One thing that that strikes me about economic development initiatives and organizations in places that have limited experience with the high risk/reward entrepreneurial culture that thrives in regions with robust venture capital resources, is that too many of them don’t understand the profound differences between the small business entrepreneur and the high impact entrepreneur. And that is a real problem, because as important as both of these entrepreneurs are to a healthy economy, besides starting small they are dramatically different in both their needs and their respective contributions to a healthy economy. Small business entrepreneurship can and should be encouraged: small businesses are the foundation of our economy. But if small business are the foundation, high impact entrepreneurship is the innovation engine of our economy. We need to support both kinds of entrepreneurship, and to do that we need to understand how different these two kinds of entrepreneurs are.
Small business and high impact entrepreneurs do have one thing in common: they both take risks. But upon closer inspection they are vastly different kinds of risks, and the differences reflect vastly different perspectives on and approaches to many of the most important aspects of starting, growing and managing a profitable business. Here are some of those differences.
Financial Goals. In terms of the big picture, most small business entrepreneurs are seeking financial independence when they launch a new business, and they expect to achieve that objective by building a profitable business that can pay them regular income. They may intend to pass on the business to their children, or they may plan on cashing out of the business when they retire, but their fundamental financial objective is regular income. They want to change their world.
In contrast, the high impact entrepreneur, while typically expecting a limited income from the business, is primarily focused on creating wealth, usually in a relatively limited time frame (often three to seven years, depending on the kind of business and the state of the economy) and usually via some sort of “exit” transaction that includes a substantial – usually at least seven figures and often much more – chunk of capital. So, at a very fundamental level, the small business entrepreneur’s financial goal is primarily income, while the high impact entrepreneur is primarily thinking, financially speaking, in wealth creation. She wants to change the world.
Risk/Reward Profiles. The small business entrepreneur typically tackles a business opportunity with the potential to generate a decent living – in terms of operating cash flow – in a relatively short period of time. The near/mid-term exit value of the business, what the business would be worth in a sale in say three to ten years, is not a major factor, because the entrepreneur’s financial objective is regular income, not cashing out.
In stark contrast, the high impact entrepreneur is primarily focused on the near/mid-term exit value of the business, as opposed to the prospect for near/mid-term positive cash flow. (In fact, most, perhaps even a majority, of high impact entrepreneurs get to the exit transaction before the business is even profitable, much less generating free cash.) With less interest in income and more interest in creating a huge exit value, the high impact entrepreneur is usually willing to take bigger risks to achieve bigger financial rewards.
While starting any new business is a risk, the inherent risks of starting a business with near-term prospects for generating cash and income for the owner is almost always less than the inherent risks of starting a business with the primary aim of creating substantial wealth in the near/mid-term.
Financing Strategies. The combination of lower risk, near-term income potential, and lower wealth creation expectations almost invariably leads the small business entrepreneur to limit ownership dilution, which is to say to limit outside equity investments that would suck out income. Fortunately, those same characteristics make small business entrepreneurs more appealing to potential lenders, including not only traditional bank loans but also equipment financiers, SBA lenders and receivables and other asset-based lenders – all of whom are much less likely to be lending money to a high impact entrepreneur with little or no expectation of regular positive cash flow over the near-term, and an asset base that is usually weighted more towards soft assets, such as intellectual property, than hard assets, like readily marketable equipment.
Fortunately for the high impact entrepreneur, the outsized wealth creation objectives of her business are attractive to (an admittedly limited class of) equity investors. And, given the “if this works there will be plenty of wealth created for everyone” nature of the high impact business, the high impact entrepreneur, while stingy with her equity, is typically far more willing to suffer some dilution to achieve the ultimate objective.
Employee Recruitment and Compensation. Job stability in the small business world, while historically not as secure as in the big business world (though the times they are a changing), is significantly greater than in the world of the high impact business. Not surprisingly, the typical small business employee values a regular paycheck and job security, and in return is generally willing to sacrifice (to some extent) both upward mobility (in terms of income/wealth potential and job description). It’s all about stability. The typical small business employee has a lot in common with the typical small business entrepreneur.
The typical high impact employee, on the other hand, places a lower value on regular income and job stability and a much higher value on upward mobility (in terms of both income/wealth and job description). It’s all about potential. The typical high impact employee is thus a bit like the typical high impact entrepreneur.
Different, But Equally Important. Nothing in the above discussion is meant to suggest that either kind of entrepreneur is somehow better or more important than the other. Both are important to our economic future. But if we want to encourage both kinds of entrepreneurs, we need to understand how they are different, and tailor our efforts in ways that respect those differences.