The global economy is changing, and with it, the skills required to succeed, according to Ian Chubb, Australia’s chief scientist, who just released the study, Boosting High-Impact Entrepreneurship in Australia.
“Knowledge is the foundation of the high-growth industries of the future — but it must be knowledge efficiently acquired, skilfully managed and creatively applied,”he says in the report, which highlights entrepreneurship as the key to a high-growth, innovation-led economy, able to capitalise on Australia’s investment in research and skills.
Chubb also believes entrepreneurship can be taught. A large number of courses have been developed in recent years to provide a practical grounding to startup founders and teams.
The outgoing chief scientist’s comments are timely, because Dr Alan Finkel, who was announced this week as Chubb’s replacement when steps down at the end of 2015 after five years, is being widely hailed for his entrepreneurial focus.
Here’s what the report says about the core skills needed by today’s entrepreneurs.
Business model innovation
“Developing a viable business model is an essential task in the early days of any startup in order to ensure that the business meets customer needs, can scale rapidly and can become profitable,” the report says.
Companies developing technology-based products and services are often also developing new and untested business models, and it is therefore essential that these entrepreneurs have a strong grounding in business model innovation.
Tools such as the Business Model Canvas, a management of tool, help guide the development of a business idea.
“The Lean Startup approach to product development is important in any company that is developing new technology-based products,” the report says. “This approach centres on rapid iteration of the product based on customer feedback as a means of ensuring the product meets the needs of the target market.”
Ash Maurya, in his book Running Lean: Iterate from Plan A to a Plan That Works, notes that a large proportion of startups fail because because their products don’t fully matching the needs of a target market.
“Startup founders require strong sales skills, not just to sell their product to customers, but also to sell equity in the business to investors in return for funding, and to prospective employees who typically accept a lower salary than they would receive in a larger company in return for a stake in the business,” the report says.
Many have good technical skills but lack sales experience. “This is therefore a core skill that startup founders need to learn,” the report says.
Managing financial resources is a critical activity during rapid growth. “Running out of cash is one of the most common causes of startup failure, and often stems from a lack of financial acumen in the early stages of growth, and before the company is large enough to have a dedicated CFO,” the report says.
Key skills needed include understanding financial statements, managing cash flow, creating financial forecasts and reporting to shareholders.
“Founders of high-growth companies need to have an appreciation for a range of legal issues spanning topics such as employment law, capital raising, company directorship, solvency and competition law,” the report says.
“Whilst startups can seek external legal advice, it is critical that founders have a sufficient grasp of the issues to know when they need advice, and also to ensure they are not being over-advised.”
Regulatory issues are also critical for biotech, medical devices, aerospace, aviation and financial products and services.
Intellectual property management
“Protection and enforcement of IP rights is an important theme for many technology-based companies. Avoiding infringement of IP rights owned by others is also an important topic,” the report says.
“Startup founders need to have a broad awareness of IP management concepts in order to maximise the strategic value of the IP assets owned by the company and minimise the risk of litigation by larger competitors.”
“A growing number of companies are engaging in platform-based business models in which they do not sell a product or service, but instead provide a platform on which others can create and exchange value via provision of products and services,” the report says.
“Platform-based businesses are generally engaging in two or more sided markets, and are common among internet businesses spanning a wide range of industries.”
Sangeet Paul Choudary, in his book Platform Scale: How an emerging business model helps startups build large empires with minimum investment, discusses the economic principles of platforms and notes that many startups fail due to a lack of understanding of these principles. “Teaching platform economics to startup founders is therefore an important step in preparing them for launching platform-based businesses,” the report says.
“Most high-growth companies need to raise external capital from investors such as angel investors or venture capital funds to fuel their growth,” the report says. “The process of raising capital is complex and requires an understanding of how different types of investors work, as well as a grasp of concepts such as portfolio theory, capitalisation tables and dilution, and an understanding of the financial and legal terminology involved in financing.”
A recent US study by Professor Tom Eisenmann of Harvard Business School analysed the funding rounds of 200 startups that had collectively raised A$500 million from investors.
The average seed funding involves contact with 58 investors, 40 investor presentations and takes an average of 12.5 weeks to raise an average of $1.8 million. Many startup founders make common mistakes in pitching to investors. They could significantly improve the efficiency and success rate of fundraising by getting a better understanding of the process.
“The same challenges exist in Australia, but with the added drawback that there are fewer investors and a less sophisticated funding environment,” the report says.
Employee Share Ownership Plans
These plans are an important mechanism by which startup founders incentivise and reward employees. The scope to use them in Australia has been greatly improved as a result of the government’s recent changes to the tax treatment of options.
However, the use of the schemes remains a relatively complex area and one that startup founders need to understand.
Building and managing teams
“High-growth companies often need to recruit large numbers of staff in short periods of time to maintain their rate of growth,” the report says.
In mid-2013 Atlassian announced plans to recruit 100 product development staff in a three-month period. Cochlear added an average of 175 new staff per year over an eight-year period to 2012.
“During the early stages of growth, startup founders need to have strong skills in recruitment, selection, management and leadership of rapidly growing teams,” the report says. “These skills are rarely taught to students in STEM disciplines.”
Managing rapid international growth
“A feature of most high-growth companies in any sector is that they are competing in international markets,” the report says. “The ability to manage rapid international growth requires an understanding of market dynamics, pricing strategies, foreign exchange, international legal and regulatory issues, cultural differences and operational matters associated with establishing a presence in overseas locations.”