‘Start out how you mean to go on.’ I heard those words frequently growing up. When starting a business, this phrase needs to become an entrepreneur’s mantra. While I believe it applies to everything from romance to building an enterprise, let’s look at three specific situations bound to come up as you launch your company.
Ownership – In the beginning, you need lots of things and don’t have money. The temptation is great to offer pieces of your fledgling business to tempt the right talent or to get the things you need, and once those shares are given out, they are nearly impossible to recall.
The last time I checked, at the time a typical company goes public the founders ownership is about 7%. This means that as you move toward a public offering, angel and venture investors will acquire an ever greater share of your company as they fund its growth. If you’ve parceled the shares out, everyone has to agree to dilution or surrender of their stake to make room for new investors. Even if acquisition is your exit, the deal becomes more difficult to do the more ownership is fragmented.
We recently worked with a $200MM company that was looking to sell and was, from a performance standpoint, in an excellent position to do it. The deal killer was that 49% of the equity was divided among 60 family members. Two brothers held the rest of the company, and they didn’t agree about much. Remember what it was like to get five of your friends to agree on where to go to dinner? Multiply that by ten and add lots of perceived money.
Lesson: Equity is fuel. You’ll need it to obtain the capital you need to grow, so hang on to every bit of it. Use stock options or other incentives rather than actual shares of stock where ever you can.
Pricing – There are two elements of price. First, price must liquidate cost. If you can’t cover cost, you don’t have a business. The second is how much people will pay for a given product and that can’t be known that until you test price points in the real world. Once you’ve launched and your product becomes more widely known, price will stay at, or decline from, that initial point unless you can a.) demonstrate a massive increase in the value of the product, b.) a magic hype cloud develops around your product and it won’t stay in inventory or c.) you have a product that people must purchase or it’s price is subject to speculative investing. SPOILER ALERT: For most companies, these events are not likely to occur.
Lesson: In most cases, there is only one way prices go for a particular product or service: DOWN. Survival is predicated on being able take down progressively larger market segments and scaling to meet them. Plan accordingly. NEVER offer your product for free.
Structure – It is never too soon to start introducing structure into your enterprise. Delineating authority, roles and responsibilities and how things get done keep products shipping on time, books balanced, customers happy. It ends the finger pointing and blamestorming that are a frequent part of new ventures.
This is particularly true when you are working with family or friends. They will expect understanding when they need mental health days or have to take their dog to its spiritual advisor for a mid afternoon appointment. You must keep this to a minimum. You won’t attract funding by running a lax ship and more importantly, things won’t get done. When you combine this lack of professionalism with a lack of structure, unless you’ve found alchemy that turns dirt to gold, you won’t be around long.
Lesson: ‘Business should be conducted in a business like manner.‘ It’s a line from the classic film noir ‘The Maltese Falcon’. It’s true. You don’t know who people truly are until the money is on the table. Build in structure early and you can prevent or mitigate a lot of behavior that isn’t obvious at the beginning of your enterprise.
Becoming an entrepreneur means stepping into an unfamiliar role while dealing with new situations. These are three hard learned lessons from one entrepreneur to another. To paraphrase another famous movie, ‘Mind what you have read, save you it can.’