Littlebanc Blog

This is a guest blog post from Robert C. White, Jr., Esq. – Equity Shareholder, Gunster. It is the last in a series of two posts that consider facing failure.

The information contained in this blog post is based on general principles of law and is intended for informational purposes only. I make no claim as to the comprehensiveness or accuracy of any of this information. None of this information should be considered as legal advice, and this blog post is not offered for the purpose of providing legal advice to any party. The information contained in this blog post represents my own personal views only, and does not necessarily represent the views of my law firm or any other lawyer in my law firm. My provision of the information in this blog post does not create an attorney/client or any other relationship between me or my law firm and the readers of this blog post or any other party. All readers of this blog post should consult their own legal counsel and other advisors before taking any actions or making any decisions based on any aspect of the information contained in this blog post. I am not certified by the Florida Bar as a “specialist” or “expert” in any area.

I’m going to list some of the primary causes of failure that I’ve encountered in my travels. This is by no means an exhaustive list, but it hits the high points. Here are five items to consider (no particular order of importance):

1. We’re Not Changing – the Market is Wrong. This is a very common situation. You’ve got a great business model and you’ve spent a lot of money and enormous amounts of time deciding how to develop your business and attack your markets. Why change now? I understand this, but you need to be keenly aware of what’s going on and adjust your model accordingly. I’m definitely not saying to follow the crowd – resisting that impulse is the heart and soul of innovation and entrepreneurship. The overall economy and the markets in which you are working are very powerful external forces, however, and you clearly need to keep on top of them and evaluate whether you need to change or adjust your model.
2. Who’s the Boss? This is often a difficult topic in a growing business, but it’s a common source of serious problems. The problem here is that in many entrepreneurial situations there is no clear cut decision making process. Sometimes you don’t need one in the very early stages because every decision is a consensus (thought this never lasts long). This can be further complicated because in many situations people each bring different skill sets or assets to the new business (e.g., technology, business expertise, money). In many cases none of these people may feel comfortable stepping out of their particular area to exert control over other peoples’ areas. You need a very clear decision making process, and you need to have someone in charge. This is not to say that you must have a dictator with absolute power – the decision making power should normally be subject to some checks and balances.  It’s critical, however, that a decision making process exists and that the power that is given to each person is clear and well documented. The best time to do this is normally very early in the business entity’s life cycle. In these early stages people are much more likely to have a consistent idea of the dynamics of the company and the contributions of each individual, and they are much more likely to agree on allocations of decision making power and the value of an individual’s contributions. It’s amazing how quickly a person’s perception of their value to the business entity can change, especially when money is involved. Consider getting a clear and well-documented decision making process in place as early as possible.
3. Who Owns What? It’s amazing how many times this very crucial subject is neglected: People quit their jobs and put all of their savings and time into their new company, but they don’t know how much of it they own.  This is a mistake that can lead to serious and expensive litigation.  Sometimes people don’t think they need to deal with this subject because they have longstanding relationships with the other participants and they believe everyone will “do the right thing” when it matters. Unfortunately, my experience says that this doesn’t always work. To protect the interests of each participant in a business entity, you need to determine up front who owns what and what rights and obligations they have relative to this ownership. Get agreement from all participants up front, and document these items very well to avoid future controversies. Clearly define if anyone has any rights to acquire additional ownership in the future and the requirements for such additional ownership. Get agreements in place that govern the rights and obligations of each participant. As discussed above, these items should be done very early in the business entity’s life cycle since this will be when the participants are most likely to be in agreement. If there is a disagreement or controversy, it is also much better to either resolve it up front or deal with it as necessary before the business entity has spent much money or built much value.
4. How Did We Spend So Much Money? Running out of money may be unavoidable, but you should at least anticipate that it can happen and plan for it. This is especially important in the current environment as any kind of financing for early stage companies has become extremely hard to get. Bank financing for most early stage companies is very difficult or impossible to obtain right now, and private equity and venture capital financing is not much better. Even angel financing has been very difficult to obtain for many of the companies that I see. I don’t believe that financing an early stage company is ever easy (even in good times), but it has been easier in the past than it is now. In any case this means that there is an even smaller margin of error in managing your company’s cash.  Stay on top of your company’s short and long-term cash requirements at all times, and develop as many feasible contingency plans as you can.
5. No One Told Me We Would Have To Sell This Stuff. This problem can arise anywhere, but it is often seen in technology companies. The principals are sometimes so smart and so technically oriented that they either refuse to focus on the mundane concepts of marketing, branding and sales or they are just not aware that a company eventually has to sell a product or service to survive. This concept cuts across all industries and spaces – it doesn’t matter if your company sells shoes, stocks or genetic mapping software, at some point the company has to sell something. This doesn’t mean that you personally have to do it, as some of us are terrible at sales and many of us don’t have the requisite skills anyway. If this is your situation, acknowledge it and hire the right people to manage and develop your marketing, branding and sales functions. I would do this early as it’s vital and it can be a time consuming process.

Thank you to Robert C. White for providing the information in this blog post. Connect with him on Facebook, Twitter, and LinkedIn.

Bob is a member of Gunster’s Technology and Entrepreneurial Companies Practice Group, its Corporate Practice Group and its Securities and Corporate Governance Practice Group. He serves as the head of the Venture Capital and Private Equity Committee of the Firm’s Securities and Corporate Governance Practice Group. He represents clients in many business segments with an emphasis on technology, innovation and entrepreneurial situations. His regular practice areas include corporate strategic counseling, technology law, venture capital and private equity law, mergers and acquisitions, corporate finance law, corporate governance and general business, corporate and financial law matters. He regularly counsels business entities, entrepreneurs and executives in these areas.

This is a guest blog post from Robert C. White, Jr., Esq. – Equity Shareholder, Gunster. It is the first in a series of two posts that consider facing failure.

The information contained in this blog post is based on general principles of law and is intended for informational purposes only. I make no claim as to the comprehensiveness or accuracy of any of this information. None of this information should be considered as legal advice, and this blog post is not offered for the purpose of providing legal advice to any party. The information contained in this blog post represents my own personal views only, and does not necessarily represent the views of my law firm or any other lawyer in my law firm. My provision of the information in this blog post does not create an attorney/client or any other relationship between me or my law firm and the readers of this blog post or any other party. All readers of this blog post should consult their own legal counsel and other advisors before taking any actions or making any decisions based on any aspect of the information contained in this blog post. I am not certified by the Florida Bar as a “specialist” or “expert” in any area.

I’m going to jump right in and hit a very sensitive and unpopular subject: Failure. No one wants to think or talk about it, especially in the early stages of developing a business. I firmly believe, however, that startup businesses need to contemplate possible failure right from the start and learn from their own experiences and the experiences of others. Many times these lessons can help an entrepreneur avoid or mitigate failure in his or her current situation.

Failure: The Unavoidable Consequence

It’s somewhat of an unpopular view these days, but a certain percentage of business failures are an unavoidable consequence of entrepreneurship and innovation. You just can’t work on the bleeding edge of new business models and technological innovation without some things not working out. The incredible rate of change that faces most entrepreneurial and early stage technology businesses is an extreme challenge, and even a top-notch business plan can unravel very quickly due to rapid changes in external circumstances. In many early stage situations you hear someone at some point say “failure is not an option.” Great sentiment, but unfortunately not always true. Failure is always an option, but you can do a lot of things to avoid it.

It’s critical for entrepreneurs and innovators to realize that failing does not permanently terminate your chances of success in another venture. Rest assured that any venture capital or private equity firm, and any angel investor with any experience at all, will anticipate and expect a certain number of failures in the situations that they evaluate. In fact, in some cities with well-developed entrepreneurial or early stage business cultures, a “safety net” of some kind (for example, large companies with job possibilities) exists to encourage entrepreneurs to continue to innovate despite the possibility of failure. This is not to say that failure does not have significant negative consequences, but a certain level of failure is clearly contemplated in most entrepreneurial situations.

How to Manage Failure

All that being said, it is critical for entrepreneurs to do everything in their power to avoid failure. Failure costs money, and it has an opportunity cost as the entrepreneur’s time (which could have been spent productively on something else) may be wasted. Failure also has extremely unpleasant psychological effects, and may chase good entrepreneurs out of the early stage business arena. Finally, it’s an obvious conclusion, but having too many failures can put you out of the game for good.

The key here is to study situations in which failures have occurred and learn hard lessons from them. Some of our most successful entrepreneurs have several failures in their past. Study the facts of these situations and apply them to your business situation – did they encounter similar circumstances and problems? How did they try to resolve them? Most importantly, what went wrong? Why did they fail and can I learn something from their actions that will prevent me from failing?

Thank you to Robert C. White for providing the information in this blog post. Connect with him on Facebook, Twitter, and LinkedIn. Check back later for part two of this blog post about facing failure.

Bob is a member of Gunster’s Technology and Entrepreneurial Companies Practice Group, its Corporate Practice Group and its Securities and Corporate Governance Practice Group. He serves as the head of the Venture Capital and Private Equity Committee of the Firm’s Securities and Corporate Governance Practice Group. He represents clients in many business segments with an emphasis on technology, innovation and entrepreneurial situations. His regular practice areas include corporate strategic counseling, technology law, venture capital and private equity law, mergers and acquisitions, corporate finance law, corporate governance and general business, corporate and financial law matters. He regularly counsels business entities, entrepreneurs and executives in these areas.

In the video above, Littlebanc CEO Michael Margolies likens entrepreneurs’ limitations to dragging rafts: you built a raft that successfully took you across the start-up company river. But, now that you’re on land and need to move forward, you’re still dragging the raft with you. It slows you down. It’s heavy. Your attachment to your raft keeps you from getting where you need to be. You become your company’s worst enemy.

These attachments are mental limits on a CEO’s capabilities, and they can hinder even the most adept entrepreneurs during not only the capital-raising process, but also the day-to-day operations of running a company. Mr. Margolies explains that the most important thing about building a small business is understanding your limitations, emphasizing that this is also the hardest thing for a CEO to do.

The Only Person That Can Beat You is Yourself

The first step for entrepreneurs is to understand that they do not know what they do not know; they must accept that they can and should seek advice from an outside perspective—a trusted mentor, a colleague, a friend, a passerby on the street. Entrepreneurs generally excel at one or two things—whether it’s product development, marketing, or an infinite number of other skills—which drives them to start a business in the first place. But to excel at running a business, entrepreneurs must recognize their weak areas, those skills or applications they just don’t get. Seeking advice from or bringing in people who do know what you don’t will not only be necessary for the survival of your business, but also a much-deserved reality check.

The Spoon Doesn’t Taste The Soup

When a founder builds a company from scratch, he spends time trying to get people to understand his business, to love it and to use it. The same idea holds true for human nature—particularly CEOs—in general: we want people to approve of us, to like us and understand us. In the video, Mr. Margolies cites a Buddhist proverb: “The spoon doesn’t taste the soup.” Entrepreneurs can waste a lot of time trying to get people to “taste” his “soup”—his business, his credibility, his personality—but the tough lesson to learn is that some people just won’t get it. The key is to not take it personally. Don’t judge it. Recognizing that not everyone will understand or even like your business is one way entrepreneurs can free themselves of one limitation.

This is particularly true of approaching investors and venture capitalists. Having a realistic vision of your business will push you in the right direction. Having a realistic view of your own strengths and limitations will make you a better entrepreneur and leader. Understanding your limitations and your business will give you a better perspective when approaching the capital-raising process.

Check back later for part 2, a look at how a CEO can free himself of limitations to better understand how a venture capitalist approaches the valuation process.

Working on your first start-up is exhilarating: everything is new, everything is a challenge, and, because start-ups are small, you can see your impact on the business on a daily basis. But occasionally, as entrepreneurs become more entrenched in the day-to-day trials of running a start-up, they might lose sight of a few business basics they picked up at the very beginning—the basics that propelled early successes.

“The hardest thing for an early stage entrepreneur to do is to step back and allow time to work on the business instead of in the business,” says Jim Bowie, associate director and site manager of the St. Cloud campus of University of Central Florida’s Incubation Program. “Working on the business is laying the foundation so the business can grow.”

When you find the details looming larger than the big picture, take a cue from Mr. Bowie’s lessons learned from not only mentoring 9 start-ups every day, but also successfully heading up two start-up companies, one of which he took public on NASDAQ before selling to Johnson & Johnson.

• Engage outside eyes. Whether it’s a trusted mentor or an honest-to-a-fault friend, an external opinion can snap you back to the real world. It’s easy to see your business as the end-all, be-all of start-ups, but an outside voice can point out limitations and weaknesses you might not see otherwise. Constantly seek advice from people who are smarter than you.
• Educate and train. Work is never done in a start-up. Pushing forward means looking for learning opportunities. Struggling with customer relationships? Investigate CRM solutions. Hit an inspiration wall? Attend business showcases or keynote speeches. Want to raise capital? Learn from those who’ve been through the process.
• Connect with your team. In new start-ups, there might be just two of you, but Mr. Bowie recommends consistent weekly meetings to review issues and set priorities. Plus, connecting with team members gives you time to make sure you understand your staff and what makes them stick with your company. Listen to their ideas and problems. They’re moving your company forward.
• Review your strategy and business plan. Consistent review of your business strategy keeps you focused on your short-term and long-term goals. Business plans might be outdated the moment they leave the printer, but they are a roadmap of sorts. At the very least, getting your thoughts on paper forces you to think through tough business questions and gives you a way to hold yourself accountable for your business goals.
• Take a breather. With all the frenzy that comes with managing a start-up—the decisions that need to be made right now, the 80-hour work weeks, bootstrapping like crazy—take a second to remind yourself why you do this in the first place. The excitement and passion that drove you to become an entrepreneur in the first place will carry you through each stage of the business lifecycle.