An exploration of the practical meaning of intellectual capital for entrepreneurs, including how to curate your experience and know-how.

A Practical Introduction to Intellectual Capital For Bootstrappers

intellectual capital for bootstrappersThere’s a background assumption in most of the entrepreneurial literature that financial capital is the most important asset. Whether it’s a startup, a new product line, or a business unit in an existing business, most writers and pundits focus primarily on gathering the financial capital necessary to launch. This narrow focus on funding leads the novice entrepreneur to assume incorrectly that success hinges primarily on money. This assumption leads them to overlook other assets that they possess or can gather that could contribute to their success. Intellectual property and social capital are at least two-thirds of the entrepreneurial puzzle, and the importance of accumulating trust and know-how needs to be emphasized.

“Sweat saves blood, blood saves lives, but brains save both.”
Erwin Rommel (attributed)

Please don’t look at everything in a purely financial framework. This will encourage you to neglect how intellectual know-how that can save money and social capital that can enable you to access both intellectual capital and future customers. Of course, there are trade-offs between these three kinds business assets, and no one form of working capital can completely replace another. Especially if you plan to create a startup in a new domain, you or your team members will need relevant know-how. It’s a mistake to assume that money can act as a panacea for all of your challenges.

These three types of working capital are like three legs of a stool. Intellectual, social, and financial capital each provide important but distinct kinds of support for your business.  But unlike a stool, the assembly is a bit more complicated. Instead of attaching one leg at a time, you build all three in parallel. If you place all of your effort on one leg, everything will topple over.

We’ve provided an overview of these three business assets to get the beginning entrepreneur oriented. The goal now is to go into more detail about the particular properties and unique aspects of these three flavors of capital.

Why Intellectual Capital matters

Organizing and evaluating your intellectual property is an important early step. Most entrepreneurs start with little money. You can decide to work on a well-understood problem where no new insights or know-how is required. But then you are choosing to compete against well-funded companies–and will likely lose. If you don’t start with domain expertise–a solid understanding of your customer needs within a specific context–you’re going to be relying primarily on financial or execution leverage. These are not insignificant, but there’s definitely a force multiplier effect when you have the relevant know-how.

Instead of trying to beat a large firm with resources and funds, go for a niche market where you have an informed perspective of the problem. Better still is a unique perspective or least one that runs counter to conventional wisdom. If you understand your customer needs and can take advantage of either a significant change in technology or improvements occurring at the intersection of two or three relevant technologies, you can thrive.

One example is the transition from the Stone Age to the Bronze Age. Ancient man first developed tools based on the mechanical alteration of stone and bone: chipping to make sharp edges for many different kinds of tools. Control of fire allowed for fire hardened wooden tools as well as heat treatment of rocks. Applying fire to clay led to the invention of pottery, first low temperature earthenware and then higher temperature stoneware and porcelain. The same kilns that could be used for stoneware could also be used to smelt copper. When it was discovered that adding tin to copper created an alloy, bronze, that was harder and more durable than either of the constituents, it kicked off the Bronze Age.

If you can find a way to remix existing elements into a novel form or combine two or three existing technologies in a novel way but useful way, you can create a powerful new offering. Another example is the World Wide Web. There is nothing about a web server  communicating HTML content to a web browser using the HTTP protocol, formalized by Tim Berners Lee in 1989, that could not have been conceived of an implemented shortly after ARPANET, the precursor to the internet, became operational in 1969. A final example: adding wheels to luggage. It took until 1970 to add wheels to luggage, although for at least 200 years prior wheeled luggage carts (hand trucks and flatbed trolleys) had enabled porters and stevedores to move one large trunk or multiple bags at once.

Your Know-How Foundation

Accumulating intellectual capital takes time, but here are five things the beginning entrepreneur should do right away to start that process:

  1. Get it out of your head
  2. List your prior failures–and those of others that may be relevant
  3. Adopt an “outside-in” view
  4. Decide what’s a trade secret
  5. Join a Relevant Community of Practice

Get it Out of Your Head

“Engineers are not superhuman. They make mistakes in their assumptions, in their calculations, in their conclusions. That they make mistakes is forgivable; that they catch them is imperative. Thus it is the essence of modern engineering not only to be able to check one’s own work but also to have one’s work checked and to be able to check the work of others.”
Henry Petroski in “To Engineer is Human”

Designing your next startup is an engineering task. Entrepreneurs need to manage the risk of mistakes and seek suggestions in the same way that engineers do.  They need to get the design out of their head and written down so they can review it in detail. Once they are satisfied they need solicit critique and listen to suggestions from other team members, advisors, and friends.

The first step is to transfer your ideas and thoughts onto paper or a computer file so that they can be shared at a team level. You have to explain to your team what you are doing and why it will work. And you need to be able to transfer this know-how to potential customers and to talk about your product or service in language that is clear to your average customer.

The best way to make a candid assessment of your know-how is to list your past successes and accomplishments. Document the starting situation, the actions you took, and the result or impact. Also, locate or write down templates, checklists, and diagnostic criteria you used to assess the situation, monitor your actions, and measure the impact.

Another good list to make: everywhere you’ve worked and what was good about it. In particular, systems or techniques that were not only good ideas in the context you learned them but are likely to be either broadly applicable or portable to other situations.

You can then assess your past successes, and the tools, methods, and technologies you have at your disposal are relevant to the new problem you’re tackling.

Your product should target customers and problems where your know-how and domain expertise will contribute.

List Your Prior Failures–and Those of Others That May Be Relevant

As loathe as we may be to admit it, the majority of startups fail. Most of your ideas will probably fail, or maybe the way you implement them will fail. But a good entrepreneur learns from their mistakes. Each new venture builds on their accumulated intellectual capital.

After listing your past successes, make a list of your prior entrepreneurial mistakes and failure sand ask everyone on the team to do the same. If you review this list before making significant decisions, you may avoid repeating old mistakes. If you are making new mistakes, you will uncover useful new insights. Maintaining this graveyard of failed ventures and past mistakes becomes a strategic advantage, allowing you to move through product design and business model iterations more quickly.

Next, research what has already been tried and failed to address the same problem you are trying to solve for your target customer. Many near misses have two out of three values in a feature set combination correct (some had too many features, and it’s less a matter of changing features than deleting a few). If you are going to introduce something that’s “been tried before,” be clear in your own mind and at a team level what is different about your new approach and why it will make a difference to your customer.

Adopt an “Outside-In” View

Talk to prospects as soon as possible and get confirmation that your collective expertise and technology really can solve their problem. These conversations will require you to describe your product or service from an “outside-in viewpoint” rather than “inside-out.”

When creating a new product/business, we tend to focus on the in-house details: what are we doing and what we need. But say my headlights break and I take my car to the mechanic. I don’t want to know where the parts are sourced from or what tools they use. I just want to know whether it can be fixed, how long it will take, and how much I have to pay. Instead of boring or confusing the customer with a description of how you will solve their problem, talk about the results your product delivers. Describe the solution and not the process.

Decide What is a Trade Secret

Early on, you will need to decide what information will not be disclosed outside your team. Typically, a trade secret is a detail of your internal operation that the customer would not be aware of but is essential to your ability to deliver better results than your competition. For software teams, this will be key aspects of your source code that is not easily discoverable from the user interface. For hardware teams, this may relate to your testing or manufacturing processes. For service teams, this may be your complete diagnostic or delivery checklists–the customer may see part of them, but only those aspects that are relevant to their situation.

Engineers and developers like to talk about how they have solved a problem. It’s more effective to speak with customers about results and deliverables. If you start to talk about how you did something, you may accidentally disclose a trade secret.  Worst case scenario: they’re more than happy to turn around and share those secrets with their current vendor or partner because it’s easier than switching to you.

In short, your first step to a successful startup, from an intellectual capital perspective,  is to understand and agree internally why your product will succeed based on the failures and triumphs of previous similar ventures.  Your first step with customers is to make easy-to-understand offers that address a critical business issue.

Join a Relevant Community of Practice

One of the most important things to keep in mind is that your intellectual capital is never just YOUR intellectual ability or expertise. The loner mentality of bucking tradition, violating the norm, and setting off to explore new fields is a major part of any startup’s impetus. So to an extent, an entrepreneur needs a certain amount of that renegade can-do attitude, but you also have to recognize the value of collaboration.

Most kinds of expertise are not developed in isolation. There’s normally some scale or gradation where expertise is expanded and curated within specific communities of practice. For example, if I’m an excellent chemist, I still need to compare notes with other chemists to improve what I’m doing. I could be innovative in my own way, but if I’m trying to know everything by myself, I’ll get outperformed by teams who are collaborating and working together. One mad scientist or lone genius is never enough.

The good news is, if you are trying to create something as an individual, you’re probably already part of a community of practice. Perhaps you’ve joined a professional society, a networking meetup group, our Bootstrappers Breakfast®, or a university alumni association. A community of practice is a group of people who share a concern or a passion for something they do and learn how to do it better as they interact regularly.

However, you may be part of a community of practice whose only members are fellow employees of your current company. If this is the case, you won’t be able to continue as a member if you leave the company. This is not uncommon for employees of large corporations. For example,  a mechanical engineer working in a large firm can compare notes with many other mechanical engineers who work there. Still, their accumulated know-how is confined to that one firm’s domain. A mechanical engineer in a small firm, who is the only mechanical engineer employed there–or only one of a handful–may find it a challenge to get peer to peer feedback. They will need to join an industry or geographically organized community of practice.

If you are working at a large firm, join one or more relevant communities of practice that are not limited to your firm’s employees. This will ease your transition to your startup and take one less task off of your plate as you get started.

Common Mistakes/Pitfalls

Succeeding as an entrepreneur requires a different mindset from working as an employee and technical contributor. Here are three mindsets you will need to avoid in your new venture:

  • Picking up a hammer and assuming everything else is a nail
  • Focusing on a hobby or research interest
  • Succumbing to the illusion of omnicompetence

Picking up a Hammer and Assuming Everything Else is a Nail

One of the entrepreneurial failings is to pick up a hammer and, at that instant, assume everything else is a nail. It’s difficult for anyone to be realistic about their own ideas. I meet entrepreneurs gripped by their idea, convinced that it’s the best thing ever and that everyone will want to use it. I have to tell them to ignore the idea’s shiny, mesmerizing hold and focus ruthlessly on where it brings customers value.

Edison’s original description for the phonograph included a plethora of uses. He envisioned applications such as audiobooks, dictating letters, recording family histories, and even an audible clock. The phonograph’s number one selling point, though, was that it could play music. Inventors may see countless possibilities for their product, but only a few will get traction in the beginning and lead to revenue. The challenge is to make offers and listen carefully to where customers see a clear benefit distinct from other alternatives available to them.

Focusing on a Hobby or Research Interest

If you have always been excited in a technology or field of study and enjoy learning about it, but have only worked on projects where you decided what “done” was then chances are that venture is more of a hobby or pure research.

It’s a good idea to maintain an active mind an curiosity on a variety of subjects. But at some point you have to start making offers, reach out to future prospects, and think clearly about who’s most likely to pay for your product.

Succumbing to the Illusion of Omnicompetence

Be careful if your first thought about a new venture is “I don’t know much about this field, but it can’t be that hard.” We have suggested that you organize your prior accomplishments and the practical know-how you have gained as a result. But all expertise has limits. You may have a low opinion of people working in a particular field and believe that they are not as intelligent or skilled as you are. That does not mean they have not developed competencies and solved problems that you may not be aware of. If you have very little experience in a field, it’s better to add someone to your team who does before committing to competing in an unfamiliar arena.

In Summary

Build on past success and focus on customers and problems you not only are familiar with but have expertise: you have a track record of executing with distinction.

Good intellectual capital means being able to make offers built on prior successes that are clear to your customers.

Unlike financial capital, intellectual expertise and know-how is not an easily quantifiable number. Developing it takes concentrated effort over a long time and frequent reflection. Fortunately, intellectual capital is also slow to decay and crucial to identifying your niche. Expert entrepreneurs are never trying to do something completely new; they leverage collective experience and expertise to their advantage, simultaneously saving money and growing their social networks.

SKMurphy Can Help

Office Hours ButtonIt’s essential to understand all three types of business assets you will need to succeed: financial, intellectual, and social. Contact us for an office hours session to help you evaluate current and potential business assets.

Related Blog Posts

Working Capital Series

  1. A Primer on Business Assets for High Technology Startups
  2. A Practical Introduction to Financial Capital for Bootstrappers
  3. Basics of Intellectual Property for Bootstrappers
  4. A Practical Introduction to Intellectual Capital For Bootstrappers
  5. A Practical Introduction to Social Capital for Bootstrappers
  6. Building, Borrowing, and Keeping Trust
  7. Taking Stock of Your Business Assets
  8. How to Leverage Current Business Assets For Growth
  9. A Holistic Approach to Launching a Bootstrapped Startup

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