How to crash a startup? The free fall of a young entrepreneur.
A year and a half from now, I was working as an entry-level lawyer in a magic circle firm with all the benefits it entails and a great set of colleagues. Graduated from law and from a business school abroad, I’d see this position as the best exposed to my studies, law and finance.
However sometimes my mind would take me far away and make me rethink my choice. As a son of an entrepreneur, I always dreamed to become one myself and follow my father’s footsteps. His business tails were part of the landscape of my childhood. I also showed some early initiatives — as a student I launched a platform to exchange books and worked on a project to start an outsourcing business with programmers in India.
I couldn’t help but think that I could make more of my career than spending my life in a modern law firm, where the client is king and the lawyer often little more than a paper pusher. I would be labouring long hours on repetitive and administrative work. Despite smart people, hands on training and interesting cross border transactions, it took me a couple of years to come to a conclusion: I was learning continuously, but I was not passionate about my job.
After leaving this law firm in good terms, I launched a web platform in the recruitment industry with two investors: the first one would provide development, the second one would provide financial benefits and I would provide my work by managing day to day operations.
A year later, I found myself with a company out of cash and forced to stop our operations.
This is my story and I hope it may fill you with some wisdom and help some other fellow entrepreneurs to avoid making the same mistakes.
1. Know your partners:
As a first rule, I will not criticize my ex-partners or put the blame on them. I am very grateful to my investors, without them this project could not have started at the first place; they are truly the people who offered me the opportunity in the first place. Moreover, I am responsible for everything that has (ever) happened to me — the positive and the negative. If you start a venture this is how you should think too.
If this first recommendation may seem very basic, my experience may remind you how important it is. The idea here is to set out some criteria on which you should choose your partners.
A. Know what amount of operational input your shareholders will provide to your company.
Why are they there? To help you with the daily management? To give you counsel? To provide the capital the venture needs? To impose their strategy? In my case, both my fellow shareholders already had their own businesses. One had extensive experience in a related industry. I hoped to be provided with regular advice, client databases and marketing channels to help get the business off the ground.
I realised a month or so in the job that I was to be the only one involved in day to day operation.
My fellow shareholders saw their role as investors. They were only interested in talking to me for updates so that I could report to them with the company’s performances
My advice is to define thoroughly every shareholder’s role, involvement and input from the outset, write it on paper.
B. Make sure, you and your partner have the same vision
What are you looking for in your early stages: developing a qualitative product, raising funds, creating a large traffic on your platform or making money?
We soon realized we had different visions, anticipating direct return after one year, create a good product, raise large amount of money and get lot of traffic on the platform first. Always talk about the company ‘objectives in the short and long term, write it on paper.
C. Forecast paybacks on “over-contributions”
Forecast how a partner exceeding is initial contribution will be rewarded. In our case, our developer (and also shareholder) wanted to get paid for any extra-effort he had to put in. Imagine an advanced platform that requires change on a constant basis, a company that makes no money yet and a shareholder who wants to bill his time and to get paid straight away by the company.
Try to forecast every single situation where one of your partner could claim for more, and ask yourself whether it would be acceptable — write it on paper.
2. The startup trap, your value is sales:
Being an entrepreneur is the fashion nowadays and for the Y and Z generation it has a “cool” status.
You should be aware that “startups” lifestyle culture has become somewhat of an industry. You can now pay to receive all kind of awards, networking events, startup coachs, etc
The lifestyle of an entrepreneur may to some seem very attractive, since you may be wearing jeans and t-shirts, come relaxed to the office, take holidays to stimulate your creativity and so on. This is all fluff.
I have three pieces of advice :
- Don’t waste your time with things that do not help your business grow such as useless summits and networking events
Check out a very good article from Arthur Attwell on this. As an entrepreneur, you should struggle and fight to make your company earning market shares, nothing else.
- The overriding objective of a company is to make money i.e. generate revenue- period.
Users, business angels investing in your company, and any other value creation through qualitative development or design should lead to that same objective. I think most tech entrepreneurs (and they are many) forget this simple objective and get lost in the rhetoric of start up culture. I once went to a startup pitch session where a future founder was asked by a business angel whether his venture had precedent in other countries. He said a similar company in the UK had just raised EUR 6 millions. I was amazed. He did not mention the earnings, the sales or any other indicator of financial performance. As if the final destiny of a company was to raise funds. Lot of startups manage to raise large funds but they are not viable nonetheless, we have already good examples in the Belgian landscape.
- Entrepreneurs nowadays tend to choose web based venture they develop from scratch
However, 99% of them are doomed to fail. You may be ok with it but don’t forget it. Truth is, most of the successful young entrepreneur I know are restaurant owners, or people making material products. Is probably better to start off with something you cansell before you even incorporate. That way you know you’re basing your venture on something that actually gets money and auto-finances its growth. I learned that at my own cost.
In conclusion, I draw two main points here.
First, sales are everything for a company in the long run, your early stage focus, model and time devotion should keep that in mind. I am very thankful to my shareholders to have reminded me that.
Secondly, learning to sell (i.e. go and pitch your product to someone who does not know who the heck you are and does not care about you or your product at the first point) is most probably the best skill I developed during my experience and the one you will need the most.
3. Beware of the “social hit”:
By becoming an entrepreneur, you will have to accept some social facts.
A. Some people (trust me when I say this) believe being an entrepreneur is pretty much the same as being jobless or lazy.
There is probably truth here for some. Many may be doing it by default, without being serious and to avoid hard corporate graft.
B. Be prepared for all type of critiques and remarks
“Entrepreneur? Oh ok.”, — “Which kind of “”corporation”” are you building?”- “I can’t believe your left “SuPeRPaIdFiRm” to do “that”(meaning your beloved startup company) full time!”
Be prepared to overcome this kind of ironic statements, especially when you were coming from a well-known firm that gives you a certain intellectual status to your friendship and network. People may not understand your choices, but you do, you are the only one who knows why you made the big jump.
C. Don’t underestimate the effect of not having a salary
Another aspect you have to beware of is your personal stipend money and personal expenses. Most entrepreneurs do not pay themselves at the beginning and that’s ok. But is it really? This applies in particular to the people who were working as employees before, It does not seem controversial to say that when you’re about to reach 30 most people are accustomed to their lifestyle (e.g.: paying a rent, using a car, going to the restaurant with friends, etc ) Trust me, doing it without for a year or more is really hard. Dependency on parents against your sense of hard won independence or having to constantly justifying expenses to your sponsor is not so easy.
D. The end of your “healthy scheduled” lifestyle
Finally, you now have that awesome job where there are no schedules. The old routine of sleeping, eating, sport slots, nights out during weekends, etc. is over. You’ll find yourself taking some free time during the week and working during the weekend. Structuring and balancing your life may actually become harder. It is up to you to be self-disciplined.
In conclusion, despite trendy start-up culture there is also a social price to be paid.
4. Don’t be tempted by a “reverse” business plan:
After a talk with my accountant, I realized I may had made a common mistake people do when they draft their business plan. It is tempting to compute all the costs your business will have to meet and, then make a sales forecast. Guess what — by doing so, you’ll tend to inflate the revenue due to confirmation bias. Forecast revenue first and then estimate the costs. Check then your revenues is higher than the cost. Make sure your project is viable and that it all makes sense.
5. Love the industry you’re in:
This section stands mostly for people who want to undertake a platform or any other tech app. Developing a company, tech or otherwise, means finding a market share in an established industry or sector. You simply cannot stay aloof from the industry nitty gritty. In my case, that industry was recruitment and I had to deal closely with all its actors. It wasn’t quite for me.
You should love the industry you’re getting into because you’re going to spend a lot of time dealing with it. You also will naturally have to develop an expertise in the industry and go to the front line to deal with its major actors.
6. When to stop: resilience vs. ego
The heart of an entrepreneur lies in his resilience they say. The most successful people went through multiple failures, unexpected issues and had to believe in what they created to succeed. Does that mean you should unconditionally continue what you started? It also takes courage to unplug the machine…
Here are a couple of indicators that should, according to me, be taken separately but rather together may lead to the situation where you should consider “killing your baby”.
- You had a deadline and targets are clearly not met;
- You feel the market does not need nor perceive your service as useful as you thought, it would be so even when you adapted your product several times;
- You realize you’re not particularly excited about the industry your company is in and do not wish to spend your entire life in it;
- Your product struggles to satisfy clients;
- Your relationship with your shareholders is tense and shows no signs of improving;
- You realize the only way to make the situation better is a large capital intake and even then you’re not sure at all it will work…
- You’re not having fun anymore.
In my case it was all of the above. Most importantly of all, with all the data I gathered from that first year, I had reached a point: risk wasn’t worth the reward anymore.
After a week or two of troubled nights, I realized that with new investment it would take me at best a few years to generate sizeable revenue. Assuming I managed to get the investments, I would have had to find and agreement on a salary that would be far below to what I previously earned for quite a time…
7. What do you lose?
This is a hard one. My belief is that you should take risks and live life to the fullest. However, you should always be ready to loose. Forecast and prepare for the worst case scenario and make sure it will not have disastrous consequence on your entire life. Borrow money, time or support from others if you need to, but watch the payback. In short: take a risk — but be stoical about the consequences.
I did not go through a bankruptcy proceeding, if I have heard it can be a traumatic experience — I am mostly happy I did not have to spend several extra-months going to court and in heavy administrative procedure for a business I decided not to go further with.
8. A stepping stone to a better role
Finally, a note on what happened to me. I quickly got a nice offer as an intra-preneur for a major media group in Belgium. The team and the job content are very promising, I get to keep a good dose of independence, I also keep a hand on my law books since I am also assigned to law matters from time to times and ice on the cake a have large exposure to the CEO .
My entrepreneurial experience resulted in the loss of one year of my life, a few thousand euros, and pride, a lot of pride… Would I do it again? Yes of course!
Reading back this article, I sometimes wonder “did I actually lose anything at all?”.
I would like to thank my startup coach Francois Lagae for helping me in this adventure, my parents who have always give me an unconditional support and my friend Simon Lerner who assisted me with the drafting of this article.