25th June, 2017

Old entrepreneurial hands have all had their fingers burnt

Every ambitious entrepreneur experiences various baptisms of fire. A new business venture is an unpredictable journey and big challenges are bound to arise. These are the gruelling rites of passage that risk-takers undergo as they navigate towards ultimate success. Typically founders don’t listen to advice much, so they generally suffer these upheavals first-hand. Some of these ordeals are avoidable and self-inflicted, some perhaps not. But, as they say, the survivors emerge stronger from the hardship.

I generally recommend that founders seek to combine their resources with a collaborator. Falling out with your business partner, however, can be financially and emotionally damaging — and such breakdowns are common.

When these unions rupture, resentments and even litigation can follow. Such relationships are a little like marriages, so if they disintegrate (as with divorce proceedings) the collateral wreckage can be considerable.

Early in my career I never had formal contracts with partners, but life has taught me that such written agreements are mostly a sound idea. They document what each side will contribute, their separate roles and rewards, and how any conflict might be resolved.

Partnerships split for many reasons — envy, illness, diverging priorities, insolvency, family crisis, fraud, retirement, recession — but in all these eventualities, negotiation, mediation and possibly arbitration are likely to deliver a better result than a vicious dispute. Being dispassionate is not easy when severing a long-term alliance, but such an approach will always serve both parties much better than a feud.

Another event that acts as a wake-up call is employee dishonesty. The first time a trusted member of staff steals or lies in a serious way, it is always a shock. After a betrayal like that, you can fall into the trap of distrusting everyone and wanting revenge.

Both such reactions are destructive. Better to move on and learn from the mistakes to prevent a recurrence — through improved systems, targeted scrutiny, thorough referencing and intelligent supervision.

There will always be the odd crook, but most people are above board. After all, paranoid bosses rarely do well: every business of scale must be able to rely on its people. It is said that extreme cases make bad law: by the same token, do not judge the majority by the wicked behaviour of the few.

A competitor launching an obviously superior product to yours is a defining moment. Believe me, it always happens. The normal response is denial, and then a search for excuses. But the supreme benefit for society of markets is that there will always be better products, since consumers have choice, and innovation is rewarded — so rivals will be perpetually seeking to supplant your goods with something better. This is a salient fact of business life, and any decent entrepreneur should attempt to stay ahead of the pack by constantly ensuring their offering evolves.

Possibly the ultimate baptism of fire is when the bank calls in a loan. This has happened to me: sometimes I’ve found replacement capital; once in a blue moon I’ve won a stay of execution; occasionally the company has failed. By its very nature capitalism is a profit-and-loss activity, and things go wrong. Despite this, lenders expect to get repaid in full and will not sit idly by if they think their principal is threatened.

At one company we spent almost every board meeting for seven years discussing how to avoid breaching bank covenants while trading gradually recovered. It was a draining and fairly unproductive process, even if we did keep the bank whole. It made me extra keen to avoid repeating such torment.

Early in my career, while running a recruitment agency, I can recall how the bankruptcy of an important customer left me feeling almost sick with fear.

The bad debt promised to kill us too. We had ignored the warnings from credit insurers and accepted bogus reassurances from the people who owed us money. Our company managed to survive, but the scar from that nightmare has made me avoid becoming over-dependent on a single customer, and become more disciplined about collecting overdue receivables.

There may be plenty more such trials in any entrepreneur’s career — disasters such as fire, flood or cyber-attack, strikes, sickness, tax investigations and so forth. But building a company is not the right choice for anyone seeking a quiet life.

Instead, entrepreneurship is an existence of limitless possibilities, punctured by frequent hazards and a few disasters. For those with an adventurous spirit, an urge for independence and freedom, there can be no substitute.