Wealth vs Control

Almost everyone in the business world can agree on the fact that any venture that wants to reach an end game above and beyond the average should be started with as little outside financing and investments as possible. With all the uncertainty in the world of entrepreneurship the only certainty will be that investors and creditors alike will expect their money back with interest. For an entrepreneur this can mean the end to a venture before it even begins. When starting a venture, it is important to understand the key resources and players that you will need on your team before jumping into competitive markets. It is during this stage that Noam Wasserman gives up his first advice for prospecting entrepreneurs. In the book founders’ dilemmas, he poses an interesting question that many entrepreneurs may not know the answer to before starting their venture. He insists however, that the notion that an entrepreneur may not know the answer can lead to inconsistent decision making and an ultimate failure of the venture all together.

               In the first section of the book Wasserman brings up the resource dependence theory to explain the contradiction and challenges associated with chasing both wealth and control. This economic theory states that the acquisition and dependence on outside resources have a profound effect on the decisions that a firm and founder must make in order to accumulate value. Wassmerman suggests that control and wealth each have a different strategy that must be followed in order to reach the founders desired outcome. These include early firm decisions such as venture capitalist investments, cofounding and financing through a lender. He goes on to explain that each seemingly small decision made, even those that seem trivial or common sense at the time, often lead to long-term consequences.

               Something interesting I came across while seeking information on the research dependency theory was that many regard resources as a basis for power in the business world. This begs the question as to what the entrepreneur sees as power and in tern will be reflected in the usage of those resources. For example, if the business wishes to maximize the wealth of the firm, then clearly the entrepreneur equates money with power and therefore is willing to dedicate resources to achieving it. In contrast if the entrepreneur seeks out a controlling equity stake or freedom to guide the firms actions you might see them invest more money from non-equity related financing or pay more out of pocket. This strategy often causes large short-term losses but in the long run allows the controlling equity to stay with the founder. The founder seeking control must also be wary of early round investors during the seed stage. The earlier the founder seeks investments the riskier the investment will be for venture capitalists. Higher risk always means that the investor will need larger shares of the equity to guarantee that they can recoup their money if the business was to fail. Another point made in the chapter was the dangers of over confidence and the inability to see additional opportunities because of the blinding belief that entrepreneurs often develop in their own abilities and judgment. These two sections together reminded me of a quote from my undergraduate entrepreneurship textbook that I wrote down among many others

Jack Garson, a successful owner of a law firm, said when asked about startups and financing

“You don’t have to open your dream business on the first day. It is better to start with a successful hotdog stand, than get halfway through the construction of a full-service restaurant and run out of money”.

 This quote sums up the excessive confidence and the overzealous attitude that many entrepreneurs fall into when starting a firm. This often leads to the loss of both wealth and control as Wasserman explained and can lead to founders losing the ability to even match their opportunity costs rather than excelling and realizing their dreams.  The real danger of this Dilemma is that it comes at a time when the entrepreneur is inexperienced and often ill-equipped to make it. New ventures are vulnerable to many external threats but according to Wasserman most fail because of internal inconsistencies and management team failures. I believe that Wasserman is correct in warning against the dangers of over confidence and highlighting the notion that a founder must know themselves before they can create a path for others to follow in the form of a venture. Without a well-known self-identity and consistency in decisions and values the firm won’t get through the rigorous challenges that ensnare 50% of businesses in the first 5 years of operations (US Bureau of Labor statistics).