Embracing scarcity

By Matthew Cushen

My favourite definition of entrepreneurialism is from Professor Howard Stevenson of Harvard Business School – “the pursuit of opportunity beyond resources controlled”.

It captures the noble struggle of an entrepreneur to create something big from little, to use their innovation, cunning and agility to overcome the inherent advantages of scale, expertise and trust that large businesses have.

Conventional theory about economies of scale would suggest that big companies are unassailable. But over the last couple of decades, we have increasingly seen this is not the case, with numerous examples of scale creating paralysis and new businesses being the drivers of innovation and new business models.

I have an unusual perspective on the business world, having worked within large corporates, then (and still) as an innovation consultant to the leaders of large businesses (such as IKEA & AB InBev) and years of investing in & helping start-ups. My belief is that an entrepreneur’s greatest advantage is born from scarcity. Entrepreneurs have…

From these constraints are born the necessity and freedom to rapidly and cheaply experiment, learn and iterate – with the main effort focused on the customer. Large businesses get fixated on the risk – of spending too much, talking endlessly about saving time (ironic indeed), navigating their stakeholders and obsessing about the risk to their brand. Summed up in the regular response from a business leader to an’ idea – ‘that sounds interesting, why don’t you pull a business plan together. If ever there was a phrase to suck the energy from creativity.

It’s why big business envy, what I call, the ‘magic dust of entrepreneurialism’. But generally, they are missing the point. They think they need to inject a cultural elixir into their organisation, but they should be taking things out – resources, time, people, risk.

The point here for smaller businesses is to embrace what you don’t have. Bootstrapping before receiving funding is the period of greatest creativity and freedom – to think up ways to learn about your customer, to get your proposition (or elements of it) in front of them to gain insight, to do just enough to build confidence in your idea.

It means being considered about how much funding you are going after. We get frustrated when we see business plans that require huge funding quickly. The entrepreneur will give up more equity than necessary and the investor will take on more risk than they need to. We prefer more gradual funding of a business, where the entrepreneur benefits from increased valuation as more confidence in market fit is created and where scarcity, and therefore the mentality of experimentation, is maintained. This doesn’t mean hand to mouth, but it is avoiding the ‘Silicon Valley culture’ of huge sums being pumped into small start-ups that then develop the structures and inertia of large businesses.

It also means that an entrepreneur escaping a big company should be very mindful of the mentality they have. Many years ago, I left a big job at John Lewis to set up a new retail business. I was full of the hubris of multi-million-pound budgets and set up my retail business with a proposition, processes, systems fit for the over 100 store chain I expected it to become. With hindsight, much of my capital expenditure was wasted. I’d have been better at experimenting quickly and cheaply, getting a deep understanding of the customer and iterating the proposition rapidly.

So as an investor, I have a huge ‘watch-out’ on the mentality of an entrepreneur that has come from a large business. Industry knowledge is hugely helpful, as is the structured thinking, prioritising, planning skills that are nurtured in a large business. But alongside these, an entrepreneur must demonstrate their experimental mentality and ability to embrace scarcity.

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