The odds for new businesses aren't great. Entrepreneurs face massive challenges launching, let alone sustaining, their ventures. According to the Small Business Association, only about half of the companies started survive by the five year mark.
For the majority of these businesses, the entrepreneurs aren't cashing out with a major payday. They're failing -- often because the entrepreneurs who start them don't have the skills to build them into sustainable businesses. A brilliant software engineer may have developed the next WhatsApp, but if he doesn't understand how to structure and run a business, his chance of long-term success is slim. Someone may have the most innovative approach to making a craft beer or a confectionary product line, but the product by itself does not necessarily translate to a successful business.
So how do we help more new businesses be successful? We need to think about alternative approaches to entrepreneurship education. We need to educate students beyond giving a great pitch and raising money, beyond incubating a business for three months. Students need to know how to grow a successful business, whether it's their own or a fledgling startup, many of which need employees who understand entrepreneurial and sustaining business practices. Our success -- and that of our students and their new ventures -- depends on it.
Here are four reasons why an alternative approach to entrepreneurship education is in order.
Often-touted key measurements don't tell the whole story.
Many entrepreneurs, investors and academics point at two metrics when evaluating entrepreneurs: the number of businesses they've started and the number of exits they've had. Those are important, but they shouldn't be the only targets. How many were profitable? How long were they in business? If you were a CEO hiring a VP, you'd question any job candidate who'd held five VP roles: Is she really good at selling herself but doesn't have the skills or substance to make it long term? The entrepreneur is the same way: If he's had five exits and they've all been small, can he really build sustainable businesses? Do we want entrepreneurship students graduating with the idea that a lot of business starts and exits are the goal? If so, we risk sending graduates of many programs out into the world with the real potential of leaving a trail of failed businesses in their wake.
Startups need people.
Established entrepreneurs are always talking about how hard it is to find people who have the flexibility and ideas to work in a new venture environment. We need to be educating students who are interested in new-venture creation and are ready to fill those startup needs. I want experienced entrepreneurs to hire my entrepreneurship students. I want my students to learn from those entrepreneurs and those experiences and then be able to create their own new venture -- someday.
Students who've learned entrepreneurial processes can add a tremendous amount of value to a new venture. If they've been educated in traditional planning, which is really a cross-disciplinary endeavor, they're able to do a market segmentation study one week, work on an operations plan another week, and then build a financial pro forma and break-even analysis. Most entrepreneurship college students that I've taught are excited about wearing lots of different hats, and they're even more excited to help grow a business into something bigger.
This point becomes even more important when you look at entrepreneurs who have no business experience. Take a chef who has the ambitious goal of starting a sustainable restaurant concept, or an app developer whose background is only in the technology. They need partners to guide the business decisions.
We need to eliminate "growing broke."
Jay Myers, the founder and CEO of Interactive Solutions Inc. and author of Hitting the Curve Balls, talks about how he started his company without a real business plan. The problem wasn't that he couldn't get funding to get his business off the ground; it was that he started doing really well. He describes how he began to grow broke because he didn't know how to do the forecasting and budgeting for a rapidly growing business, and his payables were coming in faster than his receivables. He stresses how important understanding financial modeling and planning is for a young growing business. It's important that we educate students on building businesses that appeal to customers and solve their problems and can run and grow for the long term.
Two is better than one.
One of the debates happening in entrepreneurial education is around the value of lean startup vs. traditional business planning. I see an over-focus on lean startup and an under-appreciation of the traditional business-model education.
A key reason that startups fail is that they launch with something that not enough of us want. Before the model and products can be adjusted, the entrepreneur has burned through his resources. The lean startup model has done a lot to improve new venture concepts earlier in the development cycle, which has helped improve the likelihood of customer success. But companies with compelling business models still have a failure rate that is too high. In many cases, this happens when companies move from incubation or early stage to the growth phase or maturing business. These types of failures are frustrating because there are ways to reduce this with traditional business planning and management techniques. In the enthusiasm for teaching lean startup skills, we have reduced the amount of basic business planning education that is necessary to sustain and grow a business.
I've heard lean startup advocates use phrases such as, "Business plans are worthless" or "No business plan ever survives first customer contact." This rejection of business-plan development as an important component of entrepreneurial education totally ignores the issues of financial planning, operational planning, market-segmentation planning, funding methods and use of funds, and capitalization approaches -- all of the pieces that are needed to grow and build a successful business. I'd like to see us focus on educating students so they can succeed and add value to new ventures, not just raise money and start new businesses. I'm a proponent of introducing a new phrase: No startup ever succeeds on lean startup alone.
This doesn't mean giving up lean startup. It also doesn't mean focusing primarily on traditional business planning. The alternative approach to entrepreneurship education is to shift the focus to make sustainability as important as identifying customers and raising money. Rather than pointing our students down the risky path of starting their own ventures, let's get them into emerging businesses, where they can learn to build a business with an entrepreneurial team. We need to show them that there are multiple ways to be an entrepreneur. Only when we seriously use both approaches will we be able to improve the outcomes of new businesses.
David Altounian is an assistant professor of Entrepreneurship at The Bill Munday School of Business at St. Edward's University in Austin, Texas. He is also a partner in Capital Factory, an Austin incubator for startups, and the founder and former co-chairman and CEO of Motion Computing, a provider of mobile computing products for vertical markets.