The Entrepreneur's Guide - Starting A Business

So first of all, let’s define what entrepreneurship is. There are essentially two types of enterprises for entrepreneurs . First we have SME which stands for Small Medium Enterprise. These are small companies that will stay small. That’s not to say that they are unsuccessful, it just means that the serve a relatively small market and the market will not grow beyond a certain point due mainly to locality. They're usually service businesses that serve a local area. They are directly addressing the needs of the local community. Businesses like hairdressers and beauty salons, pizza parlors and cafes.
These companies generally have a linear growth as shown in this simplified diagram.

It reaches a point where it hits the ceiling. You’ll notice that there is a low amount of cashflow out of the business.

The second is what we will call IDEs, Innovation Driven Enterprise. These companies are set up to service global or multi-regional markets. Where SMEs  are usually owner driven with regards to financing and staffing, IDEs tend to require more investment to get started and if successful will require more staff to see growth.

You can see the difference here, IDEs often have negative cashflow in the beginning but then have the potential for exponential growth. This is because it’s markets are unlimited. These types of businesses have a unique idea that can serve a broader market. It may require more research, development and funding initially, but then has the potential to massively increase it’s cashflow and this depends on their innovation.

So what is innovation and how do we achieve it? Well MIT define it as this, and it works pretty well. the equation is:

Innovation = Invention + Commercialisation

Innovation and commercialisation are not the same thing. Innovation means to improve and deliver something in a way that is valuable. You can have an invention, but that does not create innovation. We see it regularly on TV shows like Dragon’s Den, where would-be entrepreneurs pitch an idea to a group of investors. Sometimes they have a great invention, but with no ideas of how to commercialise that invention, it creates no innovation and the investors cannot invest. You don’t even need to invent the idea. You just need to find a way to commercialise the idea. Apple did not invent the idea for Macintosh commuters. Xerox invented the mouse based window system. Apple just commercialised that system for home computers, which equals innovation. So what determines the success of this enterprise? That is the simplest part. It’s the value generated by this innovation.

Netflix was not the first video streaming platform, but it’s innovation in regards to it’s business model, the one low monthly fee for unlimited movies, the integration multiple digital devices resulted in great value for the end user. People could access movies on virtually any device, whenever they liked.  The overwhelming factor in it’s innovation was it’s convenience. The value was clear. That translated into it’s exponential growth. In the case of Netflix, we see two main types of innovation, lateral business model innovation, where they used a subscription model already used in other business types and also technological innovation.

In our next post we will be talking more about the different types of innovation.

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