Marcus Cent is a well-known tech investor and entrepreneur. He is currently working on iBooking.com and Performous.com. In this article, he expresses some key lessons he has learned from some major turbulence encountered over his 20+ years in the industry.
This is an article I’ve had lying in my head for quite some time. As I approach the 20th anniversary of the first company I founded, I’m all too aware of some of the critical errors I’ve made along the way. Whilst my experience is purely in the digital space, my story could be played out in any industry, in any country, and at any time. Read on if you’re an aspiring entrepreneur or already well established with one or more companies under your belt. Misfortune may lie just around the corner. I’d like to help you avoid making some of the mistakes that have tripped me up along the way.
There’s one specific type of entrepreneur that this story will benefit more than others. We all start a business for different reasons. Some of us are born to tread our own path, others stumble into self-employment. Regardless of the how’s and whys, all of us fall into certain broad categories. I’m the type that enjoys the thrills and challenges of the beginning. Startups are my thing. The earlier stage the better. I just love the variety of seeding an idea, creating a plan, playing with a new brand, constructing a product, and winning the early customers. Being able to perform a multitude of tasks with your own hand can be a tremendously satisfying experience. Other entrepreneurs are likely to sit at the other end of this spectrum. They may be the ideas people, those with a grand vision, an ability to excite and motivate others, perhaps raise some seed money, and drive a team to long term success. For that second group, they have a better chance of putting in place the support team that may guard them against some of the pitfalls that I’m about to discuss. In the first group, you will often find more creative types, perhaps even introverts who love their niche, product, or dream, much more than they love the prospect of success and all that comes with it.
What’s Your Background and Why Does it Matter?
It matters because entrepreneurs of the first type [those like me] may be drawn into creating a business because it allows them to explore a passion, free from the restrictions that answering to an employer may bring. Entrepreneurs in this category may not come with experience of all those essential business issues. The issues that are just as important as the creative skills that may have driven them into starting their own business in the first place. It is these individuals that are most at risk of falling victim to the circling sharks. The simple reason is that these people may be blind from the risk posed by investors, partners, and even employees, just waiting to take advantage. Learning what can go wrong is the first step to making sure you don’t fall into the traps.
How something very right can quickly go very wrong
Bringing it back to my own experience for a moment to illustrate a point, I have been involved in more startup businesses in 20 years than I might care to remember. Whether or not these businesses are still around today is not especially relevant. I’m happy to say most of them area. What I want to focus on are two situations that occurred almost 15 years apart. Both have common elements, although the circumstances were far from identical. In both cases, my downfall can be traced to the same thing. If you only read one line in this article let it be this one. Don’t leave anything to trust. Make sure you ALWAYS have a trusted lieutenant on your side. That may be more than one person and it should always include a lawyer or adviser with only YOUR interests at heart.
So let’s put some colour on these sentences. It’s really easy to say “always learn from your mistakes”. In practice it shouldn’t be that hard, but when you’re at the coalface of a new business, dealing with a million and one things, it’s less easy to remind yourself of past errors that may have previously tripped you up. While there are many geniuses that have become wildly successful when barely out of pyjamas, there’s little doubt that being youthful and inexperienced makes you more vulnerable to being eaten by a shark. That was a large part of my problem in the 1st of two business situations that cost me dear. It was 1999, and my web development agency had got off to an amazing start. We could do no wrong and everything seemed to be going our way. That is, except one thing, I was ill-equipped to deal with rapid growth. I was making the classic error of working in the business and not on the business. I was overworked, over-stressed, and so were all of my staff. There was too much to do and not enough time to do it. I was well out of the comfort zone I had found myself in when I was a sole operator. What did I do? I looked for help in the form of an older, wiser, grey-haired, investor who came in promising to help me take the business to the moon and the stars. Fast forward about 18 months – the business had grown, but not only was I hating the company I once loved, I was also made redundant [yes, from my own company], and found myself fighting a legal battle in a court of law. I went from a job I loved, 100% ownership in my own business, a bunch of awards, and almost universal respect from peers and employees, to the depths of despair. I ultimately lost everything I’d worked insanely hard to create.
How on earth did that happen I hear you say? I think my mistakes can be summed up by being too trusting. Believing what I was being told, not having that trusted ally on my side, and making it far too easy for the shark to take full advantage. That’s exactly what happened. He saw an opportunity to capture a successful business, and then to quickly, methodically, take full control. The precise detail of how that was done may make for another article, but the purpose of this one is not to reminisce on what could have been. It’s to highlight the traps, and offer practical steps on how not to get robbed, eaten, screwed over, or however you might choose to describe being on the receiving end of a very raw deal. My takeaways from that situation in list form, just so they are clear;
- Don’t jump into bed with a new business partner just because you may be facing some operational headwinds. There may be a better way to resolve problems – especially those good problems that come from being successful. Take your time and make sure you’re as comfortable as you can be, that your prospective new partner is someone you will get along with.
- Get your trusted advisers on side. Don’t hesitate to pay for good advice. It may well be the best investment you ever make. If you’re not an expert on deal-making, reading financial statements and balance sheets, get someone that does. Detail is everything. Get it all in writing and make sure you understand precisely what you’re getting into. Remember, when you give up equity in a business you’re moving from a situation of total control, to one where you may no longer be the boss. Your eyes may glaze over when someone puts a legal agreement in front of you. Never, ever, sign a document you don’t fully understand.
- Don’t give up all access and control of the financial side of your business. It may be all too easy to think that an incoming partner or investor is better placed to deal with the stuff you don’t like such as paying wages, handling expenses, agreeing deals with suppliers, but losing control of what happens with company finances can be fatal. Make sure your trusted ally is fully involved in company finances if it’s something you really don’t want to stay close to. It’s very easy for an investor or partner to start chipping away at authority that may previously have been with you.
- Be on your guard for the new partner or investor trying to remove or reduce your authority. A good example might be their recommending or introducing new staff at senior level that may be on their team and not yours. This can quickly lead to a situation where you find yourself pushed out of all positions of responsibility and authority. Your new partner or investor may also start recommending equity for new people who are on their side, and not yours. That can result in further weakening of your position.
Fast Forward – Sharked Again!
Close to 15 years down the track and I found myself reliving some of the nightmares of that first bad experience. Remember I said that it should be easy to learn from past mistakes? Well, as I said, that can be easy in theory but tricky in practice. Situation Number 2 has not fully played out yet, but the lessons are there and are easy enough to document. If I’d taken my own advice from the previous 4 bullet points I may not have paid another heavy price. With Number 2 the situation was sufficiently different to be able to modify the advice, but it’s important to note that the same key elements of trust, allies, and keeping your wits about you, are the determining factors that can keep you safe.
Although this piece is about business, it’s just as much about life and how different human values, ethics, and personalities can influence outcomes. In this situation, a merger of two companies [one being mine], created a larger business, where two groups of people chose to come together for the greater good. That’s not an uncommon situation, but it’s one where the entrepreneur must be equally on guard. They must be ready to accept reduced control, and open to working with people who may have followed a very different path. Where multiple entrepreneurs come together, all with a different stake, position and role, in a new entity, all sorts of new challenges can emerge. Inevitably, the culture will change. Some will thrive, and some will move on. That’s business. One thing that we should all learn over time, is what we’re good at and what we’re not good at. Certainly, people can change, grow, adapt, and look for new challenges, but at our core, we tend to know where we’re comfortable, what we like and what we don’t like. I would caution against trying to force yourself to do something you don’t enjoy, just because it feels like it might be a fresh, new challenge. In this case, I accepted the role of CEO in the enlarged company. That came, partly be default, as a result of my shareholding, being 100% owner of the business I was bringing to the merger, and being the natural choice among the other individuals that were key players at the time.
Where did this one go astray?
At first it all seemed good. Business was booming. Targets were being broken. Process and discipline were being brought to a company that had previously been two disparate, haphazard and unstructured organisations. I was enjoying the new role, new environment, new colleagues. What I started to realize was that the CEO role was not a good fit for me. I was much more comfortable dealing in the detail of our business model than in dealing with employment issues, growth forecasting, pouring over finances, and organizing internal get-togethers. Although it’s another complicated and long-running saga, the upshot of the story is that it all started to go wrong for me when I offered the CEO role to the then, finance director. This was an individual with a significant shareholding, 15 years older than me, with a strong track record in a completely unrelated business. That last part should ring the alarm bells. I was handing over control to someone that might have been wonderful in a different industry, but didn’t have the first clue about the activity of our new business. What started as tension, then became stress, arguments, distrust, and ultimately, much worse. Despite what might be called creative differences, I still had a fundamental trust in the colleague I had appointed as CEO. Once again, I’d made the mistake of leaving too much to trust, failed to appoint an ally who could monitor what was happening from the outside, and disregarded warning signs that were only apparent after it was far too late. I had ceded control to an individual who was a ruthless, untrustworthy shark. As in the earlier example, I had allowed myself to work in the business, not on the business. I had allowed the shark to chip away at my authority, and my shareholding at the same time. He managed to create an oppressive and harmful environment where I was being pushed inch by inch out the door. Again, I found myself telling my tale to an expensive bunch of lawyers who shook their heads slowly, while sharpening their pencils.
As tempting as it is to document how I went from a 7 figure income to zero, as a direct result of the shark’s deception, I’ll need to save that for another time. To summarize the lessons from this situation, and looking for both similarities and differences between two situations separated by a continent and almost 15 years;
- Recognize what you’re good at and what you enjoy. Being an entrepreneur is supposed to offer you freedom to do what you love. Don’t force yourself into a role that doesn’t suit your skills or personality.
- If you are in a position of control, either because you’re the CEO, or because you have a controlling shareholding, recognize the value of what you have, and think very carefully before you give it away. Never make a life-changing decision on a whim, or without putting in adequate controls.
- If your business is being self-funded, make sure you have a water-tight agreement in place that covers your finances. Whether you have loaned your company money, have it using a personal credit card, or any other situation that can impact you personally, make sure your trusted adviser has rubber-stamped the agreements. Never, ever lend personal money without a legally binding agreement.
- Be on your guard for signs that a colleague may be trying to increase their equity or control using underhand or disingenuous tactics. I repeat again – do not ever sign a document without having a trusted ally explain exactly how it can impact you.
- In a business with multiple equity holders, know who your friends are. It’s all too easy for power struggles to play out and for factions to emerge that can be driven by one or more shareholders with only personal interest at heart.
- While I don’t want to suggest that no-one can be trusted, be extremely careful doing anything on trust. You’ll sleep much better knowing a properly written legal agreement is governing your affairs. I’ve had to learn this the hard way.
So there it is. My advice for any entrepreneurs who may find themselves having to make decisions about taking on partners or investors. Above all else, choose your partners wisely, but always recognize that relationships and situations change more often than they stand still. A friend today can be an enemy tomorrow. There are more sharks out there than you might realize. Swim wisely my friends.