Jaffer Ali: The Order of Things
I know many entrepreneurs and am struck by a common thread that runs through their lamentations. When entrepreneurs struggle, they inevitably point to not enough capital as the major reason for their struggle. I believe this is wrong.
If a lack of capital is not the number one problem for entrepreneurs, what is?
After years of many successes and failures, I think the major problem afflicting entrepreneurs is doing things out of order. What I mean by this is that too often assets are acquired in the wrong order; processes are added in the wrong order; people are hired in the wrong order; functions are added in the wrong order and the list goes on.
While an abundance of capital might ameliorate some of the problems of getting the sequence of events correct, Nature shows us many examples of what happens when the order of things is wrong. Take embryology as an example. For a healthy fertilized egg to develop, it is clear that the timing of when cells differentiate is critical to maturing into a healthy organism.
If organs develop out of order, the developing fetus often spontaneously aborts. This happens all over the animal kingdom, including humans. It is clear that sequencing is critical for the health of an organism. One can also see the analogy between how the brain develops and its eventual importance to organisms. We intuitively understand this with the cliché, “walk before you run”. This is a nod to proper sequencing. Organizations abort or fail with the same regularity as organisms.
This essay is not an instructional outlining the proper sequencing for a company. Each organization has its own sequencing or order of things. Marketplaces and platforms like Lyft and Uber are often well funded and this has actually covered up some of their sequencing problems. Actually, excess capital may delay catastrophic problems of getting the order of things wrong. Sometimes the delay gives the entrepreneur time to reorder their sequencing. But the overwhelming majority abort…meaning organizations go bust.
But why do entrepreneurs think capital is their number one constraint? In the 21st Century, it has never been a better time to be an entrepreneur. Think about this. The lap top I am using is more powerful than the main computer used to land a man on the moon. And it cost around $1000. We have the cloud that scales with a click of the mouse. Terabytes of information can be stored for a few dollars. Email can be deployed for practically free. Skype is free and you can speak to people all over the world for the price of an internet connection.
If the above was not enough, we have an online media landscape that is choking on overwhelming supply and increasing exponentially while a comparatively modest increase in advertising demand leaves trillions of impressions woefully under monetized. This is pure opportunity for marketers to acquire new customers at reasonable costs.
Yet the old canard of capital constraints still holds on as the number one reason for failed organizations. This is the business equivalent of fake news. One reason this notion persists is that it is a simple reduction, a simple explanation. And by the way, VCs and PE firms who control capital like to promote the primacy of capital. This is what gives them power.
But just as a botanist might know a great deal about the order of things when it pertains to how an acorn develops into an oak tree but knows very little how an egg develops into a chicken, VCs are notoriously bad at understanding the order of things with new companies. How do I know that? Look at the failure rate of VCs and Private Equity groups.
Each organization needs to understand its own order of things. Failure to understand that and your company will be aborted.