You’ve finally decided to go independent, to start your own business.
And the best thing is, you have a great idea.
That could be your first mistake.
“Evidence pretty strongly suggests that entrepreneurs will spot an idea and fail to test that idea. An idea is not the same as an opportunity,” said R. Duane Ireland .
“That can really be an issue when an industry is doing well,” he noted, “such as the oil and gas industry is today.”
Ireland serves as professor and head of the Department of Management in the Mays Business School at Texas A&M University.
In addition to writing numerous papers and books on management and business start-ups, Ireland is co-author of the textbook Entrepreneurship: Successfully Launching New Ventures (second edition, 2007; Prentice Hall).
Maybe your company is going to be built around a new technology.
Start-ups can become infatuated with a specific technology but lose sight of profitable results.
“At the end of the day, technology is nice – but it’s only important to the degree it can create value,” Ireland warned.
An entrepreneur will do better to monitor emerging technologies, choosing those that benefit the bottom line – and watching out for those that could threaten it, he advised.
“What are the new technologies out there that will impact my business? What can help me or what can hurt me?” Ireland said.
While investment money might be bountiful today, the oil industry is famous for its highly leveraged operations. Companies may take on far too much debt or financial obligation in good times, then struggle or fail in a downturn.
“The more leveraged you become, the more constrained the firm is. That can be a huge, gargantuan risk that can drag down a venture,” Ireland said.
It’s also one more pressure on a new business owner or operator, who might panic with a load of debt hanging overhead.
“Too much leverage representing too much risk,” he said, “can cause entrepreneurs to make decisions too quickly.”
First, Look in a Mirror…
G. Warfield “Skip” Hobbs is managing partner of Ammonite Resources in New Canaan, Conn. His company contracts with about 25 independent geologists and other consultants.
Hobbs said the consulting geologist should start with the saying, “Know thyself.”
“Step one is, examine your skill set. What are you good at? What are you not good at? Do you want to be a consultant, or do you want to be an independent who generates prospects?
“The other important thing is to prepare a business plan,” he said. ‘What is my timeline here?’ It takes much longer to establish yourself than most people anticipate.”
A geologist going independent should have the full support of his or her family and at least two years of working capital in the bank, Hobbs advised.
It also helps to have a specialty.
“You have to be an expert in something until you get established,” he said.
“Identify where the trends are and put yourself there,” he added. “Be on the leading edge. That’s what the market is looking for, not old ideas in old areas.”
Hobbs, an AAPG member and former president of the Division of Professional Affairs, said he decided to start his own business in 1980, a boom time for the industry. He teamed up with Gareth Roberts, now president of Denbury Resources Inc.
But two years later their funding dried up, oil prices crashed and Hobbs had to find a new direction. He began advising institutional investors with billions tied up in problematic oil and gas portfolios.
“In the 1980s I developed a tremendous business in workouts with these institutions,” he said. “I found a niche where there was nobody in the Northeast, from Boston to Washington, offering that kind of geotechnical-financial expertise.
“The message is, ‘Research the market. Find a niche,’” he noted.
Working with other experts can open new business opportunities: “If you have multi-talents, fine. If you don’t, team up,” Hobbs said.
Teaming up with consultants in Houston has helped him stay centered in the oil patch, all the way from Connecticut.
“You can do it from anywhere,” Hobbs observed. “I have a virtual company. There are three of us working on a project right now. One of us is in Calgary, one of us is in Houston and I’m here. And the client is somewhere else.”
Virtual and Reality
The idea of “core competency” leads many start-ups to outsource all other functions. It’s possible to build a virtual oil company – but be careful, Ireland cautioned.
“The more we outsource, the less is in our control,” he said. “That’s a real risk. The more control we lose, the greater our dependency on those to whom we have given that control.
“Your firm never wants to outsource to another firm what it can do exceptionally well,” he added. “Sometimes entrepreneurial firms don’t understand what it is they do well.”
Ireland said three problems for the entrepreneur account for the failure of many new businesses:
- Not fully understanding the market’s needs.
- Not recognizing the difference between cash flow and sales/income.
- Not b e ing able to cope with the sheer magnitude of stress involved.
That stress shows up in a number of different ways and comes from several different directions. One challenge is the number of roles a new business owner must fill.
“One second I’m talking to a banker about capital,” Ireland said, “the next minute I’m talking to someone in the field who has a serious production problem.”
Also, moving from management in a large company to ownership in a start-up means giving up the company support network – even the support that used to come from above.
“There is no one else to turn to,” Ireland noted. “I’m the boss. It’s me.”
Edward A. “Ted” Beaumont started a business as a consulting geologist – “It was something I always wanted to do,” he said – then watched the price of oil dip toward $8 a barrel in 1996.
“I kept going but I was thinking, ‘What am I doing? Am I crazy?’” Beaumont recalled.
“A lot of guys who were like me who were consultants are no longer consultants. There are a few who have hung in there anyway,” he added.
Beaumont, recently elected AAPG secretary, said things are “incredibly better” today. But it’s still not easy for an independent.
“We’re in an upswing, not a boom. People are still discriminating on what they want to take and what they’ll drill. They don’t want to drill wildcats,” he said.
To get established, a consulting geologist has to develop a reputation for specialized expertise, Beaumont noted. That can be in a geographical area or a technical area.
“If it’s seismic interpretation, that’s good. If it’s log interpretation, it’s good. Find an area you can be a specialist in,” he said.
The solo geologist also needs the patience and determination to see a project to completion, according to Beaumont.
“It’s not like there’s a smooth transition from when you get an idea to when the well is drilled. It sort of goes in spurts,” he observed.
“The bottom line is, you’ve got to get a well drilled. All those other things don’t matter until you can get the well drilled,” he said.
Ireland compared the operational choices for an entrepreneur to the difference between exploration and exploitation.
Some exploration has to get done in order for exploitation to take place down the line.
And the entrepreneur must deal with “that constant tension between doing things today to produce profit, yet knowing the things I’m doing today are not what I will need to be doing tomorrow,” he said.
In addition to the stress of operations, an entrepreneur has to secure the money and the people to make a company successful. That can be a problem in the oil industry today, when capable and experienced people are in short supply.
“I would make certain that I have commitments from the human capital that’s needed to make the business work,” Ireland said.
In choosing a business path, an entrepreneur should play to his or her own strengths, Ireland agreed.
“The probability of entrepreneurial success increases when you are engaging in a business that’s grounded in a skill set in which you are deeply involved,” he said.
And an entrepreneur has to be prepared for the two most traumatic things that can happen to a business.
The first is failure.
The second is a great deal of success.
The challenge of success, of managing a rapidly growing company, has confounded more than its share of aspiring entrepreneurs.
“There are so many entrepreneurs that can grow the business to a certain level, but lack the skills to take it to the next level,” Ireland said.
Finally, the independent geologist has to be prepared to go on for many years when success seems just out of reach. In three words:
Hang in there.
“It takes persistence. My kids laugh at me for my sayings, but ‘If at first you don’t succeed, try, try again,’” Hobbs said.
“Some people get lucky right off the bat. That could happen,” Beaumont commented, “but most people I’ve talked to were doing it for a long time before the luck hit.”