Friday, February 12, 2010

Are advanced entrepreneurs good negotiators?

Not ususally. But, they don't realize they are poor negotiators. So what?

In order to capture the attention of advanced entrepreneurs, I often point out that entrepreneurial businesses make life or death decisions several times per year (sometimes per month), while a large company may make a life and death decision once every five years. Therefore, the liklihood of making a mistake that leads to the entrepreneurial business feeling compelled to be acquired or worse, going out of business, is very high.

Many of the mistakes result from a failure to successfuly negotiate a strategically important transaction or relationship. Why is this? First, most entrepreneurs, like most executives, believe the ability to negotiate effectively is a natural talent (which is not true). As a result, they fail to take courses to develop negotiating skills. Second, the entrepreneur fails to follow the number one rule in negotiation - be better prepared than the other side!

Every entrepreneur will be involved in heavy duty negotiations with people on the other side who are more skilled at negotiating than the entrepreneur. Yet, the entrepreneur believes his or her common sense will be enough to do well in the negotiation. Not even close!

Hiring a lawyer or other expert to negotiate for you is expensive and, often, not very helpful since the lawyer or other expert probably does not fully understand the context in which the negotiation is taking place. Only you have a keen appreciation of the trade offs you may make to get the deal or transaction done. It is easier for you to learn how to negotiate than it is to bring the lawyer or expert up to speed about your business.

Every entrepreneur should take a mini-course in negotiation from the local university or one of the firms that advertise in the airline magazines offering weekend programs on negotiation. This will be one of the best investments of time and money an entrepreneur can make.

Tuesday, February 9, 2010

Economic gardening is a good thing, but ......

Many state and local governments are promoting "economic gardening" as a means of stimulating growth in their economies and employment. This is a good thing. But, a key ingredient is missing - access to capital for growing entrepreneurial companies. Capital is in short supply by definition. Only those businesses that can convince investors and lenders that they can produce increased value for investors or meet their debt obligations for lenders deserve to obtain capital. The programs for economic gardening seem to focus on helping the growth stage companies deal with growth issues in order to make them more attractive to investors and lenders. This is a good thing also, but needs to have an added dimension.

How can governmental entities make capital more available to deserving growth companies in their geographic areas? Not by promoting venture capital firms to focus on a their geographic areas and not by trying to educate angel investors on investing in entrepreneurial companies. I urge all governmental decision makers to read a new book by Josh Lerner, a Harvard professor, Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed--and What to Do About It, The Kauffman Foundation.

So, what can be done? Can angel investors be induced to make more investments in these companies? Probably not. Can growth companies be educated on how to raise capital from angel investors, resulting in more capital being invested in these companies? Perhaps. Can founding entrepreneurs of growth companies be convinced they need to make changes in order to be much more attractive to angel investors? This is the biggest impediment to attracting capital from angel investors. Yet, most entrepreneurs running growth companies cannot accept the realities of valuations of their companies, management changes needed, giving the investors some degree of control (through veto powers, not the power to force the company to take certain actions) and having boards of directors that are not rubber stamps for the entrepreneurs.

Entrepreneurs who have the courage to accept these realities have a much better chance to raise capital from angel investors. Those companies that raise capital from angel investors and make significant progress in developing their companies can become candidates for venture capital financing. Creating the environment where companies can raise more capital from angel investors is the best way to promote investments by venture capital firms in the future. My conclusion - economic gardening can make a difference if the economic gardening programs can help the entrepreneurs running these companies deal psychologically with these realities .