How to Exploit Your Startup’s Constraints: Good entrepreneurs use their lack of resources to their advantage.

The enthusiasm that David Schonthal has for startups is not based solely on how much funding they might raise, the chance they may come up with a giant-killing innovation, or the potential for a massive buyout from an established firm. Instead, Schonthal, an entrepreneur focused on the health care industry and a clinical professor of entrepreneurship at the Kellogg School, is fascinated by how start-ups exploit their constraints.

“The interesting thing about constraints is how they can be used positively,” Schonthal says.

Let’s face it: given limited funding, a small-if-intrepid staff, and unproven—or even nonexistent—products, most startups have to be creative just to get off the ground. But being small has the advantages of high-speed product adaptability and close contact with customers. Having little funding means throwing money at whatever problems arise is not an option. So other creative solutions arise.

The Lessons of the Yankauer Wand

“A lot of entrepreneurs go out to try to get affirmation or pushback on something that they believe they know to be true,” Schonthal says. “I have worked for startups where we weren’t even asking the right questions or doing the right research. We never really went through the exercise of asking, ‘what assumption is the whole business hinging on?’”

Failing to answer that core question can lead startups to spend time solving problems that are not really problems at all, as Schonthal came to learn in the course of one of his early ventures, a medical-device company. This company developed a holster for a disposable Yankauer wand, which is used to suction out the respiratory systems of unconscious patients. The wand is important, but it typically had no designated resting place in a care setting. As a result, nurses and doctors tended to store the wand under the patient’s pillow or dangle it off the side of the bed, neither of which is hygienic.

“In the early days, you go out to learn, not to validate.”

Armed with the assumption that the device needed a designated home when it was not in use, Schonthal’s company poured money into sales force–led research to prove the need for the product. But they asked the wrong question—essentially, “wouldn’t it be great if this holster existed?” They realized later that all those nurses and doctors who told them, “sure, it would be great,” were telling the truth. But they were also not ready to incorporate a new habit—putting the wand into the holster after each use—into their rounds. That disconnect between what people say and what they actually do posed a huge problem for the company.

Since people are creatures of habit, asking them to change their behavior can be a huge obstacle, no matter how convincing the data may be. The experience of the Yankauer wand has led Schonthal to be aware of users’ ingrained habits when thinking about innovation, rather than creating devices that require users to adopt new ways of working.

Let Go of Certainty

Being convinced of a great idea is crucial to getting a company off the ground. But certainty can also limit flexibility. A startup has to question everything about itself—from the nuances of product development to core existential questions about whether or not the business even solves a worthwhile problem.

It has taken Schonthal years to learn how to incorporate his own blind spots into the way he researches and tests the products he hopes to bring to market. Some of these blind spots have turned out to be fundamental to reasons the products were conceived.

So how does an entrepreneur figure out the right questions to ask? One way is to use the constraint of a small staff as an advantage. Most startups have no choice but to be close to their customers.

“In the early days, you go out to learn, not to validate,” Schonthal says. “Be really honest with yourself: you don’t go out to sell and scale as quickly as you can. Rather, you reduce the size of the experiment to be just big enough to answer some key questions, and do anything you can to get the thing in people’s hands so you can watch how they use it in the wild.” This allows for the kind of authentic feedback that only users can provide.

Observing how people interact with a product may lead to some very important, if painful, realizations: that you misinterpreted who your customer are, how the value proposition resonates with them, or whether they care about your product at all.

The Risks of Growing Up

One great advantage startups have over established companies stems from the size and funding constraints most startups share. In the absence of the budget it would take to hire an R&D team, the founders themselves spend time in the field gathering information. “When you’re small, everybody’s interfacing with customers every day, talking to them. When you hear feedback from the market, the whole team is hearing the same thing.”

“By the time customer information reaches the innovation department of a large company, it is usually presented as statistically significant survey results,” Schonthal says. “Thousands of people now become one synthesized voice of some artificial customer archetype—‘Meet Joe. Joe is a 35-to-37-year-old urban male who makes $65,000 to $75,000 per year and has 1.5 kids’—these kinds of abstract representations of real people.”

While useful for established companies, that kind of synthesized, humanized data is less valuable to entrepreneurs in early testing than hearing the voices of the individuals who are using the prototype. This feedback has a different value: it can clue the company into the motivations, emotions, and behaviors of the user and may reveal the true utility of the product in question. But knowing how to interpret what you hear—and knowing what questions to ask—can be a tall order no matter how big or established your company.

“If you go right to secondary data and focus groups, you lose that ability to walk into the clinic and see somebody shove the Yankauer wand under the pillow,” Schonthal says. “That kind of information doesn’t typically get translated through spreadsheets, charts, and reports. You have to be there to see it and understand why people are doing what they do. Understanding the ‘why’ needs to be the first step in creating a better ‘what.’”

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Relevance of Systems Thinking and Scientific Holism to Social Entrepreneurship

Social enterprises are said to meet two conditions—they address long-standing social problems, and they develop innovative solutions to do so. However, many social enterprises satisfy these two conditions but are unsuccessful in creating sustained positive social change. This article argues that a necessary condition for social enterprises to create and sustain social change is the ability to cognise the ecology of the social problem—the relationship and interaction between a social problem and its context. This article scrutinises how social enterprises conceptualise and address social problems by applying the principles of scientific holism and systems thinking to social entrepreneurial theory and practice. It presents social problem archetypes and develops key lessons for devising effective strategies for addressing social problems.

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Entrepreneurship and Comparative Advantage

This article advances a blueprint for understanding the function entrepreneurs perform in international trade, by drawing on the connection between comparative advantage and entrepreneurial judgement. The mutual benefits of specialisation and exchange are demonstrated whenever we find a minimum relative difference between the productivity of resources; however, we argue in this article that the concrete pattern of specialisation—manifest in exchanges between individuals, firms or states—cannot be discovered from outside the market. Rather, comparative advantage has an irreducible entrepreneurial component, and international specialisation is an entrepreneurially driven phenomenon. We explain this by unearthing the connection between entrepreneurship (understood as judgement of the allocation of resources under uncertainty), the heterogeneity of capital and comparative advantage.

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Entrepreneurs’ network evolution – the relevance of cognitive social capital

International Journal of Entrepreneurial Behavior & Research, Volume 21, Issue 2, April 2015.

Purpose The purpose of this paper is to investigate entrepreneurs’ network evolution in the start-up phase. Design/methodology/approach Based on the case studies of six fashion start-up firms, this study uses a three-dimensional perspective on social capital (structural, relational, cognitive) to investigate entrepreneurs’ network evolution (i.e. initiation of new relationships) in the start-up phase so as to acquire resources and support for firms’ goals. The study focuses particularly on the understudied cognitive dimension of social capital. The fashion industry provides a relevant research setting because it is characterised by changes in demand, which generate opportunities for entrepreneurship. Findings The findings show that the display of cognitive attributes is important for the creation of structural social capital (the establishment of new relationships). The findings also indicate that relationships initiated based on the cognitive dimension have a high probability of developing into embedded relationships, thereby becoming high in the relational dimension and providing access to private information containing referrals to other actors. Thus, these relationships also promote the continued development of the structural dimension. Originality/value The findings imply that the entrepreneurs’ sets of cognitive attributes constitute an important asset in the creation of social capital. They also point to the importance of signalling these values to potential resource holders. Relationships initiated through the display of cognitive attributes can provide resources without requiring immediate economic remuneration.
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Initiating nascent entrepreneurial activities

International Journal of Entrepreneurial Behavior & Research, Volume 21, Issue 1, Page 27-49, March 2015.

Purpose – The purpose of this paper is to examine the direct effect of two individual-level resources, one subjective and the other objective, and their interaction in influencing the business entry decision. By distinguishing perceived ability from actual ability and using theoretical underpinnings from the human capital theory and self-efficacy theory, the proposed hypotheses are tested on a data set comprising respondents from the adult population. Design/methodology/approach – Using 20,046 observations from the adult population survey (APS) collected according to the global entrepreneurship monitor (GEM) methodology, a logistic regression analysis controlling for robust interaction term is used to determine the direct and interaction effect of perceived entrepreneurial ability and actual ability in influencing the decision to initiate nascent entrepreneurial activities. Findings – The results reveal that perceived entrepreneurial ability has a distinct positive influence on the decision to initiate entrepreneurial activities and its impact is greater than that of actual abilities. Furthermore, the authors find evidence of a positive interaction effect suggesting that perceived entrepreneurial ability is a key determinant of entrepreneurial initiatives among those with high actual ability. Originality/value – The main contribution of the study is to highlight the role of subjective judgements of ability in influencing entrepreneurial behaviour. Whereas prior research has found that actual ability influences new venture performance, its influence on new business entry was inconclusive. By including perceived entrepreneurial ability to the model the authors not only establish a link between objective (observable) abilities and subjective (unobservable) abilities of individuals but also suggest the mechanism through which subjective ability perception drive the business entry decisions of individuals.
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The legitimacy of entrepreneurial mentoring

International Journal of Entrepreneurial Behavior & Research, Volume 21, Issue 2, April 2015.

Purpose This paper presents findings from longitudinal case studies of small firm mentoring relationships in Ireland. Our rationale is to explore the gaps between the theory and practice of small firm mentoring. Design/methodology/approach The paper uses a comparative case study design involving interviews, observation and secondary sources of evidence including business plans. Findings In contrast to the literature the paper extends the role of mentors in the small firm context as offering direct and indirect support, which reduces uncertainty in order to increase legitimacy of the business entity. Research limitations/implications The cases highlight a conflict between the broad theoretical scope of the mentor process versus a narrow role assumed by best practice. Practical implications The research presents an opportunity to enhance the pragmatic versus paternalistic perspective of small firm mentoring. We argue that for mentoring theory to be useful then a mentor’s role set in small firms may be wider and should be more direct than mentors in large corporations. Originality/value The emergent theoretical framework combines organisational learning and decision-making theories. The paper contributes to the theoretical development of mentoring by extending the range and defining the role of mentors in the context of small firms.
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Financial influences on export status of small and medium-sized enterprises in an emerging economy

Financial influences on export status of small and medium-sized enterprises in an emerging economy
Abu H. Ayob; Sveinn Vidar Gudmundsson; Mohd Hasimi Yaacob
International Journal of Entrepreneurship and Small Business, Vol. 24, No. 3 (2015) pp. 433 – 454
The purpose of this study is to understand financial and behavioural influences on the export status of small and medium-sized enterprises (SMEs) in an emerging economy. In particular, we tested the direct effects of perceived costs, internal financial resources and external capital constraint on the export status of SMEs. We also tested the moderating effect of cost sensitivity on two types of perceived export costs. Survey data was collected from 356 SMEs in Malaysia and analysed using logistic regression. The results show that exporters perceive higher ongoing costs but lower initiation costs of exporting. They also perceive higher internal financial resources, fewer constraints in accessing external capital and are more sensitive towards costs compared to non-exporters. Furthermore, we found that cost sensitivity moderates the relationship between perceived costs and export status.

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