5 Survival Rules Every Entrepreneur Absolutely Needs To Know
Life-hardened Founder’s Advice
This post is written as a shout out to passionate entrepreneurs everywhere who may be struggling to finance their venture. And while this “Dutch Uncle” advice may sound like heresy to some, it is informed by personal experience launching multiple businesses, as a mentor of more than 100 companies at the Nashville Entrepreneur Center, and to a lesser extent as the Agency of Record for numerous startups over the years.
Let’s start by acknowledging that as entrepreneurs and startup founders, we have all bought-into the mindset of stay the course, soldier on, and don’t accept “no” as an answer...
Indeed, we have convinced ourselves that perseverance will ultimately win the day. And no doubt, being thick-skinned and not easily dissuaded can serve a founder well. But not always.
Rule #1 There’s a time a place for “no”
Sometimes, accepting “no“ is the smartest thing you can do, possibly sparing yourself a lot of misery. Other times, it’s knowing when to say “no”, that will save the day. Let me explain.
An all too familiar scenario for many entrepreneurs is the ill-conceived decision to self-fund their venture because they have not been able to convince anyone else to invest.
Self-funding often comes in the form or personal savings and sometimes “business loans” backed by a personal guarantee from the founder. In other words, if the business defaults, the founder is on the hook and their personal assets are the collateral. At the beginning of a venture, the optimistic and passionate entrepreneur see only upside. They are convinced that failure is not an option.
Rule #2 — Self-funding is ill-conceived
If the zealous entrepreneur could only set aside his or her focus on perseverance for even a moment, they might ask themselves this very important question,
“If nobody else is willing to fund my venture on its merits, why should I?”
When the professional risk-takers (investors and institutional lenders) are telling you your venture is a bad risk — they are probably right.
Rather than bristling at the “no”, listen carefully to understand the reasons why you are being told this. If you believe there is a remedy to be had, by all means, apply it and circle back. Do not, however, decide that all the nay-sayers are wrong and you know better and are therefore willing to bet the farm to prove them wrong. Either tweak your idea until it is investible, or lay it down and move on.
Remember, if takes most of us a lot longer to earn capital than it does to spend it.
Rule #3: If a bank asks you for a personal guarantee, just say, “no”
Think about it. If your business is as sound as you believe it to be, you should be credit worthy. If that is not the case, take heart. There is a reason. Do not put your personal wealth and future well-being at risk. I promise you, there is nothing heroic about betting the farm, going broke and starting over. I am speaking from personal experience...
Intermission: A Personal War Story
During the dot-com era, I managed to bootstrap a game company, CyberIsland Studios, into existence. The name “CyberIsland” came from the fact that I had recently relocated my family to the San Juan Islands north of Seattle. My first contract was to lead the game design for Dreamworks Interactive based on the popular Goosebumps series.
I was able to leverage that project into our second deal: a contract with Panasonic Interactive to design and develop a pair of edutainment games. I quite literally closed this deal with little more than shadow puppets and bravado. I say that because I had no team, no tools, no process, no equipment nor offices — not to mention I was located on a tiny island in the Northwest.
Based on this and other death defying successes I became much too comfortable staring down financial ruin while leaping just in time to the financial safety of the next deal, all the while growing our team and capacity. Sadly not all our growth was funded by project work. In fact, we were also taking on corporate debt — all backed by personal guarantees. I was convinced It would all pan out in the end.
Then, in May 2000, the dot-com bubble burst and the tech economy went into free-fall. Even though we were not directly venture-funded, our largest client was. Worse yet, I had allowed this client to buy up nearly all our capacity making us far too dependent on them and therefore vulnerable. In fact, we were knee-deep in merger discussions with this client when we learned their next round of funding was unceremoniously cancelled. Reacting to this news, they had no choice but to cut expenses and bring everything in house — immediately. To say this was a body blow to my company is an understatement.
Then unexpectedly, God provided a way of escape that I was either too proud or too stupid to appreciate. In the midst of rolling up the sidewalks around us, the CEO of our now former client made me a surprisingly generous offer. He offered to complete the merger and assume my company debt — IF, I would come on board and help him save the business! He went on to add that I would of course will have to lay off my 22 employees and either move Los Angeles or commute.
Without even a moment’s consideration, I rejected his offer saying, “I could never do that to my team!”
He was dumb-founded.
His last words to me on the subject were, “Steve, cut your team — now! You can always hire them back if things improve.” I refused to listen. I was certain I could ride it out.
Six months later, on January 02, 2001, I was forced to lay off my entire team, but not before burning through all our savings, selling off property, and cashing out every cent of our retirement including my wife’s inheritance. In the end, these heroics were not nearly enough. Ultimately, we sold our residence to settle as many debts as we could and we packed up and moved to TN where we relied on the kindness and charity of friends to get us back on our feet over the next decade.
If ever there was a definition of “all in”, foolishly, I was it.
Ironically, only one of those 22 employees thanked me for personally bank-rolling their salary for six months. The rest were upset with me. By the time I let everyone go, I was so broke I could not offer them any severance. How much better it might have been — and far cheaper — had I faced the lay-off six months earlier paying everyone a proper severance and accepted my CEO friend’s offer to help him save his company. 20-20 hindsight.
Rule #4 — Learn as much as you can from the experiences of others
One thing I taught my children as they were growing up, which seems pertinent to this post, is this. “Life is far too short to learn every lesson first-hand.” I sincerely hope some of my hard-earned lessons will help other entrepreneurs.
Heroics like the infamous account of Frederick W Smith, founder of FedEx, flying one of his corporate jets from Memphis to Vegas in order to parlay the last $5,000 the company had in order to avoid bankruptcy, may be a great story, but certainly not much of a model to emulate.
Happy endings to all-or-nothing-stories like Smith’s are one in a million.
Rule #5 — Quitting is always an option
While quitting may be undesirable, it is always a viable contingency. Just like a good gambler, and by good I mean someone with a healthy perspective who is not obsessed with gambling, a wise entrepreneur decides upfront how much she’s willing to risk, and makes a deal with herself and her family that if she can’t make a go of it within certain parameters, she is willing to pull the plug and step away.
Failing in business is not a crime and is nothing to be ashamed of. The real crime is dragging out the inevitable demise of a business beyond reason while exposing family, friends and employees to anymore grief than necessary.
In 2016 I found myself at a book launch event. The author was Chris Guillebeau. He was promoting his book, “Born For This”. At the event, Chris fileded this question from the audience, “How do you know when it is time to shut it down?”
His answer, was pretty good and I will end this article with my best paraphrase of what he said.
“If your business is not flourishing, ask yourself if you still believe in the venture. If not, shut it down. If so, then commit to doing it differently, because clearly the status quo is not working.”