The Entrepreneurial Gap

Have you ever wondered how we go about picking our investments? It's a question I'm often asked. To understand that, you must first understand the way founders use Span of Control and Span of Accountability to deal with what Robert Simons referred to as the Entrepreneurial Gap in a 2013 Harvard Business School paper entitled, The Entrepreneurial Gap: How Managers Adjust Span of Accountability and Span of Control to Implement Business Strategy.

While we won’t go into depth here on the analysis, we highly recommend reading it when possible. Instead, we’ll use a shorter abstract example to illustrate the concept.

The funnel at the top contains measures of success dealing with large financial and non-financial concepts like Market Value and Competitive Position. A lot of freedom exists at this level to achieve success because the manager has many levers to pull.

Unfortunately, the further down the funnel we go, the narrower the options are for the manager to apply innovation and creative problem solving to effect change. At this level we find problems such as processes and manufacturing costs. There is little latitude at this level for altering the basic nature of the resources at hand.

However, if the span of accountability and span of control are aligned, job satisfaction and the ability to achieve success are maintained, as illustrated here.

What happens when there is a gap between the span of control and the span of accountability? Face it, the truth is we’re seldom given 100% of what we need to complete a task. What if an entrepreneur finds he’s responsible for a measure of success near the top of the funnel but not the resources to accomplish that task? This is literally, the Entrepreneurial Gap researched by Simons and depicted here.

Though the Harvard study focused on accountability vs. control, when evaluating potential investments we look at how entrepreneurs find ways to adjust their thinking in a situation to affect a desired change. Those with the ability to find an innovative way to bridge the resource gaps they will inevitably face, can articulate how to augment their effort with?innovation, and execute to make the resources on hand stretch to cover the shortfalls, are the ones we believe will stay in business.

We all know doing this is extremely difficult, so it’s no wonder that 90%?of entrepreneurs and small businesses fail. We want to change that with Mindgrub’s active mentorship and guidance.

Modifying the traditional definition and looking at the dilemma faced by entrepreneurs through the context of this lens, we think the gap also represents something more fundamental than what’s illustrated here. It’s more basic than the inequity between resources, time, and funding. The focus on these factors without considering something more fundamental removes the central impetus and thing the investors are betting on in the first place, the entrepreneur.

The litmus test for evaluating our investment decision includes an analysis of whether we believe an entrepreneur can fill this gap. Can he or she find ways to exceed the numerical value of their compensation, time, and by utilizing moxie, augment their effort??to achieve the potential value of their equity? If so, the potential value becomes a reality and the ROA (return on assets) reflects that entrepreneur’s influence, tenacity, and leadership, benefitting the employees, shareholders, and the economy. The inequity between resources and control appears in every entrepreneur’s journey, however here’s an example that brings it home.

Note—we do not believe driving a school bus and transporting our children to school is an easy job, and we thank the many public servants who have taken up this responsibility and execute on it safely,?every day. This example is for illustration purposes only.

Assume this: School bus drivers are given enough seats, bus stops adequate to meet the children, fuel, safety devices, a means of summoning?help via emergency communication devices, and a working vehicle. According to our thesis, in this fictitious scenario the school bus driver’s entrepreneurial gap should be non-existent. The two factors of resources and control are aligned between what they need and their control over their choices.

The reward for successful execution is?commensurate with the disparity of resources and control necessary to achieve that same goal.

Take a look at this diagram again:

When the two factors are aligned either to the left or right, the risk is low. In other words, when the access to resources and the authority to enact changes (control) are aligned together to the right, the manager has many resources and many choices on how to make changes.

When these same two factors are aligned to the left, the manager has few resources but also few choices on how to control those same resources. A manager is often compensated according to the difficulty of their work, and not typically because of the inequity between resources and control.

Wait a second, you might say, what about CEOs? They have both resources and authority, and they make tons of money!

If you said that, you would be correct. According to salary.com, the average CEO makes $788,400 per year. That is a lot of money.

Three facts: 1) the thesis above doesn’t address the inherent difficulty of the job, 2) the education and/or life experience necessary to be successful, and, 3) the consequences of mismanagement.

CEOs are paid a lot because while there may be no inequity between resources and control, there is still an inherent complexity to the job that requires many things, and their salary is commensurate with the complexity?of those requirements. Now, let’s look at the entrepreneur.

The startup founder is in a much different situation. She is potentially faced with many entrepreneurial gaps between resources and control where her ability to enact change is limited. However, IF through ingenuity, force of character, personal drive and passion, she manages to bridge those gaps, who or what did the bridging? We would argue it was moxie, her moxie. She fills the Entrepreneurial Gap, the value she brings is to increase her ROA by augmenting her effort with sheer ingenuity, passion, and tenacity.

She returns something greater than the sum of its parts. That amplification of effort is?why entrepreneurs are so highly rewarded when successful. Imagine that same school bus driver, but instead of the original scenario, now has?to?build the bus, find every scattered kid, scavenge fuel, treat emergencies both medical and natural, and get those kids to school safely, every day, day after day. What would we pay her to do that job? A whole heck of a lot, that’s for sure!

She’s got the skills of an engineer, ranger, doctor, outdoor survival specialist, chemist, electrician, and mechanic, all wrapped up in one person, a true superhero.

Let's put some numbers in to show how entrepreneurs are valued when compared to their CEO counterparts. According to Crunchbase, in 2022 the average exit value for a successful startup?is $242,900,000. According to LinkedIn, the median level of founder ownership across 79 companies was 11%. A simple calculation shows the founder exits with approximately $26,719,000.

Furthermore, according to statista.com, Between 2000 and 2020, the length of time between receiving an initial venture capital investment and the IPO of the respective company in the United States was 5.7 years. Another simple calculation shows that equates to earnings of approximately $4,687,543 and that's per year. Compare that with the average CEO’s salary above which comes in at roughly 1/6th of successful entrepreneurs and you can see the Entrepreneurial Gap carries with it a high premium in value (when navigated successfully).

This is where Mindgrub Ventures comes in. We want every entrepreneur to be successful. Our job is to ensure you get all the resources and guidance you need to nail that exit. Your job is hard, harder than many realize. We're here to make it just a little bit easier, but you've got to bring your A game... and your moxie.

Summary: Those rare individuals who exhibit moxie and an understanding of the Entrepreneurial Gap, either through experience or learning, backed by solid fundamentals of business and a ‘never quit’ attitude, are the ones most likely to succeed in the difficult role of being an entrepreneur.

Mindgrub Ventures is dedicated to maximizing your success. Give us a call. Maybe we can help you, too.

Vijay Lakshman is a 33-year veteran of software development, having successfully delivered over $2.5B in revenue in deadline-based multi-year projects with budgets exceeding $100MM. His experience includes serving as Vice President of Development for Universal Studios, Co-Founder and Chief Creative Officer for Planet3, and Executive Director for the National Geographic Society. He received his B.S.B.A from George Washington University in Information Systems, graduated from the Harvard Business School focusing on competition and strategy, and earned his mini-Medical School certification from the prestigious Georgetown University's School of Medicine.?He now serves as the Managing Director for Mindgrub Ventures, investing in human/technology acceleration hybrids and other disruptive emerging technologies.

You can learn more about him here: https://www.dhirubhai.net/in/vijayl/