September 2004
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September 2004 | |
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Avoiding the Entrepreneurial Death Spiral: 10 Ways to Grow Your Business Without Killing It by Rick Goossen, Executive Editor
In the realm of skydiving there is something called a “death spiral.” As this occurs, the company starts to spiral downward and once the momentum begins it is hard to escape. This is what I term the “entrepreneurial death spiral.” In response, there are 10 tips on how an entrepreneur can grow his or her company without falling into an unrecoverable downward spiral from which escape is unlikely. 1. Accept Good Advice The entrepreneur may have been weaned on the notion that he truly knows best and his very success speaks of his ability to prove the naysayers wrong. This may be true in some instances, but as a general rule, the entrepreneur should seriously consider the insights of others. Without a peer advisor, who confronts the entrepreneur? No one. The entrepreneur makes the rules and employees are hired to abide by them. Outsiders can give valuable advice to the entrepreneur. For example, banks can often offer very sound advice to an entrepreneur—as an unintended counterweight to his unbridled enthusiasm. The bank’s frame of reference is that they wish to preserve capital and earn a return. Banks are not interested in risk. They are not enraptured of your business plan, your dreams, your visions and your desire to change the world. They lend money. They want security. They want interest. And they want to be repaid. Being an entrepreneur, particularly with a profitable business, leads to a good dose of hubris, and some scorn for the salaried workers and clock-punchers of professional firms. But their advice needs to be carefully considered – as the entrepreneur may be seeing much more of them on his way down. 2. Engage In Worthwhile Introspection Entrepreneurs need to objectively analyze their performance and that of their company from an external vantage point. This also means being able to discern whom you should be accepting advice from and on what subject matter. If the entrepreneur does not have a balanced set of opinions, but rather is informed primarily by those who simply agree with her, then there is a continual drifting further away from the center point of reality. One entrepreneur I knew surrounded himself with acolytes and sycophants, which then bred a sub-culture that fostered a sense of corporate invincibility. After a while the culture became more and more skewed as “like attracts like”. The staff all engaged in back patting as to how good they were, not realizing that their success may be attributable to the overall market momentum. They were also unaware of growing competition. Another entrepreneur was unable to see his lack of focus, between disparate corporate initiatives being undertaken in various parts of North America, even though this was obvious to outsiders advisor such as bankers, lawyers and consultants. But no trusted employees were of a senior enough vintage to level honestly with him—and not fear the loss of their job. The company effectively died a couple of years later. 3. Manage Your Ego Don’t let your ego get in the way of the running of your company. Dale Carnegie reminded lay psychologists that sincere flattery will indeed get you everywhere, and this is often true in the corporate context. The entrepreneur needs to take a balanced approach. Remember, everyone loves you on the way up, especially when they can make money from you. On the way down, you’ll be in freefall and very confused to boot. When high-tech companies were pursuing their IPOs in the late 1990s, hi-tech company founders were being lionized. They were treated as a noble species and serenaded. Their oversized egos lead them to believe that “the suits” liked them—but they don’t like you. In reality, “the suits” will like you only as long as they think they can make money from you. The problem is that most entrepreneurs cannot see that. You’re probably not that good when the power brokers are praising you and you’re likely not that bad when they’re dumping on you. The key is not to let the fawning of biased people affect how you run and think about your company. 4. Remember The Core What is the core skill that accounts for the success of your company? And what are the peripherals? For example, the core may be that you have talented people who know how to sell and install a type of software at a better price than most others in the marketplace. It's not that you have a group hug every Friday afternoon. It's not that you have gourmet pizza on Tuesdays and a Chinese buffet on Fridays. These may contribute to employee morale. But don't get these things mixed up. Focus on the core and building up the expertise that clients want. There is nothing to support a corporate culture if the company is not making money. In some companies, the corporate culture was paraded as the key to the success of the company. Investors would tolerate peripherals dressed up as a core competency only at the height of the high-tech investment craze of the late 1990s. Now that an economic equilibrium has returned and the focus is on making money, the size of the fully stocked pantry and the ping-pong table in the foyer are no longer as endearing. 5. Greed is not Good Gordon Gekko, the icon from the 1980's move Wall Street, proclaimed, "Greed is Good." In Hong Kong, this is called the "red eye disease." This has killed more deals than any other factor I can think of. Greed is not one of the seven deadly sins by mere coincidence. While people are motivated by a variety of things, including money, it can also backfire for entrepreneurs. Mark, the entrepreneur, was in the process of taking his company public. Within the IPO process the stakes and rewards are both high. Mark had a company generating $7 million per year, but it had never really made a profit. Then a web angle was concocted as a platform for significant expansion. A financing of $3 million was on the table, a projected post-listed market cap of $30 million. Mark would have had a paper share value of over $10 million. Everyone admired Mark for being on the verge of reaping the rewards of his labor. But greed got the better of him. Despite the best advice from all corners to take the deal and begin growing the company, he thought he should be going out at a higher price per share. He reasoned that, "this is my one chance to hit it big. " The short of it is that he fell flat on his face: he pushed the underwriters too hard, the market changed, and the deal was off. His company subsequently went bankrupt, besieged by lawsuits and creditors. It didn’t have to be this way. 6. Risk Management The key for an entrepreneur is to take calculated risks—after careful assessment. Entrepreneurs shouldn't skydive without a back-up parachute. Successful entrepreneurs manage and reduce risk; short-term entrepreneurs ignore risk.
Make sure everything is done properly and that contributors are rewarded commensurate with their tasks. Recognize that there are "industry standard rates" for key advisors such as lawyers, accountants and underwriters. You may not like it but that is the cost of the process. Rather than trying to “nickel and dime” everyone one, plan for the costs properly from the outset and raise sufficient funds. Further with respect to risk management, the entrepreneur should plan on the basis that things can take twice as long and be twice as expensive. Don't be in a hurry and then expect everyone else to jump to your tune. They won't. In addition, plan your corporate affairs with long lead times for regulatory approvals. A stock exchange or securities commission will not expedite the approval process because you want them to. They have a machinery and process which moves at a certain pace. You can't force the auditors to do the job in half the time. Reduce your risk through proper planning. Make sure that time is working for you and not against you. 7. Keeping Options Open Your ability to make good decisions is to some extent dependent upon the number of worthwhile options you have available. The entrepreneur needs to decide if he is selling a vision first or a worthwhile commercial enterprise. One entrepreneur, a reputable educator, developed good learning programs and systems for web learning. He also developed a web technology that got people's attention. But the entrepreneur persisted in his vision of web education, rather than market his attractive web engine technology. He kept persisting until he became virtually bankrupt. He had run out of alternatives. In the end, the alternative that he despised and rejected, which was acquisition by a public company consolidator, was the one he ended up having to live with. And on worse terms that if he would have seen this likely outcome earlier. For this entrepreneur, it was a case of a Faustian bargain: sell the soul of the company to save it, but his resulting entity was not the same creation any more. His vision was only alive in his own mind. The company would be money-centric rather than focused on social good while happening to make money along the way. 8. You Are Not The Company If the company cannot do without you, then you don't have a real company. The company must grow beyond you or otherwise it is not a true company, it is a mere reflection of yourself. One entrepreneur was fond of telling me, "With me everything is personal." This meant that he wanted to have knowledge of all the goings-on in the company. This became increasingly difficult with company growth. In Michael Gerber's book The E-Myth Revisited, he talks about the transition from entrepreneur to company. Until you can take off for three months and no one cares, you don’t have a company—you have a personality cult. In other words, if there is an able management infrastructure in place the entrepreneur should no longer be necessary for day-to-day functioning. Entrepreneurs who have not made the transition to the strategic, forward-thinking role and who are still immersed in details, put a cap on their growth. 9. Family Ties The public market is not a good environment for a family company. An entrepreneur who wants to bring in outside investors needs to make a clear distinction between his or her personal life and the company. A hint of nepotism is simply one more issue to deal with. Having a spouse on the board of a public company, and concocting a glorified title as an officer, is not a good idea. Worse yet, it reflects the fact that the entrepreneur is not attuned to the basics of the public market. Many of the recent corporate scandals intertwine tales of family involvement and corporate shenanigans. The Rigas family of Adelphia Communications did indeed run their cable company as a private fiefdom as financial records now show. A more recent saga is that of Lord Conrad Black of Hollinger Inc. Claims in court call the management style a kleptocracy, and cite use of the company purse for private holidays, birthday parties and supporting a luxurious lifestyle. It's not a family business. Do you really want your spouse on the board? Do you really need your brother in software development? Does your cousin have to be the receptionist? Is this a fiefdom or a company? Yes, you need people you can trust, but rarely do these family members challenge the one providing the gravy train. 10. Visionaries & The Reality Check "Where there is no vision, the people perish." The entrepreneur's strength is often being able to see an opportunity, articulate a vision and then bring together the resources to pursue that vision. Some say that may be a function of youth. "Old men dream dreams and young men see visions." Visions consist of seeing the big picture and the motivation to change the world. One entrepreneur who developed educational software was an enthusiastic educator, and by all accounts a great and innovative educator. This did not mean he was an entrepreneur. His vision was great as it allowed him to develop innovative programs, but he was borderline psychotic when he began to rhapsodize about his vision. His bug-eyed vision was to change how people think, because “If I can change how they act then I can change the world!” He would have been at home as a villain on a James Bond movie set. However, there must be a reality check. A brake must be applied to a trip down the runway. The short of it is that some entrepreneurs get carried away. For most investors, the vision thing is OK as long as it fuels additional energy, passion and profit rather than getting in the way of it.
© 2004 Journal of Business Strategy |
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This occurs when a skydiver has opened the parachute strap but it has not unfurled. The skydiver keeps spiraling downward in tighter and tighter circles from which he cannot escape. An unrecoverable spin also occurs with entrepreneurs. There are many pitfalls along the way of growing an entrepreneurial company.
The process of "going public" reveals entrepreneurs' differing approaches to risk. A successful public listing and subsequent growth has the potential to be extremely lucrative. The best approach, however, is to be conservative within a risky process.