The vital factors for entrepreneurial success

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The vital factors for entrepreneurial success
November 02, 2021
Author: Shadi Awwad
Source: Rasd

Entrepreneurs are the backbone of numerous economies across the globe. They bring together resources, invest time and money, and assume financial risk to create value, resulting in a return on their investment.

Many of the conglomerates and global brands that we have become accustomed to started as ideas by entrepreneurs who applied their vision and conviction.

For every entrepreneurial endeavor that succeeds, and for every business that blossoms, there are others that fail to take off. It’s essential to be familiar and conscious of the following factors highlighted below to increase the likelihood of entrepreneurial success.

Differentiation

Differentiation is one of the most crucial aspects of a successful business. The concept could apply to anything from the product (design, feature, utility), the service provided, and the method of delivery or discourse used in delivering and communicating with the market.

However, at face value, one may find that differentiation is only relevant and valid concerning products even though there are many other facets where differentiation can occur.

Patents & Intellectual Property

If the differentiation is related to the product, the next important step is patenting – a process that involves filing for protection over your invention, where competitors and prospect competitors are not allowed to replicate the patented design, feature, or utility. If a product isn’t patented, then it is unprotected, and if a more powerful competitor swoops in to replicate it, they will generate high profits on the back of your invention.

At best, even if a small competitor copies it, they would still eat away at your market share and profits. To prevent this from happening, filing for patents, and pursuing the matter in association with a capable legal team is key to protecting your intellectual property.

Valuation & Investments

At different points during the business’ lifecycle, the entrepreneur may see that additional external investment is needed to support and/or grow the business. With that being said, entrepreneurs sometimes make the mistake of seeking investment at an inopportune time.

It is advisable to hold off on seeking investment before proof of concept and proof of market for the product(s) / service(s) has been established. Strong pre-existing sales are the most effective proof.

As a result, investors become willing to invest more significant amounts into a business, and the valuation of the business will be greater. Investors would therefore receive a smaller share of the company that is lower than it would have been had the business made fewer revenues.

Valuations are to a great degree, reliant on future cash flows, which are represented by projected profits. In healthy growing businesses with adequate margins, increased revenues should be reflected by increased profits unless extenuating scaling factors exist.

Therefore, the relationship between the revenues and the company valuation is clear. The higher the revenues, the higher the valuation, and as the valuation of the company grows.

Consequently, if the company is valued at $2 Million, for instance, a 10% stake in it is worth $200,000, whereas a 10% stake in the company valued at $1 Million is only worth $100,000.

Hence, entrepreneurs should seek investments when their valuations are at the higher end of their company’s potential.

Debt

In the same vein, investors are driven to invest in companies with healthy balance sheets and less (or a healthy amount of) debt. This is because debt is a priority claim compared to equity.

In addition, investors prefer not to have creditors standing in-line waiting to collect their interest and principal payments before the investors take their share of the profits.

Therefore, entrepreneurs are advised to keep debts at a minimum to safeguard margins and cash flow. This will ensure that investors are not turned off from investing in their companies.

Creating and growing successful businesses is not an easy task, and there is no guarantee that these endeavors will succeed. However, strong entrepreneurs understand the risk-reward trade-off that prevails in this situation.

With that being said, if entrepreneurs can tick all of the above boxes, their business is more likely to succeed and hopefully blossom into a profitable growth-oriented venture.