UCLA-Anderson’s George Abe helps guide students through the labyrinth of details associated with creating new businesses. Last week, we discussed the language entrepreneurs needed to master to create great business plans and investor term sheets. In this post, we’ll hear his ideas about venture risk and the current entrepreneurial environment.
BNET: What are some common mistakes that new entrepreneurs tend to make?
Abe: They don’t get risk mitigation. They have an idea what it’s about…they sense some potential danger…but they don’t see the landmines. I spend quite a bit of time on this topic in my course. We break it down into five types of risk: technology risk, market risk, competitive risk, financial risk and management risk. These are what a sophisticated investor will consider when making an investment. From the point of view of the entrepreneur, since you are making an “investment” in yourself, you should think about this yourself. What is your product risk? Does it work? Does it work in quantity? What about the “whole product” that surround the core product you’ve built?
What’s the difference between “market assessment” and “market entry strategy”? I think there’s a lot of confusion about that. People get that they have to calibrate a market size, but they don’t get the next step of market entry. What people fail to do completely is to characterize their customer. They are simple questions: who is your buyer? Who is your customer?
BNET: Or is that two questions?
Abe: Right, that’s exactly the point. That is two questions. A lot of people confuse users and influencers and buyers and customers. A lot of people think it’s all the same thing, but in fact they are different. That mistake can create a lot of problems. We do a medical device case. We say in the case that using this device could save $1.5 billion in malpractice fees. Students think that this is the market size, the total addressable market or TAM. In fact, it’s a measure of pain that doctors feel, but that number has nothing to do with how many units of this product they are going to buy. The difference between “pain” and “TAM” is very often confused. That’s why people miscalibrate. Pain might be a reason why people want to buy, so it really doesn’t relate to size.
BNET: Do students have any advantages over more seasoned professionals and entrepreneurs when it comes to launching new ventures?
Abe: They have less opportunity cost. If you look at statistics globally about the number of entrepreneurs divided by the total populations of various countries, the countries with the highest ratio of entrepreneurs are placed like Uganda and Zambia. They don’t have a choice. That’s kind of an oblique way to put it, but in fact, one good reason to start a business is that you don’t have this heavy opportunity cost. Now you probably also don’t have good information and there’s a lot of other things you lack, but the lower opportunity cost gives you an advantage.
BNET: How would you assess the state of entrepreneurship, so to speak, in a time of general economic downturn?
Abe: I think in many ways, entrepreneurship is immune from what’s happening. People who want to be entrepreneurs pursue it no matter what the state of the economy. It’s about control of lifestyle and all of that. That would persist no matter what the state of the economy. It does make the raising of the venture capital more difficult, but VC funds less than 1% of American start-ups anyway. There are 6-figures [in the hundreds of thousands] of new businesses created every year in the country and the vast majority of them are low-tech. We’ve had a number of graduates who have left UCLA-Anderson and founded low-tech businesses and done very well with them. For those individuals, it was about the control, lifestyle and the ability to be their own bosses.
BNET: What is your biggest piece of advice you would give to an entrepreneur today?
Abe: Do it. No matter what the times, you can find a way. You just need to know the legal and financial language…and don’t do anything really stupid early on.
