Our Corporate Finance Partner, Steve Plaskitt, shares his views on the Entrepreneur’s Dilemma…
Last month saw the engagement of Meghan Markle and Prince Harry. This seems like another step in the merger between the rich and famous and the royal family. It does not seem very relevant to entrepreneurs – other than manufacturers of china plates and royal wedding memorabilia, perhaps.
Yet it is probably a very good way to consider The Entrepreneur’s Dilemma – would you rather be the king or be rich?
There is greater detail about the Entrepreneur’s Dilemma on the Harvard Business Review website. I came across a great example of this (see image below). I sent this to a client who was considering raising private equity for his company and wanted to know more about the pros and cons of losing control.
The simple interpretation of the picture is that for businesses to achieve close to their potential, then the founder entrepreneur may have to bring in external private equity or external skills. This would mean losing elements of control in return for greater financial gain. I.e. “a smaller slice of a bigger cake” is most valuable.
Founders of a business are often driven by desires to become both wealthy and lead an organisation. For some time, these desires align and the company begins to grow but few businesses continue in this way. Private equity is there to bring additional skills and experience as well as money for the business scale-up.
When founders are looking at private equity, they face the dilemma of evaluating their fear of loss of control versus their estimate of the value of the improved chances of them becoming richer. This decision is often made harder as the business choice is distorted by their emotional attachment to their “baby” – the business they have developed and nurtured – and their illusion of their own ability to control growth. This is not an easy choice, especially when many founders are convinced that only they can lead their business. During the early stages of the company’s growth, they have seen their drive rewarded and their decision to lead vindicated.
Next stage of growth
The founders’ early success often makes it harder for them to realise that the next stage of growth needs different skills and a different way of working. For example, the founder may not have the right skills or experience for the scale-up. Can they market in different countries, sell greater product volumes, provide a great after-sales service and do their traditional role?
Whilst it is true that private equity investors want to invest into someone with the vision and desire to build a great company, they prefer to work with those who want to be rich rather than the king. In this way, the founders’ ultimate goals are aligned with their new investors.
Considering your options
If the picture above deems that having ceded control and not being close to your potential is a failure, and that having control and being near your potential is the exception, then the choice between two successful business routes is whether to be rich or the king.
I am sure that this choice was one that neither Meghan Markle nor Prince Harry asked themselves.
However, it is a good question for entrepreneurs to ask themselves over the Christmas period when they have more time with their loved ones and more time to consider their strategic options and ambitions for 2018 and beyond.
Please feel free to contact Steve Plaskitt at Tait Walker to discuss your plans for your business.