Let me try to categorize start-up situations of enterprises in a model-like way.
You get three “types of foundations”:
- The pragmatic establishment of an enterprise.
- An enterprise being constructed in mass-production.
- The foundation with the help of “entrepreneurial coincidence”.
In this article, I will only write about the first of these types (pragmatic). Instalments 4 (mass-production) and 5 (coincidence) will follow later.
More often than not, the first step towards the pragmatic foundation of an enterprise is the move from a job as a regular employee to free-lancing. I know only very few persons who, in our sector, start as free-lancers directly after having finished their university education. Most of them already worked as regular employees, because turning free-lance successfully usually calls for a certain degree of technological and other competence, as well as a good reputation at least in one field of expertise.
Incidentally, the situation for free-lancers on the market gets harder and harder due to the legal restrictions, as well. This is truly a pity, because it also makes the pragmatic path via this interim step harder to follow. It is high time for our legislation to come up with a sensible freelance model on top of the regular employee model. But I am afraid we are not going to live to see this happening. Besides, it is not really what this article is about.
As I see it, the “pragmatic” foundation of an enterprise is the normal case. It also seems to be the most successful. There are numerous examples where, for instance, roofers, coachbuilders, cooks, carpenters, toolmakers…, became self-employed in exactly this way through very logical steps.
If such craftsmen turn self-employed and establish their own company, this is mostly done totally without making a huge fuss about it. They need neither much ado about the foundation, nor innovative “super ideas”. Now you might counter: “we understand this, but this can only be done in the service sector”.
Well: not true! There are many examples of craftsman’s companies where the start was with absolutely innovative product ideas – and then they became a huge success. Especially in the sectors Bikes and Outdoor, I discovered quite a few success stories during the last few years.
The married couple Rohloff started with very innovative bike chains – and later built the legendary Rohloff gearshift, the SON (Schmidt original dynamo hub), the Ortlieb bags and many more innovative products originated with very pragmatic foundations.
My carpenter from Southern Bavaria, too, who started out with his own carpentry as a totally “normal service provider”, simply made his own dog-house a long time ago. He liked it so much that he advertised it on the internet. It became the one of his products with the biggest marge. He can produce it “in between” in moderate numbers.
I know a roofer who founded a small, very normal roofing company. His son extended it to become an enterprise in the second generation. It became the world-wide market leader for special buildings with particularly demanding roof constructions, such as sky-scrapers, mosques, theatres, etc.
And you can believe me that I could come up with an endlessly long list of more examples. In fact, it comes as a surprise (or maybe not) that so few craftsmen ever apply to participate in the business plan contests. After all, for those craftsmen it seems to be a logical conclusion to establish their own firms. Rooted in their competence and know-how, based on a calculation of incoming and outgoing money that is short and easy to understand, without a complex business plan, let alone having to participate in a contest. Of course, once in a while, when – later on – they develop expensive products, they also take advantage of federal promotion programs.
As I see it, the development of software, the establishment and the running of a firm with IT infra-structure and managing IF projects, is also “only” craftsmanship. Actually, “software development as craftsmanship” is now an accepted technical term.
Consequently, most of the enterprise foundations in the IT sector are craftsmen’s and thus very pragmatic foundations. As a general rule, they always write good success stories for several years.
I need to warn you against the “ultimate solution idea” as it is often presented to me during business plan contests. Some of those who present them are really lunatics. I actually feel more pity for them than anything else.
More often than not, the “great idea” is actually not at all singularly innovative. And too often, you will read a telling sentence like this one in the business plans:
“We will probably need most of the required capital for sales and marketing. We assume that we will have to come up with a sum somewhere in the seven-digit range up front”.
This is when I ask myself why the would-be entrepreneurs did not come up with a product or service that the market actually needs? Also: is the magic formula “sales and marketing” really the solution? And how exactly will it look?
The majority of contestants in business plan contests are IT based business ideas (“we will write an app”) and projects in the pharmaceutical sector (“we will create a miracle medicine against this or that illness”). Or else some people want to start big instead of trying out small. Which would be the pragmatic approach. And if an idea gets positive feedback on the market, a realistic financing would also be more likely. A financing where you do not sell your enterprise before you actually have it.
In one business contest where I was among the jurors, a “pragmatic founder” of an IT enterprise was presenting. He was an expert for Androids and Unix. Yet the only reason why he presented at the contest was because he had applied and registered a long time ago and found it a matter of good manners to then also attend. He was an Android expert and simply sold his know-how. As a basis, he had made his own Android Built. At the time of presentation, his enterprise already had more than 50 employees in various countries. The majority of his customers were Asian high-tech enterprises looking for Android and Unix based solutions for their hardware of the “internet of objects”.
Craftsmen or “pragmatic founders” are a rarity in the “big foundation business”. Perhaps they have no time to participate in a business contest? Or maybe they do not see any positive effect in it? It is quite remarkable that those entrepreneurs who were a success in the last 30, 20, 10, 5 or even 2 years never wrote a big business plan. Nor did they ever participate in a contest. Still (or maybe this is why) they were a success.
So my advice for young founders is to be very pragmatic. Do not write a huge business plan. Instead, use your common sense, courage and joy to establish your business and trust in a reasonable cost calculation. Be courageous and have no fear.
And do not participate in contests. It is better to use the time you would spend there and find friends and partners. If, however, this phase is already behind you and you have, for instance, already guaranteed a certain income for a certain span of time, then I would advise you to quickly turn towards the business on the pragmatic path.
In my next article, you will read about how I feel about “foundations as mass-production”.
RMD
(Translated by EG)
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