Wednesday, July 29, 2009

Why do young businesses have to go through hoops to succeed?

In order to succeed, a young business (from startup to high growth mode) must go through many hoops. Why? Should our government (federal, state or local) eliminate some of these hoops? My view is - No. A market driven economy has an "invisible hand" that allocates success among the many young businesses at each stage of their existence. As with any scarce resource, success is hard to come by. Can government pick winners and losers? Hardly.

The "invisible hand" customizes the hoops that each young business has to go through. If the business makes it through these hoops, then more hoops are presented. It's the way our market driven economy disciplines businesses. Each set of hoops is different, but most of the types of hoops can be predicted such as finding a product or service for which demand exists (not just a perceived need), finding a good (although not perfect) mix of people to run the business, obtaining capital (directly or indirectly), staying focused (but on the right things), etc. When a business makes it through the hoops, it deserves to grow and, possibly, thrive. If it doesn't make it through the hoops, it deserves to fail or become part of the living dead.

So, one of the jobs of an entrepreneur is to know the hoops that he or she will have to go through and, then, to acquire the skills and resources to go through the hoops. But, entrepreneurs "don't know what they don't know." So, how can they possibly anticipate the hoops let alone be able to get through the hoops?

Frankly, most entrepreneurs who make it through a set of hoops are lucky. But most of them don't make it through the hoops because they are blindsided by the hoops and, when a hoop that wasn't anticipated is presented, it's too late to change direction or gather more resources to avoid the hoop or overcome the hoop. This is why smart investors want to invest in serial entrepreneurs - they have been through the process and are smart enough to know most of the hoops or to get "just in time" advice,to tackle or avoid a major hoop.

The hoops are the best filters our system has to pick the winners and losers. Government should stay out of the way and not try to eliminate the hoops. Our economic system is much better at determining the necessary hoops than bureaucrats who are just like entrepreneurs. They usually "don't know what they don't know."

The best way entrepreneurs can find out what they don't know is to ask others who have been there. Yet, one of the weaknesses of most entrepreneurs is an unwillingness to seek advice (or listen to advice). The hoops will take care of entrepreneurs who fail to seek advice.

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