The seven levels of entrepreneurship in start-ups

Entrepreneurship

Entrepreneurship is the buzzword. No one talks about creating businesses that add value to our society; people talk about being an entrepreneur; it is not enough to own a business, you need to have found a start-up.

The positive side of this trend — my most optimistic self wants to believe — is that there is a growing portion of the world’s population willing to take risks. And, of course, this can be very beneficial, as long as the agents that benefit from the upsides of taking risks are the same that suffer the downsides when things go wrong.

Now, putting my optimism aside, the ugly truth is that the word entrepreneurship is used almost as a mere synonym for “new ideas” and “creativity” or in the sense of “giving life to new products [1]” and “earning a lot of money.” In other cases — more and more commonplace — the word is used to sell tickets to self-help events.

Despite all the fantasies that surround the “world of entrepreneurs,” the success of any company will always depend on the interaction between entrepreneur and executive work. One does not go without the other; and, if doubt, ask a true business owner — he will help you get the record straight.

But what, after all, is the difference between these two types of work?

• Entrepreneurial work: identifying opportunities for organizations to add value to our societies, satisfying any existing or latent needs; and promoting the growth of organizations, carrying out the necessary changes and investments or even starting them from scratch.
• Executive work: managing organizations so that they provide goods and services to our societies in an increasingly effective manner; and promoting improvements in all activities, work systems and relationships that are needed. [2]

Now that we have a clear definition of what constitutes entrepreneurial and executive work, one can easily conclude that saying that someone is an entrepreneur makes as much sense as saying that another one is a leader; i.e. it does not make any sense at all.

The exercise of leadership and entrepreneurship can not be understood apart from a specific function or without a particular context. For example, every person who occupies a position of management is, by definition, a leader. After all, a manager is someone who is accountable not only for his own personal effectiveness, but also for the output of his subordinates. The inverse, however, is not true: not every leader is a manager, as the exercise of leadership is also inherent to other functions, such as the president of the USA and the cop who helps children cross the road. A rule for life: if you ask someone what they do for a living and he answers that he is a leader, be suspicious… very suspicious.

The same reasoning applies to entrepreneurship. It does not matter if you are a small business owner or the CEO of a multinational corporation; in both cases — and regardless of your personal wishes and inclinations — you have to carry-out entrepreneurial work and also executive work as well as leadership. Entrepreneur is not a noun, it is an adjective (despite what the dictionaries may tell you about it).

Anyway, now that we have clear understanding of what entrepreneurship is, we can finally turn our attention to how it manifests itself. Starting a business involves planning, making key financial decisions, and completing a series of legal activities. Scroll down to learn about each level. The descriptions of each of the seven levels below [3] were written to give typical examples of how entrepreneurial work can manifest itself in a start-up setting; but — you know very well by now — the same reasoning equally applies to established organizations.

Level 1

The focus of entrepreneurship at this level is to seek non-prescribed ways of producing an output that was previously specified. The focus is on interfaces and the experience that people have with the organization. Think of someone replenishing shelves in a supermarket and noting that a customer is not finding the product that he is looking for; he offers to go check the stock and find the sought item. Or think of a software engineer that realizes that the way in which some lines of code of a program used by millions of people were written can be improved; he then rewrites those lines of code to save processing power and increase performance for end-users. The actors in these examples found non-prescribed ways to fulfil the purpose of “having satisfied customers” and “good user experience”, respectively. Sometimes we call it “having whim with what you do.”

The work at this level is obviously very important because this is where customers actually experience and interact with the organization; but the creation of a start-up — as a real business — is only possible from the next level upwards.

Level 2

At this level, entrepreneurship is in finding the best solutions to existing problems. Think of a computer engineer who realizes that the process of scheduling meetings between several people is slow and cumbersome; and to optimize it, he uses his knowledge and skills to create an application that automates the entire flow, avoiding frustration and overburdened e-mail boxes. Or think of a German PhD student who, frustrated with the space that audio files take up on his computer, realizes that he can develop a mechanism to compress these files with minimal loss of audio quality and creates what we now know as MP3.

It is clear that the creation of many products and technologies that ended up changing the way we work and live took place at this level. Many of the start-ups that have become billion-dollar businesses firstly emerged here. Apple, Google, Facebook and Uber are just a few examples. But it is only when start-ups migrate to the third level that they can begin to conquer the world.

Level 3

At this level, we start to talk about mini-organizations: the start-up “leaves the founder’s garage” and has to worry about other aspects of business beyond the very product that led to its establishment. The focus is now finding alternative ways for the organization to grow and reach more customers or users. It requires a plan to achieve goals that are one or two years ahead, and the construction of alternative paths to reach them.

These paths involve other focuses of attention that were one secondary plan, but that are now required for success and growth: sales and support functions are notable examples. A start-up that successfully migrates from Level 2 to Level 3 realizes its purpose and makes sure that the venture is effectively transformed into a business that has a form and is self-sustaining.

Level 4

Start-ups mature to this level when they start to have more than one way through which they realize their purposes. This usually means that they cease to be focused on a single product (or product line) to act in very different ways. Remember when Google decided to add Gmail to its then search-centered business?

But, of course, the work is not simply launching new product lines. We are now talking about looking out, identifying changes and trends (marketing, technological or social) and acting so that the organization is in a competitive position years ahead. At Level 3, it was enough to build a path (or alternative paths); in this fourth level it takes several parallel and interconnected paths in order to reach the desired outcome. One must judge, in a practical way, if new initiatives fit with the existing work systems and promote the necessary changes for all to walk in a simultaneous and coordinated manner.

Interestingly, it is the Level 4 of established organizations that is in charge of neutralizing the threat that emerging start-ups pose to their businesses — or, at least, they should be able to do this job. One of the most infamous example is IBM failing to notice (or to take seriously) the threat posed by personal computers in the late 1970s. Or the giant telecommunications and cable TV companies, which, even with abundant access to capital, failed to take advantage of emerging technologies that would end-up challenging their business model. As a result, they are now reduced to mere infrastructure providers for platforms that add more value and, naturally, have the end-users in their hands (Skype, Netflix, WhatsApp and YouTube are just the tip of the iceberg).

Level 5

Companies that reach this level are no longer start-ups. They matured to this level because they have already been successful, created value and garnered customers with a product that showed the world what they came for; they have grown, expanding their addressable markets and tapping new niches and geographies; and they have also innovated in the true sense of the word, seeking new ways to create value and to achieve their purposes. At this fifth level, the work is as simple — and as complex — as sustaining the well-being of the organization.

Undertaking this level of work requires understanding the business as a complex system and constantly navigating the environment in which it is inserted to create a representation of how the organization should be. The goal is to ensure its success and viability — socially and financially speaking — in the long-term (typically five to 10 years ahead). Entrepreneurship is now much more than just finding solutions, defining paths and integrating simultaneous ways adding value; it is, rather, to constantly put into question, define and redefine the purpose of the organization and make sure that this purpose is fully materialized at all levels.

Here we talk about the real work of a CEO; who navigates a complex environments populated by groups of large and diverse stakeholders with interests that often conflict with each other: shareholders, employees, suppliers, customers, governments and regulators. The matters for consideration are purpose, financial viability, social role, organizational culture, management model, etc. and the work is to make them be felt and perceived at all levels of the enterprise. It is understood that this is the only way that the organization will prosper.

Level 6

Now we enter the level of corporations. Forget a business; now the work is to monitor and increase the value of a portfolio of independent and diverse businesses. Undertaking this work requires understanding contexts and anticipating significant global changes to protect the business units in the portfolio. There is a need to balance the global and the local, and integrate institutional values ​​with the specific cultures in which the organization operates. It requires a representation of how major trends and changes will unfold around the world and decisions on the creation or acquisition of new businesses (and also on the discontinuation or disposal of some of them). Decisions are made now and the results become tangible only 10 to 20 years ahead.

A recent example that helps to illustrate the transition of an organization from Level 5 to Level 6 was the creation of Alphabet. Work at Level 6 is to protect and allocate resources to fully-fledged business units, which may have such diverse purposes as “creating elegant hardware for homes” (Nest), “making medicine proactive instead of reactive” (Verily), “fighting aging and extending human life” (Calico), “revolutionizing urban life” (Sidewalk Labs), and — of course — “organizing the world’s information and making it universally accessible and useful” (Google).

Entrepreneurship at this level involves navigating and creating a high level network so that one can understand what is going on in the world and allocate resources among diverse businesses that have different purposes; and that includes providing guidance and direction for Level 5 CEOs, so they can review their goals and strategic directions. It also involves creating and discontinuing whole businesses, and integrating them into a coherent representation of the values ​​of the corporation and its way of doing things.

Level 7

Businesses and portfolios of businesses are not as interesting anymore, but they can be vehicles for something bigger. The work now is to create new values ​​for societies and future generations. The goals are more than 20 years ahead and there is a tranquil acceptance that, perhaps, one will not see the fruits of his own work; the value is being created for future generations that are yet to come. “How to carry out changes that ensure the survival of Western values ​​for generations to come?” “How to promote an organizational model that will redefine institutional trust and the well-being of societies”? Questions like these are the ones that must be answered at this level.

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I hope to have made it clear, with the use of examples, that entrepreneurial work has many facets and that very few people are (or will be) capable of working at the higher levels that I have described in this article. Entrepreneurship for a recent graduate seeking out an innovative idea to start his own start-up means one thing; entrepreneurship for the CEO of a multi-billion-dollar company means another. Entrepreneurship is not just a “lifestyle” or “pleasant idea”; it is something that requires hard work and increasing levels of tolerance for uncertainty.

End notes:

[1] I use the word product to refer to any good or service; [2] This is one of the central ideas of Nassim Nicholas Taleb’s Antifragile, a great book; [3] This distinction was described by Elliott Jaques and is now revisited for this article; and [4] — The seven levels of abstraction in human action have been discovered and described by Elliott Jaques and then distilled by Gillian Stamp in the form of the Matrix of Working Relationships; this model, of course, was the basis for the thinking behind this article and it is also a central part of Bioss International’s and Instituto Pieron’s work with organizations.

This article was originally published at Instituto Pieron’s blog in Portuguese by Rafael Beran Bruno (MD Instituto Pieron) and is now translated to English.