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By Andrew Maxwell

Investors and entrepreneurs often ask me to shed some light on how to value pre-revenue companies – an issue often raised when entrepreneurs are looking for external investment.

Teaching courses on entrepreneurship and innovation, which include raising finance, suggests that I have a level of expertise in this area, which enables me to provide a definitive answer. Unfortunately, the opposite is true. The more I teach this issue and research different valuation techniques, the more I recognize that valuation of pre-revenue companies is more of an art than of science.

Essentially, the purpose of identifying a formula to provide a company valuation is simply to provide a base number from which both parties involved in a negotiation can start. This can be inhibiting, as most valuation techniques limit the potential upside of the venture – despite the fact that the entrepreneur is often optimistic. However, it is an approach that has merits, as the investor and entrepreneur have different knowledge and experience of the business and industry and the process of discussing the current status of the venture, the market opportunity and the long-term vision, creates an improved understanding that can enhance the relationship. That said, about 50% of the businesses that receive investment offers, turn them down as they cannot agree on company valuation.

The traditional way of calculating company value for pre-revenue companies is to rely on one of two approaches. The first is based on the calculation of equivalent value, whereby forecast profits (or revenues) are estimated in five years time, and current industry multipliers (such as price to earnings (P/E) ratio) are then applied to this forecast to calculate the future value. Armed with a valuation, post-investment, in the future, the current value of the venture can be calculated backwards. This simple approach has a number of benefits, but two fundamental limitations:  it’s very dependent on the accuracy of the forecast profit or sales and whether using a standard P/E ratio reflects the fact that a possible acquirer is likely to pay significantly more for the venture. Specifically, this approach assumes that the investor will exit from their investment through an Initial Public Offering (IPO) whereas a strategic acquisition is a much more likely option. In this case, the strategic acquirer will see value in their ability to leverage the acquired company with their existing business, and therefore be willing to pay much more for the business. Accurate forecasting of five-year profitability and the P/E ratio that might be offered by a strategic acquirer becomes quite a challenge.

The second valuation method, is one that is traditionally preferred in business schools and large companies, and uses the forecast cash flow of the business to calculate in the net present value. It is calculated by taking the forecast cash flow for each year and discounting that value back to today’s net present value, based upon assumptions about interest rates. While this is a reasonable way of looking at valuation in an ongoing business and an accurate method for making the decision to invest in a fixed asset, it is less useful when used to measure the value of a pre-revenue company.

This technique suffers from three fundamental problems when used to value a pre-revenue company. First, it is very dependent on the cash-flow that is forecast in the final years of the period chosen. Estimates of cash-flow in at some time in the future are likely to be inaccurate, and small changes to them can have a significant impact on the calculated value. Second, it is very dependent on assumptions about the interest rates used, and small changes in the interest rate can dramatically change the valuation. Third, this technique traditionally uses a standard interest rate for each year, despite the fact that interest rates are meant to reflect uncertainty, and that uncertainty about cash flows in future years are much greater – suggesting a standard interest rate for each year might not be appropriate.

Given this problem with using traditional calculation methods, two other methods might be more useful, but are much more subjective. First, there is the Berkus method (www.berkus.com), which calculates an estimated value based on the achievement of certain milestones. This is a much more useful technique, partly because it highlights the importance of certain factors (such as availability of a prototype, or the signing of a strategic alliance) that fundamentally changes the value of the business.  Also, this process tends to provide a framework for investment, which encourages the achievement of specific milestones before more investment is received.  Finally, the VC shortcut method is based on a simple estimation of how much someone will pay for the business in five years, and what that is worth in today’s terms, assuming that they make a required interest rate (usually around 35 % per annum) in the period.

At the end of the day, the valuation of a business is a function of a negotiation between an investor and entrepreneur that reflects the ability of the entrepreneur to share his or her vision with the investor.  Importantly, most pre-revenue valuation negotiations should focus on  identifying the amount of money needed by the company and how the entrepreneur and investor wish to divide control of the company. As a result, the convertibility of debentures issued and the inclusion of specific contract clauses in the shareholder agreement, become more important than the actual calculation of the company value, which underlie the shared vision of the entrepreneur and investor.

Join us for Business Valuation-Busting the Myths: How do Investors Value Your Business? Growing Your Business” breakfast event series 7:30 to 10 a.m., Thursday April 14th, at the University of Toronto Mississauga’s Faculty Club . To register, visit www.riccentre.com.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.


The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

In a recent interview with Rick Drennan, the editor of the Mississauga Business Times, I was asked to explain the relevance of innovation to businesses operating in Mississauga. I made the comment that if you are not innovating your business, then someone else is. I suggested that more innovative companies created better solutions, better services, and ultimately better performance.

However, as innovation involves risk and the possibility of failure, Rick asked about attitudes to risk. I suggested that the risk of innovating, should be compared against the risk of not innovating, and that the risk of not innovating could lead your business, however successful, to long-term failure (or acquisition by more innovative companies).

Rick decided to lead the front-page story with the headline “Innovate or Die?” which at first surprised me. However, upon reflection, I began to see parallels with “Eat or Be Eaten” (Phil Porter, 2000), and reflected that in my experience more innovative companies are the usually the acquirer, rather than the acquiree.

The problem is, that while many companies espouse the need for innovation, they struggle to implement innovation, either because they are risk averse, or have processes and systems designed to protect their existing businesses, rather than to innovate their future.

In reality, organizations are designed to achieve a certain level of innovation, and changing this to increase innovation rates can require fundamental changes in the business that can damage the existing business. As a result, I suggest that companies recognize their own limitations and constraints to decide if they simply cannot innovate, are willing to change their internal processes, or can collaborate with third parties who can innovate on their behalf.

We have introduced a new certification course at the University of Toronto, School of Continuing Studies, “The Foundations of Innovation Management” to help companies identify the innovation challenges facing their businesses, and develop appropriate innovation processes to help implement innovation processes.

We launched an introduction to the course at a half-day conference in Toronto last month (www.innovationcentre.ca) and discussed both the innovation imperative, and the importance of seeing innovation as a process.  The course is designed to change the mindset around innovation from product innovation in a small part of the company, to business innovation throughout the organization. The development of an innovation process helps both capture ideas inside the company and implement them, and as a result impact the bottom line. Importantly we focus not only on product innovation, but also process, service and business model innovation, all of which can increase company revenues and profitability.

One of my colleagues in the design of Foundations program highlighted an insightful example from their period as a senior executive involved in innovation and productivity improvement at Royal Plastics. He used the example that Royal Plastics adopted innovative production processes that allowed them to produce molded plastic components at lower cost than their major competitors. This competitive advantage built economies of scale for the company, which both improved cost (and hence financial) performance and encouraged the company to increase innovation levels. They created a virtuous cycle of innovation and productivity improvement that led to cost reductions that allowed them to become a dominant player in the industry, and acquire both market share and competitors. In other words, they put themselves in the position of eating rather than being eaten.

The Foundations of Innovation Management course (http://learn.utoronto.ca/bps/imc.htm) is designed to help people in small, medium, and large companies increase the rate of innovation in their businesses. First, it challenges assumptions about innovation that have inhibited companies from being more innovative. The most important observation, from examining innovation rates in companies, is that once the imperative of increasing innovation rates is established, the most important issue is that of introducing a more formal innovation process which can gather innovative ideas, select those worthy of consideration and implement those most likely to improve the bottom line, or enhance company value.

The creation of a more innovative company requires not only the creation of an environment and culture that successfully stimulates new ideas, but where those ideas are assessed through an open communication process, and the more promising ones implemented (at least in a pilot). In addition, the company must constantly review the process to identify opportunities for process improvement, and specifically to learn from failure.

Finally, outcomes from innovation initiatives must be visible, and used as a catalyst to stimulate further rounds of innovation. In my next blog, I will talk about some of the challenges of increasing innovation rates in companies, if you would like to find out more about the course, please check the link. http://learn.utoronto.ca/bps/imc.htm

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.


The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

In recent blogs, I have tried to address many of the questions raised by entrepreneurs looking for financing. You can download a guide that we prepared for entrepreneurs pitching to the Dragons in CBC Dragons’ Den.

In this blog, I will answer the two specific questions raised in the previous blog.  How do you raise large amounts of money without giving up too much equity and how do you develop an exit strategy to maximize the likelihood of receiving investment?

How do you raise large amounts of money without giving up too much equity?

In a previous blog, I identified that you can decide how much money you need to raise from third-party equity investors, by first working out the negative cash flow for the first three years of the business, and then identifying sources of non-equity finance (debt, government grants, customer advances etc.). From this you can calculate how much cash in exchange for equity you need to raise.  However, if you ask for all of this at the beginning, then your equity will be significantly diluted. If you obtain the same amount in stages, then you can give up a smaller amount of equity if you have increased the value of your company at each stage. This puts you in a better equity position and increases the likelihood of being able to attract further investment subsequently.

Here is a working example:

Alternate A:

Initial company valuation  $500,000 – $2 million investment required: investor requires 80% of company’s equity (limits your equity and precludes raising larger amounts at subsequent rounds).

Alternate B:

Initial company valuation  $500,000 – $2 million investment required, raised in tranches ($250,000; $500,000; $1.25 million). $250,000 received from investor for 33% of company. Company uses this to attract IRAP funding and complete prototype – company value increases to  $1.5 million. $500,000 received from investor for 25% of company (You retain 50%). Company uses this to attract first customer and leverage debt financing, to increase company value to $3.75 million.

$1.25 million received from investor for 25% of company (You retain 37.5% or more than double the equity had you raised the $2 million at one time).
How do you identify an exit strategy to increase the likelihood of receiving investment?

While achieving business milestones identifies points at which you can increase the value of the business, it also helps you develop a realistic exit strategy, by focusing on company valuation, how you can determine it and increase it.

Valuations are based on the price someone is willing to pay for your business, and in practice, most start-up exits are due to a sale to a third-party.

Planning for this exit strategy is both a pre-requisite for obtaining an investment and helps you make decisions once you have obtained the investment that make such an acquisition likely. Potential investors expect you to suggest an exit strategy, both because they figure you know the business and industry better than them and because they want to see you are conscious of the need to develop a business strategy that aligns with the exit strategy.
In general, I assume that your exit strategy is an acquisition by another industry player as this is the most frequent scenario. The three most common acquirers are: direct competitors (who offer similar products or service and can consolidate), suppliers (who see how your business can enhance the value of their solution) and distributors or customers (who understand your business and can expand it faster than you).

Identifying these potential partners helps you make decisions around business value and encourages you to develop an ongoing strategy that maximizes the likelihood that they will be interested in making an offer to acquire your business, whether this is to remove you as a competitor or enhance their own market position by increasing their product or service offering.

In this blog, so far I have discussed strategy and finance issues that affect the likelihood of receiving an investment offer. However, there are many other factors that both impact the likelihood of receiving an offer and the likelihood of the business achieving success once the investment has been received.

Specifically, the investor is looking to develop a good “chemistry” with the entrepreneur, both to take the risk of making the investment, and to act as a “litmus test” of how future interactions will develop. Many have likened the investment process to “courtship” and the post investment interaction to “marriage”.

In the next blog, we will discuss how the investor relies on signals during the courtship process, to decide to get married, based on their anticipation about how both the future business and interpersonal relationship will develop.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.


The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

In my last two blogs (Part 1 and Part 2) I raised questions about when to ask for external finance and the critical factors that an investor might look for, before deciding to make an investment offer. I provided some answers to each of these questions, based on considerable research in this area. However, I left questions about how much cash to ask for, how much should you offer in return and how do you identify an exit strategy to subsequent blogs. So, today I will address how much cash should you ask for?

The answer to this question requires that you first calculate the cumulative negative cash flow the company expects (plus some contingency), before the cash flow becomes positive. You must then identify every possible way of reducing this cash flow to minimize the amount you have to raise as equity.

Typical ways to reduce these costs may include sharing resources, leasing instead of purchasing and finding partners who will wait to get paid. In some cases, government funding can also reduce the negative cash flows.  In addition, debt financing can sometimes be used to fund the negative cash flow, for example to buy fixed assets, or inventory. While this debt has to be serviced it can also reduce the total negative amount of cash the venture requires, before cash flows become positive. The answer to the question of how much to ask for is then the total cumulative amount calculated by your negative cash flow forecast (including some contingency for unexpected delays or expenses).

Now you have decided how much you need, you need to decide whether you wish to raise it all in a single round, or over several rounds. To decide this you need to consider that the costs of raising money are often fixed, making it more efficient to raise money in a single round than over stages, however this can mean that you raise all the money at a relatively low valuation.

If your negative cash flow extends beyond six months, it may be worthwhile raising the money over several rounds, each round corresponding to the achievement of a milestone that significantly increases the company valuation. The benefit of this approach is that the achievement of milestones allows you to justify an increased valuation for the company, and you will have to give up less equity for the same amount of cash.

Once the forecast of negative cash flow has been defined, next you have to identify points in the company’s progress when the company valuations will increase. Contrary to the normal view of how company valuations change, at this early stage the company increases in value are not linear but step-wise. Each step increase in value corresponds to the achievement of specific milestones, and is a function of both time and the magnitude of the impact that achieving that milestone has on the value of the business. Examples of such important milestones can be completion of a prototype, signing of a first contract or obtaining a patent. Each of these has a significant impact on the value of the company. Armed with this information, it is possible to identify how much you should ask for.

While this leads to the conclusion that you should raise money every few months, you must also bear in mind that the process of raising is money is costly, time consuming and a big distraction for the entrepreneur. Consequently, the number of occasions when you choose to raise money should be minimized. This creates a challenging balance, because raising  too much money early can lead to you having to surrender too much equity in the company, while raising it too frequently can cost too much, be a distraction and increase the likelihood that you will run out of money before reaching the next milestone (which is often fatal).

To answer the question about how much and when, you need to work out on a monthly basis the negative cash flows identified, and any steps you can take to minimize them. You then need to indicate on the same chart, the milestones that you think will have a significant (greater than 10%) impact on the value of the business. Armed with these two pieces of information, and cognisant of the cost of raising capital, you should be able to develop a cohesive strategy that you can validate with your first investor.

Specifically, you will learn that experienced investors contemplating several rounds of financing, will already plan where to source the next round of finance when making the initial investment offer (even if it is themselves).

We will leave the questions about structuring different rounds of financing, developing a viable exit strategy, and showing the investor you can develop a relationship with them to subsequent blogs.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.


The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

This is Part 2 of  the four most common questions I am asked by entrepreneurs seeking to grow their businesses.

  1. What do I need to do to get ready for external financing?
  2. How do I persuade the investor my business is viable?
  3. How much should I ask for initially?
  4. When should I ask for more?

To seriously consider an investment, an investor must be satisfied that there are no basic flaws in the business. Surprisingly, more than 85% of the opportunities seen by investors have a critical flaw that causes them to be rejected in less than ten minutes.  Understanding the evidence that the entrepreneur must present about each of these eight potential critical flaws is vital:

  1. Customers in target market will adopt product or service
  2. Features and benefits designed around customer needs
  3. Sufficient overall market potential
  4. Sufficient barriers to entry to discourage competitors
  5. Evidence that technology can be made cost effectively
  6. Available route to market
  7. Sufficient entrepreneur experience
  8. Financial forecasts realistic and venture can be profitable

After deciding not to reject an opportunity due to a critical flaw, the investor will evaluate each in more detail, along with four other factors, to determine the long-term likelihood of venture success, and the chance of earning a sufficient return on his or her investment.

We provide an outline of the types of evidence the investor will look for in each of these factors to be persuaded that the business is viable:

Customer Adoption

A new product or service should be designed with a specific customer in mind. The investor is likely not a typical customer, so he or she requires evidence that a customer will buy the product or service, by:

  1. Actual sales, even on a small scale
  2. Orders, or conditional orders from a customer
  3. Market validation study, focused on showing reactions to your proposed product or service

Customer Needs

Many inventors develop products with little evidence that each feature is required. Even where there is evidence that basic features are essential, inventors often continue to add features and their associated costs, when the costs exceed the customer’s perceptions of the benefits. The entrepreneur must show the skeptical investor, that each feature meets a potential customer’s need and price point.

Market Potential

The entrepreneur must persuade the investor that the overall market in which the product or service competes is large enough for them to achieve forecast revenues. If the product or service replaces one that already exists, then the entrepreneur must be clear on why people will switch to the new product or service, and how they will stop existing suppliers from retaining market share. If the market is new, then the entrepreneur will need to justify the creation of the overall market size and its sustainability.

Barriers to Entry

The entrepreneur must show that they can achieve long-term profitability by discouraging others from competing on price. Typical ways of creating a barrier to entry this, include developing a brand, filing a patent or capturing a strategic long-term customer.

Technology  Status

Investors are not interested in opportunities at the early stage of the development process. They want to see evidence that the product is reliable, will work, and can be made cost effectively.

Route to Market

In certain cases, getting a new product or service to customers can be challenging and often require distribution partners. If the entrepreneur cannot show that such partners are both available and interested, their likelihood of receiving investment is limited.

Entrepreneur Experience

The investor must be convinced that the entrepreneur has the capability to run the company, either based on related external experience, or direct entrepreneurial experience. In some cases, an entrepreneur can attract investment without such experience, but in this case, he or she must demonstrate the ability to learn quickly, and are willing to rely on the investor’s guidance.

Financial Performance

The entrepreneur must show realistic financial forecasts that provide the investor with evidence to support top-line revenue numbers and bottom-line profit numbers, which can be achieved while managing cash flow.

What other factors does the investor consider when making an investment decision?

The four other main factors that the investor considers are:

  1. Will the amount of cash required allow the venture to grow as forecast without running out of cash
  2. Will the value of the venture forecast, and the percentage of equity offered, provide sufficient return
  3. Is there a viable exit strategy, such that the investor can take out his or her money
  4. Can the investor trust and work with the entrepreneur over the long-term.

We will provide  more details on each of these questions, in the next blog.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.


The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

The four most common questions I am asked by entrepreneurs seeking to grow their businesses are:

  1. What do I need to do to get ready for external financing?
  2. How do I persuade the investor my business is viable?
  3. How much should I ask for initially?
  4. When should I ask for more?

The answers to all of these are interrelated, and I will answer each in turn.

Today I want to talk about What do I need to do to get ready for external financing?
There are two important things to do when asking for an external equity investment. First, you need to look at the opportunity from the perspective of a potential investor to see if investing makes sense. Second, you need to consider the consequences of having a long-term investor as a partner.  To look at the deal from the point of view of the investor you need to ask if they are going to make an adequate return on their investment. This requires you to persuade them that they can make a return of between 25 – 35% per annum.

Over six years, a $100,000 investment would require a return of about $380,000 (note that the average investment period for an initial investor is five – seven years). You need to show them that such a return is likely, and that there are potential exit strategies (such as an IPO or acquisition by a third part) that will realize this return. Many great opportunities fail to raise money, because there is no viable exit strategy for the investor. This is why thinking about the opportunity from the perspective of the investor is so important.

Justifying the amount the investor will receive at exit

The money the investor will receive is based on the estimated value of the business at the time, multiplied by the percentage of equity the investor owns. While the percentage of equity has other implications, which we shall discuss subsequently, it is a critical component in the investment decision.

For example, if you can justify a business valuation in the future, based on a multiplier of future profit or revenue, then it is relatively simple to calculate how much equity the investor should have. Typically, a multiplier might be one times revenue or 10 times profit (multiplier can be calculated based on industry standard multipliers on public exchanges).  A company with revenue of $1.9 million in six years could be valued at $1.9 million. Using our calculation above, that the investor would require $380,000, would mean that the investor needs 20% of the equity.

Identifying the exit strategy

In Canada, most successful exits are based on the acquisition of the business by a third-party, that believes they can manage the business for greater growth or profitability, whether directly, or by integrating it with their other business. The identification of potential third-party acquirers is thus important for the entrepreneur raising capital. It both helps the investor see a potential exit strategy, and can increase the value of the business by creating a bidding war between potential acquirers.   Acquirers are likely to be interested if:

  1. The business is large or strategic enough to impact their business
  2. They see a defensive opportunity that reduces your ability to hurt them
  3. They see an offensive opportunity to leverage both companies existing resources

Embedding potential exit strategy into the business plan can be critical. For example, if a large company only makes acquisitions of companies with greater than $10 million revenues, obtaining this level of revenue is critical. This may require the company to purse a more aggressive sales strategy, which may involve attracting a higher level of initial equity. In addition, getting your business on the “radar screen” of a potential acquirer may be important.

In fact, many acquisitions are done by companies who initially collaborate with the smaller company, for example as a supplier or channel partner.  Alternately, many acquisitions have been stimulated by an aggressive action by a small company that makes the potential acquirer take notice, for example by taking a strategic customer away from them. Importantly, the potential acquirer must be able to see how integrating your business with their own enhances shareholder value.

Reducing the investment risks

Investors are also concerned about the risks of failure and need to know there is a reasonable probability that the venture will not fail. Risks are viewed in three categories:

  1. Market risk, that customers will not want the product, or that competitor actions will inhibit your success
  2. Performance risk, that the technology does not work, or there are production or other operational issues
  3. Financial risk, that the company will run out of money, or require too much money to get the point where it can attract additional funds (revenue, debt, equity or from the government)

An entrepreneur seeking investment needs to show the potential investor that each of these risks have been identified and mitigated. We will discuss each in turn, in the next blog.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.


The RIC blog is designed as a showcase for entrepreneurs and innovation. Our guest bloggers provide a wealth of information based on their personal experiences. Visit RIC Centre for more information on how RIC can accelerate your ideas to market.

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By Andrew Maxwell

In the past few months, several people have asked me about the purpose of educating entrepreneurs. They identify research that suggests entrepreneurs are born and not made, and question the purpose of education if this is the case. They point out that entrepreneurs have inherent traits that cannot be taught, and question both the approach to entrepreneurial training and its benefits.

Immersed in this issue because of my long involvement in teaching entrepreneurship, I was initially surprised by the question. However, as I thought more about it, I realized that answering it thoughtfully would both help explain how entrepreneurship should be taught, and the benefits that can be derived from training entrepreneurs.

First, lets start by identifying that there are certain traits that seem to be common to all entrepreneurs, such as the need for achievement and willingness to take risks. While these traits are both a function of DNA and family/social environment, it is evident that they affect entrepreneurial orientation and intention from an early age.

Before discussing these traits, lets discuss two other entrepreneurial characteristics that seem to be linked to an entrepreneur’s likelihood of success: relevant experience and capability. It is often said that entrepreneurship is a “contact sport”. Certainly there is significant evidence that entrepreneur’s are more likely to be successful if they have been involved in previous entrepreneurial ventures, or started ventures themselves. Entrepreneurs are also more likely to be successful if they have existing knowledge of the technology or the market in which their proposed venture will operate. Entrepreneurs, who have had the chance to learn from their own experience and the insights of others, find such experience to be very useful when faced with the many challenges of running their own venture.  One way of training entrepreneurs is to give them the chance both to gain relevant experience and reflect on it in a learning environment (a good example is the co-operative placement programme at the University of Waterloo).

While inherent capability is also something an individual is born with, many basic entrepreneurial skills can be taught. At the business development level, these skills include the development of business plans and cash flow statements, while at the personal level this can include training in time management, project planning, and making presentations.

In addition, there are some basic knowledge components, which can help increase an entrepreneur’s likelihood of success, such as how to file a patent or complete a market survey.  Most of these skills are the ones we focus on when we teach entrepreneurship courses.  While they cannot make an entrepreneur out of someone who does not have the basic traits required, they can certainly help an entrepreneur who has the required traits to increase their likelihood of success.

Finally, acknowledging there are certain inherent entrepreneurial traits suggests that education cannot modify entrepreneurial behaviors. However, there are important aspects to entrepreneurial traits where awareness can help the entrepreneur increase their likelihood of success.

Some of the most common entrepreneurial traits include: high levels of confidence, enthusiasm, and passion for the venture. There is no doubt that these are all prerequisites for entrepreneurial success. However, there is evidence that excess amounts of these same traits (such as over confidence) can reduce the objectivity of the entrepreneur’s decision-making, which can in turn reduce the likelihood of venture success.

It would seem that the same traits that are important in moderation for an entrepreneur could actually become his or her Achilles Heel. Helping an individual entrepreneur understand these potential issues is another important role for entrepreneurial training. Entrepreneur’s aware of these issue can either find individuals with complementary traits to join their venture team (as co-founders, senior managers or board members) who are able to moderate the entrepreneur’s pre-dispositions. Alternatively, the entrepreneur can try to build in some self-control (such as wait 24 hours before sending an important email), which can enable him or her to have second thoughts about important issues.

Providing some ideas into how entrepreneurship education can help entrepreneurs also answers another strategic question I was recently asked: if most entrepreneurial activities fail, what is the point of encouraging entrepreneurship through increased levels of entrepreneurial education.

I think that there are two important answers.

The first is that the impact of entrepreneurial activity on regional wealth creation is often understated. Entrepreneurs are the engine of wealth creation and are able to react quickly to new opportunities, based on market or technology changes. Entrepreneur’s who react fastest to these opportunities, often have the greatest chance of long-term success, suggesting that showing them how to identify opportunities and assemble the required resources is critical.

Second, there is no doubt that many entrepreneurial activities fail, this is not a reason to reduce the number of entrepreneurs, but a driver for increased education that teaches entrepreneurs, not about entrepreneurship, but about how to increase their likelihood of entrepreneurial success, by reducing their likelihood of failure. Enhancing entrepreneurship education, by helping entrepreneurs understand potential causes of failure, based on their own personalities as well as market and technology issues will increase the percentage who achieve success. In turn, this will stimulate more individuals with entrepreneurial traits to consider starting and growing their own ventures, and reaping the rewards.

Andy is currently working at the Canadian Innovation Centre and pursuing a Ph.D. in the area of new venture creation at the University of Waterloo. In his spare time, he enjoys teaching technology entrepreneurship at UTM and the University of Waterloo.

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