouping, of five individuals, with whom you accomplish work. This would be in a professional context, your coworkers. If you're not presently working in that kind of a setting, it could be in an organization that you're volunteering with-a social organization, a religious organization, people with whom you frequently accomplish work. There may be names that overlap with the trusted group. Create a third list of up to five people with whom you regularly socialize with-your social circle.

     When we begin to analyze these networks in this way, we can look at age, education, gender, ethnicity, experience, expertise, and a variety of other factors. How different are these individuals in your trust, work, and social lists?

     What we find for entrepreneurs is that the diverse social capital improves their startup's success. If everyone with whom I work and collaborate and socialize is like me-40 years old, male, white, works in education, and has an engineering background-even tough I may know 1,000 people of that profile, It's arguably not better than knowing one person. There is incredible redundancy. There's minimal differences in experience, skills, relationships, and perspectives. 

     When we define social capital, we're addressing the resources available in and through your personal relationships. Social capital is not limited to one degree of separation; it's whom you know and whom they know. Social capital gives you the opportunity to make connections through subseuent connections. It can be very expansive, and it can be measured in its size as well as in its quality and diversity.

     Why build it? People with rich social capital, people with large and diverse networks, are better informed. They're more creative, they're more efficient, and they're better problem solvers. You can save time, you can save money, you can collaborate, and work smarter, when you have relationships in place. When we examine examples of this, it's not uncommon that successful startups breed other successful startups.

     With the early PayPal team, they've gone on to bigger and better things. Three former PayPal engineers started YouTube. The former CFO of PayPal funded YouTube's launch. A former PayPal executive founded Yelp, and a coworker from PayPal funded it. PayPal alumnus Reid Hoffman founded LinkedIn. A former PayPal coworker funded it.

     There are many instances where individuals have success within a startup and create subsequent startups. They build relationships, they understand skills set, they understand personalities, and their interpersonal relationships form. They can establish social capital and stay connected, and do new things with one another in a  variety of different ways. 

     Raising capital through social capital is the most common way that people find funding. The U.S. Small Business Association reports that 75% of new businesses find and secure financing via their social networks. Whom they know often enables entrepreneurs to have the financial capital to start their ventures. For most startups, it's the social capital that leads to the financial capital.

     There are a breadth of opportunities to build your social capital. You can attend meetups. You can volunteer. You can go to events and conferences. You can participate in professional associations. You can associate with alumni clubs of your universities. You can join degree programs of people that have common interests; of course I suggest the online Master of Technology Entrepreneurship Program at the University of Maryland. 

     You can also make new programs, and make new organizations. If there's not a group that's accessible to you, start one. There are probably other people in your area with similar interests who would benefit form connecting with one another.

     In summary, recognize that social capital is exceptionally valuable to entrepreneurs. It's important to map and track and understand your network, and to keep the friends you have. It's easier to retain relationships, or renew relationships, than to form new ones. You should also be willing to go out and get involved. Get involved in organizations. Get involved in activities. Start your own organizations and activities. Work to build your social capital.

Entrepreneur Spotlight on Neil Blumenthal, Co-Founder and Co-CEO of Warby Parker

     As director of a non-profit vision assistance program in El Salvador, Neil Blumenthal spent 5 years of bringing glasses to people living on less than $4 per day. He soon realized that glasses can change lives, but only if they are attractive to wear. Neil recalls that "In the poorest village on the planet, people would rather be blind than wear a pair of used 1970s cat eyes."

     This lesson in the desire for attractive eyewear at an affordable price was an influencer in Neil's creation of Warby Parker. In 2008, this New York city native enrolled in an MBA program, where he met his three future co-founders of the company. Their idea for Warby Parker was to build an online optical retailer that sold affordable, stylish glasses, and provide a pair to Vision Spring (the non-profit that Neil previously led) for every pair sold.

     In contrast to the existing companies in the eyewear market, Warby Parker integrated the design, development, production, and sales into their company. The efficiencies created by removing multiple companies in the middle (i.e middlemen) brought costs savings to the end customer. The result is comparable-quality designer eyewear at half the price of many of their competitors. Warby Parker aims to deliver unique, vintage-inspired designs at a reasonable price while providing a pair to one in need with every pair sold.

     Launched in early 2010, Warby Parker reached its first year's sales target within three weeks of starting the company. Two years and 150 employees later, the company has donated over 250,000 pairs of glasses to individuals in need.

Ideas in Action: Entrepreneurial Behavior

• How can you improve your confidence level and risk tolerance?
• What resources can you use to enhance your interpersonal relationship skills?
• How can you grow your social capital?