The entrepreneur’s worst enemy

Those behind small businesses are quick to point the finger when their businesses fail.
They usually fail to point it at the biggest culprit though.

I’ve been a freelance IT guy for more years than I care to count and over those years I’ve worked for some of the biggest companies in the world and also some of the smallest.

As I write these words my two current clients perfectly demonstrate the range. My time is shared between one of the biggest banks by market capitalisation on the New York stock exchange and a maturing start-up with less than £1m annual turnover.

In huge, global corporations my role as a very small cog in an unintelligibly vast machine can make the link between my work and that of the business almost indiscernible. In small companies beset with the day-to-day problems of simply surviving as a putative enterprise in a harsh, competitive market, that link can be all too real.

Over the years I’ve accumulated plenty of the tales of terror that grizzled old contractors are wont to share when gathered around the embers of a burning enterprise on a cold, harsh night.

I’ve also heard more than my fair share of the excuses trotted out by the founders of those burning enterprises to account for their failures. The Evil Big Banks didn’t understand or weren’t supportive. Their business partners weren’t fully on board or didn’t do enough. The workers weren’t playing for the team. The market just didn’t get what the business was about. The competition weren’t playing fair.

Yes I’ve probably heard them all save one. And from my perspective and in my experience it’s the most common cause of small business failures.

It was their own damned fault.

Entrepreneurs build, own and run small businesses. Unfortunately they also tend to define themselves by building, owning and running small businesses. They therefore have a tendency to put themselves before those small businesses. And this, it seems to me, is where most of them go wrong.

 

Gotta do it

I’ve never tried it myself. I’ve never gone out there with an idea and tried to build a business out of it. It’s not that I wouldn’t like to. I’d love to do it. I’ve just never had a single idea that I’ve felt anywhere near good enough.

That I’ve never had a good idea does not separate me from many of those who define themselves as entrepreneurs. That I wouldn’t go ahead and do it anyway does separate me from them.

Strip away the poetry of failure – those trite little sugared words like “you can learn more from failure than from success” and “at least I tried” and what you’re left with is a colossal waste of time, money and effort. I wouldn’t do it unless I genuinely felt the chances of success were excellent.

Some ideas just don’t make a lick of sense yet I’ve been paid to work on them more than once or twice. If you define yourself as an entrepreneur it’s what you’ve got to do, and you’ll do it with the “best” idea you have, irrespective of whether it’ll really fly in practice. 

 

Gotta sell it

There are a whole host of reasons why genuinely great ideas might simply not be commercial. The potential market may not be big enough to recoup your investment and make money out of it. On the other hand the market may be huge but your potential customers simply not interested in what you’re offering. Or the market might just not be ready for it.

The technology sector is rich with examples of the last of these. I worked for a number of start-ups in the smartphone app space around five to ten years ago. Some of their ideas were awesome and some of them are making a lot of money for other companies today. Back then the platforms weren’t mature enough and the market too small to sustain them so they withered and died before they could enjoy their day in the sun.

It’s easy to be blinded by enthusiasm for a great idea and not see just how unlikely or impossible it will be to convert it into a great business.

 

Gotta fund it

A few months ago a new deli opened on the high street in my hometown. It filled a gap in a local market woefully underserved with rotisserie chicken and all-in-all it seemed a great business idea. Within a few weeks it had closed down.

Entrepreneurs are great at looking on the bright side and focussing on the best case scenarios but when it comes to funding the initial stages of a small business this can be a suicidal error. Revenue will frequently undershoot what you expect or hope for, costs and timescales will invariably escalate. It’s all too easy to find yourself running on fumes with a long road still ahead.

10 years ago I started working for a startup with a great BPO idea. 9 years ago it was already consigned to the history books. With the hard part done, with systems in place and customers starting to sign up it catastrophically ran out of money and had nowhere to go to plug the gap.

This embarrassing failure for the entrepreneur who founded it was made all the more painful when the systems he’d developed where picked up for a song from the receivers by an industry competitor who went on to successfully build a business on top of them.

 

Gotta own it

Your small business has found its feet. You’ve got paying customers, you’re making money, you’ve found your market and you’re growing.

Unless you’re lucky enough to have founded a business with a very forbidding moat you’re unlikely to be alone.

So you need to establish your place in your market. You need to keep those initial customers and get new ones. You want to dominate your market.

So you need to grow and you need to grow quickly. And to do that you’re probably going to need funding. Within limits you might be able to borrow but taking on investors may be the most cost-effective route to getting the capital you need.

Unfortunately taking on investors means ceding some control. If you’re putting the business first this won’t be a problem; you simply issue equity in proportion to the funds each investor will add and get stuck into it.

But of course, many entrepreneurs define themselves by owning their business and hence there’s a 49% limit on how much control they’re willing to give up. Therefore the capital they can raise to grow their business is limited to roughly twice the capital they’ve put in themselves.

And this seems to me to be the cause of some of the most tragic small business failures I’ve seen. Great little businesses strangled in the early years and ultimately gazumped in the market by bigger hitters for want of capital investment caused squarely by entrepreneurs who would rather own 51% of a flop than 49% of a Facebook. 

 

Gotta get paid

The lessons for the aspiring entrepreneur are clear and really little more than common sense. To achieve success you need a solid business plan built around a great idea brought to the market at the right time and with the right funding to grow. And all of this needs to be put squarely in front of your own gratification and ego.

Unfortunately, time and again, not only are these lessons not followed by our budding business builders but neither are they picked up in the aftermath of failure.

At least though, over the years, I’ve learnt one useful lesson for myself and others who may find themselves working for startups from time to time.

Make sure you get paid before they crash and burn. You won’t get a penny from the receivers.