Tuesday, December 11, 2007

Pensacola: Impact Entrepreneurship in A Small City in a Changing Economy

Entrepreneurship: To be King, or to be Rich?

In my last post, I talked about two styles of entrepreneurship, "Lifestyle" and "Impact". There is another way to look at entrepreneurship and what you want from it. This is not so different from the last discussion, but has a different view point of the same thing.

When engaging an entrepreneur, I ask them the question, "Do you want to be King, or do you want to be Rich?" Most reply that they want to be Rich, without hesitation, but when I look at their business, I see that they are King, which prevents them from being Rich.

Undoubtedly, every entrepreneur has a bit of each. It takes ego to be an entrepreneur, and ego likes to be King. However, it is only through the discipline of suppressing the King ego can we become Rich.

Kings, at least in the old days, had absolute control of their kingdom. They were the end-all of decision making and had absolutely power. Most small business today is run in such a way. This is not to say it is inefficient or unprofitable, but that profit's growth is limited by the organizational structure. Without delegation of power, an organization's growth is limited to only what the King can handle. Different Kings has different limitations, but the limitation exists none-the-less.

Kings often hold all the expertise and believe that they alone know the best way to rule their kingdom. Again, this has growth limitations that are obvious. Kings are often married to one goal as well. That their kingdom will be most successful doing X and Y in the Z market. And they know this better than anyone.

To become truly Rich, one must let go of all these limitations. Responsibility and expertise must be delegated. Control must be relinquished. Others must be allowed to participate in the growth and the rewards. Bill Gates did not become the wealthiest man in the world alone. Microsoft created dozens of billionaires, each with ownership of one piece of that success.

Here is the key distinction: Is it more important to you that you be successful or that your company is successful? Do you want to be King, or do you want your company to be King? Are you willing to give up some Kingship to be Rich?

Two Styles Create Two Outcomes of Entrepreneurship

There are many different ways to become an entrepreneur and many different styles of entrepreneurship. However, entrepreneurship can be very roughly categorized into two styles. These can best be defined by their desired outcomes.

The first is a "Lifestyle Entrepreneur". This entrepreneur wants to create a good income for themselves, wants to be in complete control of that income, and wants the flexibility to make lifestyle decisions- such as take the day off to go fishing, or take three weeks off to take a family vacation. In this path, lifestyle may take precedence over overall return on investment. As long as a substantial income continues, the entrepreneur is happy. Most "mom and pop" businesses fall under this category. Most small businesses also fall here, as well as independent professionals such as doctors, dentists, accountants, and attorneys. The risk is often relatively short lived and minimal. One can make a very good living as a Lifestyle entrepreneur,and if they manage their finances smartly, can become independently wealthy. However, at times, lifestyle may trump finances. The business then runs into problems.

The second style of entrepreneurship is what I call a "Impact Entrepreneurship". The desired outcome is high-growth. This type of entrepreneur typically wants to grow from a small business to a large business. They want to either make an impact on the world or create great wealth- often a combination of both. These people are willing to undertake larger risk over an extended period of time with the vision of large returns. The organization is designed (or should be) for constant and radical growth (2-4x revenue each year). Margins are thin in the first 3-5 years. However, once high-growth has been achieved, some very attractive exit strategies materialize. A first or second round of funding can occur to take growth to the next level. Or the company for a significant profit to the owner. Both can create great wealth, the first allows the entrepreneur to continue to create an impact or "change the world".

Sometimes a lifestyle business will accidentally convert to a high-growth business. This may be driven by changing goals of the the entrepreneur. However, sometimes it just happens because the business is at the right location, in the right industry, with a rapidly growing demand. In these cases, the entrepreneur must make a choice to change personal goals and lifestyle, or to suppress the business. This decision is often be delayed because the entrepreneur is uncomfortable with the related decisions. Delay serves to suppress the business. Organizational, financial, and quality control decisions that support high growth are not made. The business can begin to crumble. Perhaps not immediately, but surely over time.

Lifestyle entrepreneurship is most often engaged to create a sense of independence, that the entrepreneur is not reliant upon anyone for income, expertise, and lifestyle decisions. It takes time to achieve this goal. Lifestyle entrepreneurs are often frustrated with slower results. Further, if presented with a high-growth opportunity, Lifestyle entrepreneurs are often reluctant to give up independence and decision-making power. Impact entrepreneurship is dependent upon many factors. Financial obligation exist to investors, banks, or both. Expertise is generally held by an employee or partner. Decisions must be delegated. The market is often more volatile. Business travel is required. Time obligations are intense. This is a much different lifestyle.

The rewards are different. Successful Lifestyle entrepreneurship creates financial freedom and a fluid lifestyle relatively quickly. It creates a "family" business that can be passed on. It creates the satisfaction of being a business owner. Successful Impact entrepreneurship creates significant personal wealth, but is delayed 5-15 years. This personal wealth creates greater freedom and can be passed on to family or charity. It creates the satisfaction of having made an impact on the world around you.

Neither is the right way. But both have distinctive requirements and a conscious decision should be made at all times to engage in one or the other. You may have to make this decision every year. Your personal goals may change. Life is like that. But we must make the decision and take responsibility for the obligations and rewards associated.