The less-known entrepreneur

Estoy actualmente participando como juez en un concurso de planes de negocio. Hago este tipo de trabajo con cierta frecuencia y mis comentarios siempre terminan pareciéndose para la mayoría de los trabajos que evalúo.

La principal falla que encuentro es una pobre vinculación al mercado.

La mayoría de las ideas están planteadas desde el punto de vista de “yo hago esto bien; ahora quiero que me lo compren.” A veces (en realidad, muy pocas veces), el interés de una emprendedora coincide con una necesidad latente en el mercado.  Peor, cuando sí sucede, está mal preparada para aprovecharlo – termina ahogándose en su éxito. La mayoría de las veces solo una pequeña parte del interés del emprendedor se solapa con una necesidad del mercado, por lo que el emprendimiento termina forzando su oferta en el mercado, lo que requiere de mucho más tiempo y dinero que lo presupuestado.

Además, ¿quiénes son los nunca-nombrados “ellos”? ¿Quién pretendemos que compre nuestro qué? Los planes que leo, en gran medida, carecen de una clara definición de su usuario o cliente meta. Es sorprendente como, una vez que empezamos a examinar el quién, el qué queda claramente “fuera de lugar”, requiriendo extensiva reingeniería.

Ésto está relacionado al segundo problema que encuentro con frecuencia: “se vende solo”. Todavía me causa mucha gracia encontrarme con un presupuesto comercial (ventas, mercadotecnia, comunicación, etc.) con solo dos o tres ceros. NADA llega a su mercado meta sin consumir algo de recursos (a veces muchos) – me burlo de la gente que propone que los intermediarios no se han ganado sus comisiones.

A su vez, este error también lleva a la subestimación del capital de trabajo. Una empresa recién conformada tarda algo de tiempo en alcanzar su punto de equilibrio, mientras tanto, el patrimonio financiero de la misma se va reduciendo. Es más, para penetrar en un mercado, normalmente se tiene que vender a crédito. Ésto se suma al hecho que los inventarios consumen sumas considerables de efectivo. Me fascina el asombro de un emprendedor cuando notamos en un modelo financiero articulado que su empresa puede quebrar por haber vendido demasiado.

Es así que veo muchos planes repletos de obstáculos estructurales: la sobre estimación de la aceptación de su producto o servicio exacerba la subestimación de los recursos requeridos para llevarlo a su mercado meta, lo que socava hasta el más minuciosamente preparado presupuesto y distrae al equipo gerencial de actividades de valor agregado (explicándole a un acreedor por qué está en mora, por ejemplo).

I’m currently participating as a judge in a business plan competition. I do this kind of work frequently and always end up with feedback that sounds the same for most plans.

The principal fault I find in most proposals is a weak link to the market.

Most ideas are couched in terms of “I know how to do this really well, now I want them to pay me lots of money to do it”. Sometimes (read: very rarely) an entrepreneur’s personal interest connects with a market need, and when it does, most entrepreneurs are unprepared for the result – like taking a sip of water from a fire hydrant. Most of the time, only a small part of the entrepreneur’s interest overlaps accidentally with a market need, and the resulting enterprise spends a whole lot of time ramming their offering down their customers throats – this takes a whole lot more money than what was planned.

And “who” is “them” exactly? Most plans I read do a really poor job at identifying their target market – once we start talking about “who”, it’s amazing how quickly we discover that our “what” has little or no demand and that it requires extensive rework.

That’s related to the second most-common fallacy, my “what” sells itself. I still smile at business plans that include a commercial (sales, marketing, communications, etc.) budget with only 2 or 3 zeros. NOTHING gets to its intended market without consuming some resources – I scoff at people who claim that intermediaries aren’t worth their commissions.

This also leads to understating working capital needs. It takes a while for the company to reach break even, until then, company finances must cover the burn rate. Furthermore, in order to break into a market, especially an established one, sales must grow on some sort of credit terms. This, on top of the fact that inventories eat a whole bunch of cash. I love the face of most entrepreneurs when we go through a fully articulated financial model and see how the company can go broke by selling too much.

Thus, I see a lot of plans that are rife with structural obstacles: overestimating market acceptance compounds the underestimation of resources required to get to market, which undermines even the most carefully crafted budgets and distracts the management team with non-value added activities (like explaining to creditors why the company is in default).

There are two reasons why poor markets affect entrepreneurs negatively:

Size

Most entrepreneurs begin with local markets – not only does it make sense (sell your wares to you neighbor, who you probably know and speak to frequently, not some complete stranger 5 time-zones away in a language you don’t speak, etc.), it’s highly recommended by academics, advisers, consultants, etc. (for basically the same reasons as before).

Problem is, local markets off the beaten path are normally too small to support huge growth (wherein huge returns hide) – in fact, oftentimes these local markets are too small to support break even.

Remember that entrepreneurs in the long tail are survivors? If you were one of them, what would you do, without leaving the local market, to ensure your survival? Think about it. They do just that: reduce costs to the minimum and diversify their products and services. Thus, it is not unheard of to come across an entrepreneur who, in addition to owning and operating a successful wood shop, also raises cattle and manages two or three dilapidated vehicles as taxis.

But what, you’re saying to yourself, is wrong with that?

• Dedication: as an investor, I want an entrepreneur that I invest in to dedicate as close to 100% of his professional time to the activity I invested in. Unless I’m into investing in furniture, cattle and fleet management, I’m going to leave out one or more of those business activities.

• Low cost strategy: given the competitive pressures of these markets, the cost structure of small and medium companies is as lean as possible – this includes blatant and systematic evasion of any possible liability (taxes, labor contributions, accounts payable, you name it, if the receivables management function is weak, that’s a cost “savings”). I love the look on the face of both the investor and the entrepreneur when we start talking about “contingent liabilities” (“You mean he hasn’t paid more than 5% of the taxes he is supposed to pay over the last 7 years?”; “You mean she wants me to figure out what it would cost if I got caught, and put that on my balance sheet?”). Then we talk about “moral hazard” to really get the conversation “flowing” (another post)…

• Talent pool (in tune with what I mentioned earlier, in the Poor entrepreneur, Part 1 post): the lean nature of SME operations dictates that raises are few and far between – I frequently find that the head of finance and administration achieved the position because he was amenable to staying at the company for 15 years at low pay with little or no training – he knows accounting really well (that’s what he got hired to do in the first place), but nothing else. How would you feel as an investor if nobody in the company (less so the “specialist in finance”) knows what a put option is, for instance?

• Asset dedication: entrepreneurs are accustomed to cross subsidizing their businesses – the anti-cyclical benefits of diversification wouldn’t have it any other way! Investors normally frown on a company in their portfolio making large transfers of assets (in time and money) to companies outside their portfolio, but, after 20 years of doing it (and talking about doing it with his friends over the same period of time), the “unnatural” thing to do is NOT commingle funds. “What do you mean I shouldn’t use company assets for my personal activities? This company IS a personal activity!”.

Difference

The skill set required to survive in alternative markets “spoils” entrepreneurs for “real” markets.

• Focus: because the market is small, products and services tend to offer the “smallest common denominator” of value that will maximize cross-segment adoption. That is, in alternative markets, entrepreneurs learn to provide the lowest cost product with the most “features” that will appeal to the largest amount of people in the domestic market. It’s not quite “everything for everyone” and it definitely isn’t “everything for someone”.

• Value proposition: small markets pose a significant logistics challenge, thus, in many cases, the value proposition of a product or service is simply “availability” – all I have to do as an entrepreneur is make it to the atomized market – a logistics-differentiated monopolistic competition, if you will.

• Value chain: as such, most entrepreneurs are somewhat vertically integrated and very mistrustful of middlemen (those nasty folk who insist on getting paid -read: cost- to help with customer fulfillment) and “competitors”.

• Tight networks: in order to survive in marginal markets, entrepreneurs work mainly within their social network as “trust” is sometimes harder currency than money (another post).

For those of us who exist off the beaten path, the preceding points are a matter of course, by now as much a part of our culture as language or our approach to time and schedules (another post), thus not anything new or revealing.

The revealing part of this is that, in order to succeed in “foreign” markets, particularly in the face of Chinese cost-competitiveness, these “key success factors” become a significant obstacle: successful products and services in “advanced” markets are hyper-segmented (looking to achieve the “everything for this person” position), offering very high value (at a high price), leveraging a complex distribution system that require experts that “I just met”. The importance of this distinction will be lost on the vast majority of the entrepreneurs, simply because they will not be able to fathom the differences.

To further complicate matters, the segmentation and purchase behavior of users and clients in alternative markets are often radically different than foreign markets. If a particular entrepreneur does not have some really great market intelligence with the appropriate “cultural explanation”, there’s no possible way he or she will be able to provide something valuable; the tastes, likes, and trends are incomprehensible, “what do you mean that the client doesn’t like my pink leather sofa? My customers here totally love it!”.

Thus, if we apply evolutionary theory, markets off the beaten path forge companies with the wrong mentality and skills for the leap to more dynamic markets, while making them unattractive to outside investment.

This is the first of several posts on the reasons why the “beaten path” misses so many places and concentrates in the well-known geographical markets:

• Poor entrepreneur
• Poor investor
• Poor market

Being my first post, I think some ground rules (or caveats) are in order:

1. My experience is limited to the American continent. Though I imagine that much of what I have to say may apply to most “southern” markets in Africa and Asia, and, that from time to time I may use data from those markets to make a point and/or imply that what I have to say extends to those markets, my experience is bounded by the New World.

2. Generalizations help analysts reach useful conclusions. Of course there are exceptions to any simplification (it wouldn’t be that if there weren’t). I mean no slight or disrespect, nor undue glorification to anyone. Readers of this blog are adults with intelligence and an ability to take the good and discard the rest.

3. Disclaimer: it wasn’t me, I didn’t mean it, I wasn’t there. If you can prove the contrary, dock my pay. Furthermore, I am not a lawyer and have no legal training – when I write about legal matters, I do so from my limited exposure and my personal experience. If you do something because I told you to and it turns out badly, tough (but if it turns out well, send me my cut).

4. I can change my mind and edit my posts – get your own blog if you don’t like it.

5. Because this is a space where I can vent or procrastinate, I’m leaving a series of “notes to self” on future topics – that way I don’t have to struggle with writer’s block when I have something more important that I should be working on.

6. I’m biligual.  Though most of the time I will write in English, once in a while, especially when I think that non-English readers may benefit from my effort, I will write in Spanish.  This is not to be interpreted as a slight on either language or you.

I’ll add more of those as I come up with them.

Ok, on to what I have to say.

What do we mean when we say “mainstream markets”?

When we talk about the financial food chain (to simplify: angel, VC, PE, banking, stock exchange) , it is a foregone conclusion that the “real” money is in the US (see rule #1 – I know that there are financial centers outside the US in Europe and Asia; so do you), though some can be found around the major economic hubs throughout Latin America, the real deal belongs to “los gringos”. They’re better organized, informed, protected, and, principally, funded. But is that all?

No. They’re also collocated with major user/consumer markets AND major centers of entrepreneurial activity.

Hence the road map – if you’re looking for solid growth and returns, you need great entrepreneurs, fantastic investors, and hungry markets. Take even one of those away and you’ll struggle.

Next up, the Poor entrepreneur…