Entrepreneurship is serious business. Failure can have major consequences. Just like survivors of civil wars and family divorces, survivors of failed entrepreneurial ventures or collaborations rarely forget the past, and in the worst cases, are permanently scarred.
The risk of failure can be avoided or at least minimised. This article sets out 10 questions and answers to light the way.
1. What is entrepreneurship?
We define entrepreneurship as: “a process which treats the factors of production (land, labour, capital and knowledge) to produce new businesses, goods and services“.
Entrepreneurship certainly involves the processes of innovation and sometimes commercialisation. It also involves taking risk for reward.
People often associate it with start-ups. However, entrepreneurial behaviour can arise at any stage in the life cycle of an industry, business or product.
In a corporation entrepreneurship is balanced between:
- the shareholders (who carry the risk),
- the directors (who set the policy direction of the corporation), and
- the executives (who manage and implement the corporation’s strategies).
2. What are the origins of the term “entrepreneurship”?
In law, as in other disciplines, the origins of a word can help understand its meaning. According to the Oxford dictionary the word “entrepreneur” originates from the Old French word entreprendre or ‘undertake’.
Here’s an interesting footnote to the history of the use of the term.
The life of Jean-Baptiste Say (1767-1832) involved defining entrepreneurs and being one himself. Say, a French economic theorist, is credited as the first in continental Europe to write about entrepreneurs and entrepreneurship. In his 1803 Treatise on Political Economy he promoted the laissez-faire notions of Adam Smith. This caught the attention of Napoleon Bonaparte who demanded that Say rewrite parts of the Treatise to conform with Napoleon’s attempt to create a war economy, built on protectionism and regulation. Say refused. Napoleon proscribed the Treatise and had Say ousted from the Tribunate in 1804. The second and third editions of the Treatise appeared in 1814 and 1817. Larry J. Sechrest writes that “By means of his writing, his influence spread to Italy, Spain, Germany, Russia, Latin America, Great Britain, and the United States…”.
3. What do entrepreneurs do?
Say stated that the entrepreneur “shifts economic resources out of an area of lower productivity, into an area of higher productivity and greater yield”. Entrepreneurs use their “industry” (a term Say prefers to “labour”) to organise and direct the factors of production so as to achieve the “satisfaction of human wants.” This involves taking risks in the hope of gaining rewards eg profit.
Effective entrepreneurship requires a continual search for productivity as resources are applied to ventures, and nowadays often for products, services and systems as well.
4. Is entrepreneurship about being an individual?
While historically entrepreneurship was led by individuals (known as entrepreneurs), more often than not nowadays it involves a team working in collaboration. In this context we can speak of entrepreneurial ventures and entrepreneurial organisations.
Whether, entrepreneurs today are individuals, a team or sets of teams in companies or organisations working in collaboration – all of them have to collaborate with others. This seems to be the case more than ever before. Entrepreneurs make their efforts for their opportunity throughout the life cycle of venture, product, service or system development, testing, marketing, distribution, sale, support, upgrade and so on.
Similarly an entrepreneurial or even non-entrepreneurial organisation goes through a business life cycle which classically is split into about five phases – start-up, development, growth, maturity and decline. The accompanying graphic illustrates that life cycle, with money invested indicated in the vertical axis and time in the horizontal axis.
However, as the growth, maturity or decline phase approach, some supremely entrepreneurial organisations have the capacity to re-invent their core business and thus survive through more than one life cycle. For example IBM, Intel, and Apple Computer have all excelled in re-inventing themselves. IBM has gone from being a supplier of various business machines including typewriters, through to producing market-leading mainframe computers, then PCs and now it is largely an IT services company.
The process of re-invention through innovation is illustrated in the accompanying graphic focused on product or venture innovation. As illustrated, each time a version of the product reaches the turning point or crest of success, innovation results in a new wave of revenue generation. That may involve creation of a new product version or a related venture.
Having reached the half way point in this FAQ, we’ll focus in the remaining four questions on learning to improve entrepreneurship.
5. Why is it critical to improve entrepreneurship?
It is as true in law as it is in strategic planning – if you fail to plan then you plan to fail.
Our case work over many years repeatedly illustrates that individuals and collaborators on the entrepreneurship journey will have fewer, and more easily resolved, obstacles and disputes, if at the outset they are clear or agree on their values, objectives and roadmap. It is an obvious point and worth never forgetting. It is not just about risk minimisation, by planning entrepreneurs learn about and improve their entrepreneurship. The type, length and detail of plans should suit the size of the challenge and the overall needs and circumstances.
If a plan is in place, what else might help or hinder entrepreneurship? Numerous studies indicate that a combination of personal, societal, business, public policy and wider environmental factors are all at work in either encouraging or discouraging entrepreneurship.
For example, personal factors which encourage entrepreneurship include a willingness to exploit opportunities, to work hard, to persevere and to be driven by self belief. Many of those features seem to appear in the life of Jean-Baptiste Say, as profiled above.
Public policy factors include the nature and degree of regulation. Finally, entrepreneurship can be helped or hindered by the availability and quality of education, know-how, people, finance and professional support. Especially with intellectual property, learning about the management, training, rewarding and motivation of people needs special emphasis. People create intellectual property, not machines.
6. How can learning about entrepreneurship produce results?
Entrepreneurship is about the journey. Learning about entrepreneurship helps you and other participants set, communicate and monitor a common vision, mission, goals and objectives. Clarity increases the chance that you will pull together and collaboratively deal with individual or collective shortfalls and challenges.
7. How else does knowledge of entrepreneurship assist?
Entrepreneurs often work in collaboration, eg an inventor working with a few co-developers or investors. There may be no agreement, or at least in writing. Writing is useful, but clarity and communication are essential.
Unfortunately our firm’s experience is that even the collaboration agreements in writing are too often either:
- in essence generic templates; or
- lacking in customisation for business considerations.
We’ve seen this as an all too common situation arising. Here’s the usual pattern that follows cases in which there is problematic legal documents.
- The issue Insufficiently equipped lawyers do the legal work for a collaborative enterprise, eg preparing a shareholder agreement or a major intellectual property licence agreement.
- The problem – Lack of know-how on the part of such lawyers regarding what entrepreneurship involves for the specific enterprise and its circumstances, or gaps in their market or industry knowledge, contribute to the venture having progress issues.
- The crisis – The venture reaches a crisis point, the participants turn to their foundational or constitutional legal documents. Rather than finding a hoped for blueprint for problem resolution, the documents are suddenly recognised to be in fact too generic. In the worst cases they are “cut and paste” legal “solutions”. Yes they may be perfect at law, but that does not mean that the rights, obligations and prohibitions in them are practical, workable or commercially feasible.
- The disagreement – If and when a disagreement or dispute arises between participations about interpretation of the foundational agreement, document or constitution between them, then it is often the beginning of the end. Each camp withdraws to its lawyers or new lawyers.
- The outbreak of war – Sometimes there is a solution, but if the crisis festers, it grows into either a dispute, project abandonment or litigation.
- The cleanup of the mess – Ultimate resolution or clean up of the mess involves more cost and time than good commercially-informed legal and consultancy advice would have required at the outset, at the time when everybody was friendly and collaborative.
The short point is that good legal documentation should contain future-proofing provisions. For example, provisions setting out plan, funding and remuneration specifics and how to resolve differences of view before they evolve into disputes, let alone litigation.
Just like survivors of civil wars and family divorces, survivors of failed ventures or collaborations rarely forget the past, and in the worst case, are permanently scarred.
Knowledge of entrepreneurship and the life cycle it involves, helps better future-proof creations, inventions and relationships. It helps prepare better legal and practical documents for each of them. The knowledge helps overcome shortfalls, challenges and differences of view that inevitably arise.
8. Ten key competencies for entrepreneurship
This is a challenging question. The answer involves pulling in information from many disciplines. To provide some guidance, set out below is a structured list of 10 areas of knowledge and expertise we often apply or consider in our firm when advising clients involved in entrepreneurship. We call the list the Dilanchian KML Framework.
- Market Knowledge – it is helpful in entrepreneurship to know the relevant industry, sector and market and the trends and drivers in them.
- Strategic Planning – it is vital for the entrepreneur to operate with some degree of planning, eg to link what is known about an opportunity to the market conditions. Planning helps map an entrepreneur’s operating environments of law, accounting, economics, science, technology, business and politics. Planning should include preparation of financial documents such as cash flow forecasts.
- Asset Evaluation – asset development requires identification and evaluation of the portfolio of intellectual property in a legal sense (eg trade marks, patents, copyright and confidential information) and the intellectual capital that is to be leveraged.
- Enterprise Structure – entrepreneurship requires linking people with entities and groups of entities, and understanding how to reward and manage employees, contractors and collaborators.
- Document Management – it is valuable to retain knowledge, to both apply it and use it to defend against business and legal challenges. Risk management and legal compliance is usually not possible without the creation and proper management, storage and communication of records and documents.
- Deal Making – a structured approach to making deals helps entrepreneurs in negotiations and in reaching at least preliminary understandings, arrangements and agreements. It also supports subsequent needs in transaction planning, due diligence and project management.
- Contracting – ideally structured deal making steps should be taken in advance of negotiations or drafting work for a legally binding agreement; otherwise, while legally perfect, the contract may not relate, as much as it should, to practical or business needs and considerations.
- Commercialisation – understand the process of commercialisation through each of its stages, phases and exist paths. The options for an exist path include licensing, trade sale, merger, business sale or a float. The stages may also include the design, production, marketing, sale, distribution and support of a product, service, technology or business. It may also be relevant to understand and apply to these – design upgrades (including new versions or editions), customisation of offerings (eg for specific markets or classes of customers) and offerings extension (eg brand extension).
- Legal and Regulatory Compliance – business and corporate activity is regulated; disputes, litigation or breach of law can all be show stoppers. Proactive compliance is recommended.
- Assets and Knowledge Management – for organisational coherence and portfolio valuation it is vital to know what you have, what it is worth in different contexts, and how to manage the assets into the future. For example, if the key assets are a set of signed contracts – understand them and evaluate them so as to use them strategically.
Finally, the graphic below illustrates the tremendous results which follow when entrepreneurship is combined with waves of innovation.