Good Partnerships Have Balance, Not Perpetual Agreement
I had a conversation the other day with an entrepreneur (let’s call him “Ed”) who was frustrated with his business partner (“Phil”). Ed is extroverted and focused on the big ideas. Phil is introverted and detail oriented. Ed’s frustration is rooted in feeling like Phil hasn’t been supportive of some of his ideas.
I came to the conclusion that these two are the perfect match. They balance each other’s weaknesses and together are a well-rounded team. The difficulty is Ed’s perspective on the situation. He can’t forget times when Phil has disagreed with ideas he felt strongly about.
Ed and I went through some of their most successful initiatives of 2020 and the role each person played. I pointed out how each of them contributed and how unlikely each success would have been without both of them. Sure, some ideas didn’t pan out, but the ones that did were successful because of the partnership.
In my opinion, in this partnership, Ed has more to be happy about than unhappy about. He just needs to adjust his thinking. Does he want to play team ball or beef up his own stat line? Partnerships are difficult. Sometimes you get your way and sometimes you don’t. In the end, it doesn’t matter as long as you end up wearing the championship ring.
Insights from an Entrepreneur after Failure
I listened to an exchange the other day that resonated with me. A former entrepreneur who couldn’t get his idea off the ground was talking to a friend.
Former entrepreneur: I used to think I had to be the leader or the ideas guy. I’m starting to realize I’m happier executing someone else’s vision. I like being on teams.
Friend: Really? You always wanted to start your own thing.
Former entrepreneur: I think I just thought that because I was supposed to.
The self-awareness of this person and the circumstances that led to his growth struck me. He has embraced being better suited to be a good team member than the leader. That’s a tough pill to swallow for anyone with an entrepreneurial mindset.
Entrepreneurship is demanding. For many people, it doesn’t work out. If you’re considering it, just know that even if your idea doesn’t fly, it won’t be the end of the world. You’ll learn a lot from making the attempt, and that growth will be priceless. It may be the very reason for your future success.
All Customers Aren’t Good Customers
I had a conversation today with a friend who’s also an entrepreneur. He has a consumer-facing business. He told me about a difficult customer who has unrealistic expectations on a shoestring budget. I had this exact same situation many times in the early days of CCAW. We tried to work with customers who had tight budgets and priced our products aggressively. In the end, we accomplished our goal of attracting more customers. What I didn’t realize was that some of them weren’t a good fit for our business. The time and energy required to service these new customers skyrocketed. Many of them were unprofitable and impossible to please.
As CCAW grew and we had more resources, we developed a more sophisticated pricing strategy and implemented it in a dynamic pricing engine. The strategy was aimed at attracting customers who wanted a fair price but also wanted high-level customer service. These customers were OK with paying a little more for peace of mind. Over time, our data told us they were also more agreeable and easier to work with when unavoidable circumstances arose (e.g., bad weather). We ended up building a large profitable business by targeting this type of customer.
When you’re starting out, you’re figuring out how to solve a problem in a way that people are willing to pay for. Once you do, it’s worth stepping back and thinking about whom you want as customers. You can’t be everything to everybody. All revenue isn’t good revenue. If you’re intentional about the customers you want to serve, you can steer clear of those who aren’t a good fit—who, frankly, are more trouble than they’re worth—and build customer loyalty.
It’s Going to Be OK
Today I had a conversation with the leader of an innovative company. They had a really cool technology and counted some well-known organizations as customers. Unfortunately, the pandemic caused their customers deep distress and made their business model unsustainable for the foreseeable future. Though he did everything in his power, he wasn’t able to right the ship. I was struck by how upbeat this leader is. He seems at peace with the fact that the company won’t survive. He’s not dwelling on their bad luck. Instead, he’s making sure his team is treated fairly and has a safe landing.
Sadly, there are far too many of these stories this year; 2020 will go down as one of the most challenging years ever for many founders and other leaders. When you’re in the midst of pain, it can sometimes feel paralyzing. While we’re still grappling with everything that happened this year, it’s important for leaders and team members to remember this: painful periods always pass. Look for the light at the end of the tunnel instead of dwelling on the fact that you’re in a dark tunnel. Tough situations have an end, and you should train your energy on getting to it. Once you’re there, you can take as much time as you want to reflect.
Every founder I know has had to endure bad situations. Over the years, I’ve been humbled by mine. (Some were downright awful.) Each time, I tried to keep a positive attitude and focus on getting through the situation rather than dwell on its dreadfulness. Some of them resolved quickly, while others played out over the better part of a year. Either way, focusing on getting to the end was one of the biggest reasons I was able to weather the storm.
As we approach the end of 2020 and look to an uncertain future, just remember: In the end, it’s going to be OK.
I caught up with a buddy today to discuss an opportunity he’s evaluating. He said he knows he says yes to too many things, often too quickly, and that he’s looking for another perspective before deciding. I’ve known him for years, and I agreed with him. His self-awareness impressed me and made our conversation about his opportunity more substantive. I realized that he and I are opposites, which is likely why he called me. I quickly say no to most things and am slow to say yes to things I’m interested in as I evaluate them.
Being self-aware is difficult but valuable. It helps you understand the areas you can improve upon (your weaknesses) and those you should lean into (your strengths). My conversation today was a timely reminder that in 2021, I want to do a better job jumping on good opportunities that interest me. My habits won’t change overnight, so my plan is to recruit the perspectives of people who recognize good opportunities and are good at saying yes quickly.
I’m glad I connected with my buddy today. Our opposite styles are complementary, which is valuable to both of us. In the end, we agreed to balance each other in 2021. I’m looking forward to that!
Company-Paid Personal Expenses
In my first year of running CCAW full time, I did an awful job of keeping my personal and business expenses separate. Considering my financial background, one would think I’d have been on top of this from day one. I wasn’t. I did a good job tracking gross profitability. But I used company profits to supplement my personal life. Once I surrounded myself with other entrepreneurs, I learned that was a common bad habit. And I learned how to rectify the situation.
Mingling business and personal expenses is unwise for a variety of reasons. I’ll share a few here:
- Taxes – Filing accurate tax returns is more challenging when expenses incurred by the business may or may not be related to the business. This can come back to haunt a founder, usually at the worst possible time.
- Decision-making – It’s hard to rely on the data to make business decisions when there are non-business-related expenses in the data.
- Bad example – When employees see this type of behavior, it sets a bad example from the top. Employees may think it’s OK and mimic you.
- Mentality – If you begin by using the company as a personal piggy bank, you’ll tend to do so more and more as the piggy bank gets more dimes and quarters in it.
- Tug of war – A growing company may require a reinvestment of profits to fuel further growth. Decision-making can be challenging when the founder has to choose between maintaining the lifestyle to which they’ve become accustomed and growing the company.
- Owner versus employee – Founders often own the company and work in the company. These are two separate things and should be treated as such. Founders should get a wage for the work they do in the business. If the business is profitable and it make sense to take cash out of the company, an annual distribution or dividend can be paid to the owners.
This list isn’t comprehensive; it’s just a few of the reasons you shouldn’t mix business and personal expenses. Going into 2021, founders who are mixing should consider starting the New Year off on the right foot.
Start-ups as a Unique Asset Class
Yesterday I shared my thoughts on ways entrepreneurs can derisk without selling their entire company. A friend reached out after reading the post and we had a conversation about private companies as an asset class to invest in. He isn’t involved in tech or start-ups, so I enjoyed hearing his perspective.
My friend views high-growth private companies (i.e., start-ups) as a truly unique asset class. He thinks a start-up is an amazing investment opportunity when it’s generating profits (not breaking even or losing money). The ability to generate more cash than the company needs to maintain a high growth rate is what makes it an attractive investment. He sees a supply-versus-demand imbalance that these companies can benefit from. Historically low interest rates have investors seeking higher returns. More investors are seeking this type of investment opportunity than there are companies that meet these criteria. As valuations for these companies rise, the return on invested capital goes down, but if the company is growing at a high rate and generating surplus cash, the return is probably far better than the return on holding cash in a bank account—a great investment.
My buddy makes some good points. If you can build a profitable company that’s growing quickly, it’s unique and hard to replicate. The higher the growth rate and the higher the profit margin, the more unusual the opportunity. If the entrepreneur can receive meaningful distributions without affecting the growth rate, the entrepreneur can derisk without selling ownership in the company and while the company quickly appreciates in value. That’s an amazing position to be in as an entrepreneur.
I think my friend makes a strong case for why entrepreneurs should maintain ownership of profitable high-growth companies. Having been an entrepreneur and having close friends who are founders, though, I can definitively say that everyone’s situation is different. Every entrepreneur must decide for himself or herself whether that advice works for their circumstances.
Founders Can Derisk without Selling the Company
A lot of entrepreneurs have a goal of selling their company. It makes sense when you think about it. They often take below-market or no salary for years. During the seven to ten years or so that it takes to scale a company, most of them transition to different life stages (marriage, family, home purchase). These and other factors can put immense pressure on an entrepreneur over a long period of time. The pressure can motivate them to carry on through tough times. It can also be a factor in setting a goal to sell.
When I talk with entrepreneurs, I like to understand the “why” behind their desire to sell in X years. With some digging, I often learn that what they really want is to derisk their financial situation. They decide to sell because it’s the only option they know of to get some liquidity. I define derisking as removing enough financial pressure to be comfortable—not to be in a position where they can do whatever they want without having to work. Maybe their home and their children’s educations are paid for and they have some savings. They’re not flying around in private jets to their multiple homes.
There are lots of options that allow entrepreneurs to derisk without selling the entire company. Secondary share purchases are one tool. Raising a round of capital through investors buying shares from employees or executives is common. Private equity and venture capitalists do these deals regularly. The founders can maintain a controlling majority ownership and continue to execute on their vision for the company. One founder friend likes this route because it “takes the edge off.” I know another founder who took this route so he could “swing for the fences” without worrying about his family. Because he knew that his family was comfortable, he felt good about growing more aggressively and making some bold bets.
If you’re trying to build a large company, know that there are ways to derisk during the journey that don’t require selling your company. Also, be mindful that most investors understand the desire for some security once enough scale is reached. Most will want to work with someone who’s focused on building something big, not ejecting at the first offer to sell the entire company.
Partnerships Aren’t Perfect
I’ve noticed a pattern in the lives of people I admire most in life. They tend to be members of great partnerships that contributed to their success. Co-founders . . . business partners . . . spouses. Being part of a team has allowed them to accomplish things they otherwise wouldn’t have. Because their strengths offset their partner’s weaknesses, and vice versa, they form a well-rounded team.
Almost universally, great partnerships go through rough patches. It happened to Bill Gates and Paul Allen. Such a time is a defining moment for the partnership, and how the partners work through it will determine whether their partnership becomes stronger or dies. The partners don’t see eye to eye, but if they make the effort to understand each other and resolve points of conflict in a respectful way, it will demonstrate commitment to the partnership and go a long way toward moving past the period of conflict.
I’m a huge fan of co-founders. I think startups increase their chances of success by having more than one founder. But it’s almost inevitable that the co-founders won’t always get along. If this happens to you, consider taking a step back to think carefully about how you want to resolve the rift. In fact, you might even consider planning for it in advance. Your approach will have a lasting impact on your partnership—not to mention your business and your life.
Investors May Value Your Industry Knowledge
I recently shared my thoughts on the value that investors offer aside from investing capital and the importance of founders building relationships with investors early. You want those relationships to be healthy, which I believe includes their being bidirectional. I discussed this in more depth with a founder and was asked how someone new to entrepreneurship can add value to a relationship with an experienced investor. It was a great question.
Founders often have deep knowledge in their space. They’re on the front lines, so they can spot trends and challenges before others are aware of them. They may notice that an early company is gaining traction before that becomes apparent to anyone outside the space. While it might not seem like it, all this industry knowledge can be valuable. Sharing it is a great way to add value to your relationships with investors.
Founders are constantly learning. (To build their company, they must.) Investors are too. They’re learning about new problems that they can help great founders solve. Helping investors (or anyone for that matter) learn about your space quickly can be a great way to build a bidirectional relationship.