Principals and Principles

Back in 2002, I wrote a short paper on Entrepreneurship. I created quite a stir, when I got in front of an MBA class and began my presentation with the following statement: “ there are some things that cannot be taught in class and there is a mind-set in entrepreneurs which is decidedly different to managers, therefore to some extent, aspects of entrepreneurship are not easily transferred to a class of MBA students”.

Almost two decades on, I stand by what I said, and expand to discuss the Principles of entrepreneurship and the Principals as the main protagonists in a venture, supported by managers, brokers and sometimes intermediaries, but never replaced.

  1. The Principles:
  For Principals (Entrepreneurs) Driven by the opportunity
Multiple stage – end commitment
Risk is shared, accepts risk, but requires rapid growth
Based on value creation
Able to understand change
Unrestricted by resources or structure
Stakeholder management, better outcome for all Compensation is based on ‘Harvest’  
  For Managers (Administrators) Driven by resources under control
Single stage commitments
Seeks lower risk, higher certainty
Not based on value creation, but activity
Requires stability not changing environments Restricted by procedures, resources
Management of task, regardless of outcome Compensation is based on experience, seniority or tasks performed  
  For Intermediaries (Brokers) Driven by short term opportunity or gain
No commitment or due diligence required
All risk is transferred to project owner
Based on fee for service or introduction
No need to understand environment
Restricted in capacity to add value in real terms Management of introduction, not success of venture
Compensation philosophy is to ‘clip the ticket’ (and pass it on)  
  1. Principals are opportunity driven entrepreneurs:

The role of an entrepreneur has more to do with the mind-set of an individual and their attitudes towards uncertainty, risk and reward, as well as their ability to operate in open-ended environments of rapid change, chaos and creativity. In other words, entrepreneurship is defined as behavioral, and relates to how the individual (the Principal) behaves within their paradoxical environment.

The entrepreneur embarks on a venture, regardless of the resources at hand and makes things happen with the aim of ‘making the pie bigger’ for all stakeholders concerned. Entrepreneurs are Principals  that “own” a project in more ways than one, who negotiate and ride the ups and downs and are responsible for the outcome of that project, and who therefore have an overall schema of the project and the possible scenarios in their mind. Often the entrepreneur acts as an “Architect”  putting pieces together that add value and make sense. The reward is at the end, at harvest time, and it is an event where all stakeholders are rewarded for their part. In other words, compensation is always based on value creation.

  1. Managers are administrators working within agreed and set guidelines:

In contrast, Managers, do not operate in open-ended environments effectively, and need a sense of rules and consistency in the way they approach and manage  tasks. Their role is to manage a whole project or parts of a project with objectives which are apparently ‘static’.

Where the principal has a focus on the opportunity, the manager has a focus on administration, and often restricted by resources held or controlled. The manager is ill equipped to make decisive, direction changing actions which affect the outcome of a project. In terms of compensation, they are duly compensated for results delivered within the opportunity ( restricted by the resources at hand), but this compensation is always based on responsibility and seniority, and not based on value creation.

  1. Brokers and Intermediaries are neither opportunity driven entrepreneurs nor administrative focused managers:

Compensation is almost always short term, a fee for service, or ‘clipping the ticket’, it is not value creating in itself, and does not carry the responsibility of managers. The usefulness drops away after an introduction or door is opened to the success of the venture, and in some cases, where it is poorly structured, it is a potential drain on the business or project financed ( as would be the case in daisy-chain commission agreements where there is more than one introducing party).

Because the compensation is rather short term and is based on an ‘introduction’ and there is no value add to the project, then it carries little responsibility on a successful outcome. It certainly carries no due diligence on behalf of the client and any advisory role is possibly (in some cases) skewed towards the short term gain. This is especially evident if introducers do not discern between a good deal or a bad deal, and accept clients in any situation in order for a service or product to be sold, regardless of the client’s needs.

In conclusion, I admit that we have all acted one or more of the above roles, but it is useful to understand the limitations of each and know when each role is best applied.

We can all be intermediaries or brokers by providing an introduction between parties. Most of us can learn to be managers by following procedures and agreed tasks, but it takes a little more effort and understanding of what is at stake to be an entrepreneur, and therefore fewer can walk the path of Principals.

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