Entrepreneurial Tips

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Transaction Cost Economics defines the ‘firm’ or corporation as an entity whose purpose (aside from maximizing profits and increasing shareholder value) is to lower the cost of a transaction in an economic system. In other words, of the cost of a transaction were sufficiently low (a transaction being any exchange of capital, goods, services, knowledge, assets, property, etc between multiple people or groups) then individual workers (freelancers) would be able to conduct complex business with the same efficiency as a large corporation. That means it would take as much time and resources for 2 separate small businesses to enter into a contract to exchange capital for services, as it would a manager to assign work to his employee.

Yet it is obvious that corporations reduce the transaction costs of exchanges, management, and economic processes. Why else would every entrepreneur need a lawyer, yet every employee in a company uses the same company lawyer? But my interest in the transaction cost of entrepreneurship is not in reference to the transaction of management, delegation, or exchanges in products or services. Rather, my interest is in the transaction cost of Deal-Flow.

Someone should conduct research on the amount of time and resources spent by an entrepreneur preparing, planning for, seeking, negotiating, securing, and maintaining either investment, strategic partnerships, acquisition, or equity-based deal-making. Some startups ignore ‘deal-flow’ and focus on the basics such as organic sales. Yet some companies do nothing except push their own deal flow. Many startup lawyers tell me new tech ventures might spend 20% of their revenues on the legal and administrative costs whose purpose is little more than to secure more funding. In other words, the transaction cost of finding, negotiating, and securing either funding or equity-based deal flow is not efficient. Mostly because its a buyer’s market and the startups need to jump quite high to get noticed.

Therefore my interest is in reducing the transaction cost of entrepreneurial deal flow. In other words, both eliminate the guesswork or ‘information assymmetry’ from startups who do not know when or where to get funding or partners, as well as the ‘game theory’ information assymmetry of multiple investors or partners conducting multiple independent reviews and negotiations. Within a corporation the transaction cost of an acquisition is the salary to the analyst and then the VP in charge of presenting the acquisition to decision-makers. In Entrepreneurship, there is no well-defined process.

I have some ideas in mind.

Having witnessed several successful startups grow from concept to real-business, I can finally sit down and define what elements you need if you hope to succeed.

1. At least one of the founders must have a car, in case you need to pick up office supplies from Office Depot. However, multiple founders should help pay for parking when you meet at Starbucks.
2. There should be at least one girl in the group, whether she’s a founder, employee, or one of the founder’s girlfriends. The girl is a good litmus test for flagging extremely stupid ideas.
3. Draft roles, processes, timelines, plans, bylaws, org charts, or resource allocation charts at least once a year, but no one should look at those docs for the rest of the year. At least one team member should protest “whats the process for this” or “whats his role” to which someone might reference the fact that there is a document for that somewhere.
4. Whenever the founders go home from the office around 6pm or 7pm, they should go back to their computers and keep working until 1am, communicating frequently over gtalk ot Skype. In fact, more communication should happen over gtalk and Skype than by phone or in-person.
5. Own at least 2 dry erase boards and always run out of markers. Accidentally use a permanent marker at some point.
6. Have at least one founder who thinks he is a good designer, humor him a little, though everyone unanimously agrees he can’t design.
7. At any one point in time, at least one founder should be working at a coffee shop, even if you have an actual office.
8. Have 3 pitches for your startup. One pitch is for smart investors who understand your market and might actually invest. Another pitch is for people you meet at parties, explaining why you’re going to save or change the world. The third pitch is for your parents or non-techy degree’d friends explaining why you’re not wasting your life.
9. Have private corporate documents indescriminately mixed in with personal notes, like print-out maps to the airport or university alumni newsletters.
10. Have at least one founder who refuses to maintain a calendar, so that everyone else is forced to call him every few hours asking where he is or if he is coming into the office.

I like the ‘try and do everything’ model. Great companies are often built on a resistance to narrow their scope. Google never set out to “only search travel websites”, Microsoft never confined its mission to “we only sell operating systems” and even Facebook resisted the strategy of a college-only social network. Just this past week I’ve had startups tell me “I want to focus on all media”, “My clients are all small businesses”, “we provide all types of business consulting” and “we can raise funds for any type of venture”. However, I generally do not recommend the “do everything’ model.

Google did one thing well- indexing the internet via pagerank. Microsoft built its leverage off of operating systems inside IBM computers. Facebook out-competed Friendster and Myspace by focusing on colleges. Then they grew into conglomerates with diverse footprints. Take midVentures. Back on day one, I wanted to be a web development shop, a consultant, an incubator, an event planner, and a venture capital firm. Each customer will ask you for different products and services- do not give every customer what they ask for. Focus on the one thing you do well.

Entrepreneurs always veer towards the ‘Do Everything’ model; because the entrepreneur is at heart either a visionary or a salesman. Visionaries want to change the world; requiring them to do everything better. Salesmen want to sell a customer whatever they ask for- requiring the salesman to deliver on any request. But there’s a difference between ‘wearing a lot of hats’ where the entrepreneur is the lawyer, the accountant, the HR, the salesman, the developer, and the marketer - and ‘trying to do everything’ where the entrepreneur is practically running different companies for each customer set. I’ve never seen a company start with a ‘do everything’ model and succeed, unless the ‘do everything’ model was simply a litmus test for finding opportunities.

Doing everything works well for diversifying personal skills; I have a friend who’s a yoga and kick boxing instructor, fluent in german and japanese, a concert pianist, pre-med, art history degree, anthropology degree, classics degree, a painter, and future doctors without borders member. Best of luck to her. Doing everything also works well for conglomerates, where you have an economy of scale via vertical or horizontal integration. Doing everything does not work well for the early growth stage of a startup.