One thing that has struck me about the various economic development initiatives and support organizations in northeast Wisconsin is that they don’t distinguish between small business entrepreneurship and high impact entrepreneurship. Before exploring the important differences between these two kinds of entrepreneurship, let me say that, as my younger children say, “this is a team, not a race.”
In suggesting we recognize that promoting a small business entrepreneurial climate is not the same as promoting a high impact entrepreneurial climate, I am not proposing that one goal is better than the other. Both goals are important to the future prosperity of the New North, and each goal can be promoted without undermining the other goal.
What is so different about small business entrepreneurship and high impact entrepreneurship? Almost everything. Both kinds of entrepreneurs take risks, true, but on closer inspection they are vastly different kinds of risks, and those differences reflect vastly different perspectives and approaches to most of the fundamental aspects of starting, growing, and managing a business. Let’s look at a few examples of those differences.
At the highest level, most small business entrepreneurs are looking to achieve financial independence by building a profitable business that can pay them regular income. They may intend to pass on the business to later generations, or they may plan on selling the business to finance their retirement, but their basic personal financial objective is regular income. In contrast, the high-impact entrepreneur typically expects to achieve limited income from the business, but ultimately obtain wealth, usually in 3- 5 years, in some sort of “exit” transaction that includes a substantial, usually at least seven figures and often much more, chunk of wealth. At a very fundamental level, then, the small business entrepreneur is primarily out to generate income, while the high impact entrepreneur is primarily interested in wealth creation.
These different economic objectives lead to enormous inherent differences in the kinds of business the two entrepreneur types start; their risk/reward profiles; how they finance their businesses; and how they recruit and compensate their teams.
The small business entrepreneur typically tackles a business opportunity with the potential to generate a decent living – operating cash flow – in a relatively short period of time. The near/mid-term “exit value” of the business, that is what the business would be worth in a sale in, for example, 3-10 years, is not a major factor because the entrepreneur’s objective for the business is regular income. In stark contrast, the high-impact entrepreneur is primarily focused on the near/mid-term exit value of the business, as opposed to the prospects for near-term operating cash flow. With less interest in near-term income potential, the high-impact entrepreneur is willing to accept much greater risks to achieve a much higher near/mid-term exit value.
While starting any new business is a risk, the inherent risks of a business with near-term prospects for meaningful positive income potential are almost always lower than the inherent risks of businesses that offer meaningful wealth generation over the near/mid-term. Not surprisingly, small business survival rates, while daunting, are much higher than high-impact business survival rates.
The combination of lower risk, near-term income potential, and decreased wealth creation potential inevitably leads the small business entrepreneur to limit ownership dilution, which is to say, to limit outside equity investments that would suck out income. Fortunately, those same characteristics make small business entrepreneurs more appealing to potential creditors, including not only traditional bank loans but also equipment financers, SBA lenders, and receivables and other asset-based lenders. They all are much less likely to be interested in lending money to a high-impact entrepreneur with little or no expectations of regular positive cash flow over the near-term and an asset base with a usually much higher component of “soft” assets such as intellectual property. Fortunately for the high impact entrepreneur, though, the outsized wealth creation objectives of his/her business is attractive to (an admittedly limited class of) equity investors. Given the “if it works, there will be plenty of wealth to go around” nature of the high impact entrepreneurial endeavor, the entrepreneur is also more willing to suffer some dilution to achieve the ultimate objective.
Employee recruitment and compensation
While inherently less stable than employment in traditional “big business” firms, there aren’t many of those left today; or, rather, there aren’t many of those around that still offer the job stability that they did a generation (or two) and more ago. Job stability in small business is much greater than job stability in young – or even more established – high impact businesses. Not surprisingly, than, the typical small business employee is looking for a regular paycheck and job security, in return for which he/she is willing to sacrifice (to some extent) upward mobility (in terms of both income/wealth potential and job description). It’s all about stability. The typical small business employee is thus a lot like the typical small business entrepreneur – only more so.
The typical high impact employee, on the other hand, typically places a lower value on regular income and job stability and a much higher value on upward mobility (in terms of both income/wealth potential and job description). It’s all about potential. The typical high impact employee is thus a lot like the typical high impact entrepreneur – only less so.
Different, but equally important
Nothing in the above discussion should be seen as an endorsement of one kind of entrepreneur over another. Small business is the heart of the economy: it more or less has been since the dawn of the modern age, and it likely more or less will be for the foreseeable future. And it goes without saying that small business entrepreneurs are what keep the small business sector vibrant. At the same time, high impact business is and has been the innovation driver, the wealth generation engine, of the economy since the dawn of the modern age, and it likely will be for the foreseeable future. We need them both. If we want to encourage them both, we need to recognize that they are different, and tailor our encouragement in ways that respect those differences.
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