A recurring litany the media utilizes, when referring to entrepreneurs, is the high failure rate. When you attempt to define “what it takes” to turn an innovative idea into a success and you will find an array of hypothetical models, psychological profiles and entrepreneurial traits, and “motherhood and apple-pie comments” about what makes a successful entrepreneur.
Yet, how often is a rigorous de-risking process emphasized? Technology development typically begins with an early invention. However, before an invention can enter the market, its commercial viability must be demonstrated. The gap between an early-stage invention and its commercial viability is a critical one. A disciplined de-risking strategy can bridge this gap. This same type of strategic insight can be applied to entrepreneurial success.
Successful investors will tell you that they invest in the people, rather than the product or service, so many also assume they invest in the process of assessment. However, a high failure rate remains, nevertheless. This leaves a question mark around the topic of “rigor”.
Is there a solution? Yes.
Climbing Mountains and De-risking Startups
To better understand the importance of de-risking a startup, at Watershed we often refer to a real-life analogy.
One of our colleagues, 32 years ago, did a solo ‘fingers and toes’ traverse of the front face of Table Mountain, Cape Town — a flat-topped mountain forming a prominent landmark overlooking the city of Cape Town in South Africa. At the time, Andrew was 18 years old. He currently runs a successful business in Johannesburg.
Prior to making the traverse Andrew thoroughly researched, practiced and managed all the elements that might destabilize him. He had gone through the most rigorous de-risking process before he ventured to cross the mountain. He worked it out for himself.
The life-giving differentiator on this occasion was providing his mind with the emotional ecology to ensure he was focused on the process and not on the absence of supporting equipment. To focus on negative situations in a challenge such as this creates fear which, in pure physiological terms, can be disastrous.
For Andrew, the risk of failure was always there, but the percentage had been profoundly lowered by his rigorous attention to detail; skill, external climbing conditions, physical and mental preparedness.
This level of de-risking is based on competency and insight that has been around in both theory and application since the 1940s.
The saying that “past behavior is a good predictor of future behavior” means that one can attribute common insights into human behavior based on this simple, psychological truth. In Andrew’s case we know for a fact, in terms of a successful climbing behavior, he demonstrated extraordinary capability. Failure would have ended his life. He is not average. Rather he is exceptional, and it is this level of performance that holds our interest.
We know that if we interviewed Andrew, and other climbers who achieved similar levels of excellence, we would be able to derive a statistically validated behavioral profile. This would show us the levels of coping behavior (or competence) needed by other climbers to replicate their success.
In fact, using experience taken from the commercial world of competency profiling, we can predict a high level of performance success when a mountaineer with a similar behavioral profile is recruited.
Identifying and De-risking Successful Entrepreneurs
This same level of diligence and profiling can be applied to business. In fact, the level of predictability is sufficiently compelling to suggest that a savvy business leader would insist that all the strategic roles (i.e. those that ensure the sustainable execution of the strategy at all levels) are subjected to this discipline. It is precisely this insight that can identify and de-risk successful entrepreneurs.
Creating an Entrepreneurial Competency Profile means identifying, in detail, the coping behavior used by successful entrepreneurs. Deconstructing the profile into levels of granularity can take days to evaluate, but results in a robust profile of an entrepreneur.
The value of the resulting insight is that within very high levels of predictability — upwards of 70% — one can predict whether a person is likely to succeed as an entrepreneur.
Intriguingly, it is possible to gather sufficient insight at an early age – before 20 years old – whether there is an “entrepreneurial predisposition”. Being in a position to make a comprehensive assessment on the competency levels an individual is, for executing the required tasks expected of an entrepreneur, is of enormous significance to an investor.
It would be fair to say that most consultants will talk a good game when it comes to this approach. The result, generally, is a usual “mish-mash” of approaches which are next to useless in predicting and ensuring high performance. However, there are a few who really understand the power and practicality of this discipline.
We know there are three distinct phases that arc over the process. Each one requires a distinctive set of necessary behaviors. The value of this insight is the capacity to identify which phases will challenge the entrepreneur the most and where an investor needs to potentially find additional people to augment the competency set of the entrepreneur.
Creating an ecosystem in which an entrepreneurial idea thrives starts with de-risking the people involved and ensuring that a sustainable team of people is brought together. The innovative idea or invention itself is secondary to the human capacity to execute it.
Simon Middleton has 30 years’ international “people agenda” experience in the blue-chip multinationals of Hewlett-Packard, Philip Morris, PwC and, more latterly, the Lufthansa Services Group where he was Head of HR. Simon is one of the founders of Bath-based Watershed Entrepreneurs. Connect with Watershed on Twitter.