Entrepreneurship: The Art of Balancing
At their inception, most start-ups and new businesses struggle with the same set of challenges: Insufficient resources (cash, mainly), Lack of exposure and Intense competition from larger or more established players. Although these challenges may seem to be the most significant to the business, there is another, less obvious aspect that entrepreneurs need to contend with that may be even more challenging or significant.
To get a clear understanding of the dilemma that an entrepreneur faces, we must first understand the two essential roles of an entrepreneur. An entrepreneur wears two hats. First, an entrepreneur is a manager. They are tasked with managing different aspects of the business in order to ensure its smooth running. From financial management to employee management, a thorough entrepreneur should understand how every single cog of the business machine works. Skilful business management is instrumental for a thriving business.
The second hat that an entrepreneur wears is that of an investor. Not only does an entrepreneur invest a lot of his/her time in the business, but more importantly, entrepreneurs invest a significant amount of their personal cash into the business. Obtaining external financiers is a daunting and often unsuccessful endeavour. With this in mind, many entrepreneurs result in pumping their own cash, or even borrowing from close family and friends in order to keep their business going. This in effect makes an entrepreneur an investor.
Both the roles of manager and investor are essential for the success of any enterprise. Without investors there would be no funds to start the business or keep it going. Without managers there would be no operations.
Although many don’t realise it, the balancing act an entrepreneur has to perform is far from a simple one. An investor and a manager often have completely different mind-sets and perspectives on similar issues regarding the running of a business. As agency theory suggests conflicts (agency costs) may arise in corporations due to different objectives and views. Mastering the art of knowing when to switch from a manager’s mind-set to an investor’s mind-set (and vice-versa) may take years of experience.
An obvious area that highlights the different mindsets of a manager and an investor is risk. In general terms investors tend to be more risk averse compared to managers. Why is this? To begin with, managers will generally seek and evaluate the short-term gains of a business deal or opportunity. This is because they are often bound to the company by relatively short-term contracts and therefore the future well-being of the company is not their biggest concern. They may also engage in more risky ventures or projects that may increase their returns and bonuses.
Investors on the other hand (especially value investors) may be focused on long-term investment returns. They are interested in increasing the value of their wealth over time and are therefore concerned about the health of the business. In many situations, as exhibited by the 2008 financial crisis, the undertaking of risky positions has adverse long-term effects on the company.
When it comes to diversification, managers and investors also tend to have different responsibilities. A manager is expected to focus on his/her core business and not get distracted by other ventures. They are expected to stick to what they know. An investor on the other hand, can put his eggs in many baskets and have a diversified portfolio, in accordance with his/her risk tolerance. In simple words, while an investor is encouraged to diversify, a manager is encouraged (and expected) to specialise.
As viewed from these examples, investors and managers have different priorities in the course of their activities. Given that an entrepreneur has to perform the tasks of both an investor and a manager, it is easy to see how an internal struggle can arise. An ‘internal agency conflict’ of sorts. Different situations may require an entrepreneur to put on a different hat. It is however important to note that entrepreneurs should always take the long-term effect of their activities. Engaging in a loss-making strategy in the short-term for significant gains in the future may sometimes be necessary for an up and coming entrepreneur.
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Interested in learning more about these two critical roles that an entrepreneur performs? Understanding these conflicting roles and which one you are more suited for will help you identify your weak spots and how you can start improving on them. At the Institute of Small Business Initiatives, we train entrepreneurs on how to navigate such situations using a practical approach. Striking a balance between investor and manager is the epitome of entrepreneurial skill and whoever can achieve this balance, is sure to achieve great success.
