As a 21-year old college student at Wharton, the business school of the University of Pennsylvania, I embraced the ideals of entrepreneurship so whole-heartedly I started my own company. My classmates and I managed the company for two and a half years and it became our full time job after graduation. We wrote a business plan and believed we had a unique concept, a strong management team, and a viable “business model.”
Unfortunately, despite some initial success, my business eventually shut down. Our fate isn’t surprising when you consider the challenges faced by entrepreneurs starting new companies. Like many entrepreneurs, we lost a lot of money invested by friends and family. For two years, we lived in our offices, sleeping on the floors, working day and night with no personal lives. In the end it seemed as if those sacrifices had been for nothing.
I think the failure of my company can be attributed to inadequate leadership among its founders. After years of reflection, I’ve asked myself to define what being a “leader” means to me. My definition follows:
A Leader is someone with sound judgment, integrity, and a sense of responsibility for others. A leader motivates others towards common goals, provides hope and inspiration in times of uncertainty, and helps the organization to adapt to an ever-changing environment.
While some degree of technical competence is necessary, these attributes mostly stem from increased self-awareness. It was Sun Tzu who said, “Know your enemy and yourself and you will win 100 battles; know the enemy and not yourself and you will lose every time.” Unfortunately, as a first time entrepreneur, there was a lot about myself I didn’t know. While a lack of self-knowledge isn’t so unusual for someone in his early twenties, it’s a huge problem for an entrepreneur.
I have always found that a good acronym helps me to remember things. For example, “ROYGBIV” and “Please Excuse My Dear Aunt Sally” have locked the colors of the rainbow and the mathematical orders of operation into my brain since I was a high school student. As I was writing this manuscript, I wanted to create another mnemonic to help me remember the mistakes I made so I don’t repeat them in the future.
I have categorized these entrepreneurial mistakes into five elements (the “E CODE”). These five areas are as follows:
Outlook (or Attitude)
As a college student, I heard stories how Michael Dell started his company from his college dorm room, and how Bill Gates dropped out of Harvard to start Microsoft, and how many of the wealthy benefactors of my university had been entrepreneurs. While I couldn’t possibly know the hardships and brushes with failure these men had, I latched on to their larger than life images of “success.” After all, I wanted to believe I could accomplish anything with my future. I wanted to believe in the unlimited potential of entrepreneurship.
In my mind’s eye, these tales were all that came close to meeting the “extraordinary expectations” I had of life. I was convinced that entrepreneurship was the single greatest wealth-building opportunity. At 21 years of age, I wanted to make my own decisions, to be my own boss, and to have a financial stake in the outcome of my work. At the same time, I didn’t want to spend 10 or 20 years slowly climbing the corporate ladder. By starting my business, growing it quickly, and selling it, I believed I could have my cake and eat it too.
It was Bill Walsh, former head coach of the San Francisco 49ers, who remarked that “ego” is a misused word in the United States. He said, “We Americans throw that around, using that one word to cover a broad spectrum of meanings: self-confidence, self-assurance, and assertiveness… But there is another side that can wreck a team…That is being distracted by your own importance… [It] ends up interfering with the real goal of any group .”
As a young entrepreneur, I considered it my right to serve my own self-interest. Since I was “taking the risk,” I believed I was entitled to the rewards. Therefore, I was very controlling about who I allowed to get involved in my business. Even if recruiting a larger team added benefits, I sometimes hesitated. After all, I viewed it as “my company,” so I didn’t want to share the upside with others unless it was absolutely necessary. If I had checked my ego, I would have been more likely to recognize my limitations and concentrate on assembling the right team of people, even if it meant slowing things down.
Unfortunately, my exorbitant expectations of entrepreneurship were difficult to meet. Soon, I became embarrassed to show people I worked in a small office with only a handful of employees. I wanted to live up to my lofty ideal of a “real entrepreneur.” So, I rushed to rent larger office space and expand my business prematurely. When the image I had in my head failed to live up to reality, I panicked. Why? Because I was far more excited to chase a “rags to riches” fairy tale than I was to hunker down and slowly build a business over a long period of time. I wanted results in a hurry, but it wasn’t going to happen that way. It was time for Peter Pan to grow up.
At the end of the day, an entrepreneur has the responsibility of stewarding his company and its many stakeholders, not just himself. There’s no room for large egos, because they lead to bad decisions. Entrepreneurship is not so different from other career paths as many of us would like to believe. It still takes many years to build a reputation and a strong client base. It still requires the founder to start at the bottom. If anything, it’s less glamorous, because there are fewer people around to help and a lot less resources at our disposal.
2. Corporate Governance
My partners and I had little corporate governance and no written policies or procedures. Oftentimes, we lacked the independent perspective necessary to critically evaluate our thinking. “GroupThink” was rampant, whereby everyone was entranced by the same views, so no one was thinking independently.
Although we didn’t think we needed advice, my company would have benefited from including independent directors on our Board. It would’ve forced us to share our assumptions with outside professionals. Inevitably, we would’ve had to test our theories, identify potential risks, and slow down our growth plans. At the very least, independent directors would have forced a system of checks and balances.
Although no entrepreneur wants to create bureaucracy, having some structure in place is essential to a healthy organization. Unfortunately, my partners and I thought the primary value of having independent directors was to tap into their business contacts. We weren’t concerned about corporate governance. Instead, we wanted directors to help us get financing or drum up new business. When it became difficult for us to recruit these “well-connected” people, we gave up looking.
As founders, we couldn’t afford to pay ourselves high salaries, so we were financially dependent on the value of our stock. While our ownership stakes were nearly worthless at the time, we assured ourselves that “equity” was the best motivational tool. Unfortunately, being solely dependent on the value of our shares made us more inclined to embrace riskier strategies. After all, our stock could never be worth less than zero. In that sense, it resembled a “call option,” so adding volatility to our business was a way to boost our equity value.
Ultimately, I grew so concerned with protecting my ownership that I turned away venture capital. Rather than selling a large chunk of my equity, I preferred to embrace a highly leveraged operating strategy. Now, I realize that anyone can bet his entire company on a risky financing strategy. The real whiz can capitalize his business in a way that doesn’t “sink the boat” if things take an unexpected turn for the worst.
I also realize that my company’s corporate culture lacked discipline. My partners and I were generally unkempt – we showered everyday at the gym and we slept on the floor of our office. We didn’t keep regular business hours and we had no planned schedules. As a result, the environment we created lacked professionalism. Unfortunately, our lack of discipline manifested itself in a negative way whenever we faced stressful situations.
Tense arguments between founders would turn into screaming matches. We became hotheaded and it spread into the way we managed our business. We were prone to knee-jerk reactions and quick changes of strategy. Although we viewed our nimbleness as a competitive advantage, we lacked the emotional intelligence to realize when we were behaving irrationally. Unfortunately, we lacked the balance in our culture to keep us grounded.
As founders, it was our job to mold the company’s values after our own beliefs. Unfortunately, we listed corporate values in our business plan, but they were just words on paper. Now I realize that corporate values are not pieces of PR fluff that companies put on their websites to appease investors. When these values are held deeply by managers, they help in making difficult decisions.
I think of the nationwide Tylenol recall by Johnson & Johnson whereby 7 people in the Chicago area died in 1982 because their Extra-Strength Tylenol had been laced with cyanide. J&J made a $100 million decision to do a nationwide recall and take its products off the shelves. J&J wanted to send a strong message to its stakeholders that customer safety came before profits. No doubt, it was a difficult decision, but senior management relied on the company’s corporate values to guide them through the crisis. At the end of the day, shared values are a much more reliable way to control behavior in unpredictable situations than are extrinsic controls.
Undoubtedly, part of the allure of self-employment had been the feeling of freedom from not having a boss to which I was accountable. However, the reality was that such freedom didn’t exist, because I was still accountable to my stakeholders. I couldn’t just behave however I wanted. Therefore, I needed to be willing to put checks and balances on my activities for the good of my company. That meant being clear about my company’s values, creating more structure in my organization, and including independent directors on our Board. In short, I needed to take corporate governance a lot more seriously and make it just as important of a goal as my quest for profits.
3. Outlook (or Attitude)
After becoming an entrepreneur, I often compared my life with those of friends who accepted the types of jobs I turned away. While I slept on the floor of my office, ate the cheapest thing on the menu, and was buried beneath a mountain of credit card debt, my peers had apartments in the city, corporate expense accounts, and were improving their credentials in the job market. I began to fear my friends were developing better resumes than I was, while I worked twice as hard for a fraction of the pay.
Comparing myself to others created a lot of unrest, because I was a competitive person and I didn’t want to feel like I was “falling behind.” Although I think it’s natural for entrepreneurs to contend with self-doubt, these emotions only impaired my judgment. They made me impatient, because I was scared of “wasting” years of my life as an entrepreneur, but never becoming “successful.”
After the initial excitement of writing a business plan and setting up my company, I was almost depressed to be sitting in my small office handing out debit cards to college students. I didn’t really have an appreciation for the work. In my mind, I had earned my degree from Wharton to become the manager of a tiny debit card office, but I probably didn’t need to go to college to do that. It made me feel as if I wasn’t living up to my “potential.” Therefore, I wanted to put my head down and focus on growing my business faster.
It sounds ridiculous, but a founder must train himself to find meaning in his daily toils, not just in the dream of his future victory. Otherwise, he’ll feel powerless every time the business takes an unexpected turn and leaves his prospects worse off than before. If a founder feels that he is powerless and at the whim of fate, his psyche can easily become easily damaged by the emotional roller coaster of potential failure and success. The stress can lead him to make bad decisions.
Experiencing failure is an inevitable part of success. Therefore, an entrepreneur has to view adversity as a necessary step that helps him to learn, to grow, and to become a stronger leader. In that regard, challenges and struggles can be hidden blessings, not curses. Entrepreneurs need to observe someone like Nelson Mandella, who survived many years of abuse and imprisonment, but never allowed the situation or his captors to break him. Rather, he used adversity as a tool to transform himself and grow stronger.
There are lots of stories of prisoners of war and concentration camp victims who use their experiences to their advantage. As Warren Bennis and Robert Thomas noted in their book, Geeks & Geezers, leaders often use periods of difficulty as opportunities for reflection that allow them to look deeper into themselves and make discoveries about their own character. It’s ironic, but without moments of desperation, many leaders would never have the opportunity to find their inner strength.
By looking at hardships as opportunities to conquer ego, an entrepreneur can mitigate the emotional swings. As Carlos Castaneda observed with his concept of the “petty tyrant,” life is filled with lots of petty obstacles and challenges, so we might as well learn to use them to our advantage and not allow them to drag us down. In fact, obstacles and hardship can teach entrepreneurs to keep a sense of humor about their plight. It can teach founders to laugh at life’s surprises, both good and bad.
In his book, Man’s Search for Meaning, Victor Frankl describes how life demands things from us, not the other way around. Therefore, we should condition ourselves to find meaning in answering life’s daily callings and use them as opportunities to live with dignity and find meaning in every moment. Learning to enjoy the unpredictability of life can enable an entrepreneur to appreciate the path chosen rather than stress about the uncertainties of future outcomes.
It was John Keats who said the most important attribute of a leader is the ability to be in “uncertainties, mysteries, doubts, without any irritable reaching after fact and reason.” I wish I had a better sense of humor when I was an entrepreneur. Not only would I have had more fun, but I would have been less likely to feel sorry for myself when my company faced challenges. Instead of wasting my energy worrying, I would have been poking fun at my anxieties, strengthening my character, and living in the present. This outlook would have kept me more even keeled and better able to make good decisions.
4. Deeper Meaning
It was Benjamin Disraeli who said, “The secret of success is a constancy of purpose.” I believe an entrepreneur must choose a “cause” to which he’s willing to devote himself, even in the face of failure. It should be a broader purpose that’s worth the fight regardless of the outcome. After all, of the approximately 1.8 million new businesses incorporated every year in the United States, less than a few thousand receive venture funding and a fraction of those ever go public. Clearly, there are no guarantees of success, so a founder’s reasons for choosing his journey have to be about more than the allure of financial gains.
In fact, there is so much volatility embedded in entrepreneurship that it can be difficult for founders to stay motivated by the prospects of riches. Too often the company will be in peril and the founder will be forced to reinvent aspects of the business. If the entrepreneur is only motivated by financial success, then he’ll probably lack the necessary staying power. In fact, most new ventures would probably never get started if a founder’s motivations were based purely on the risk-adjusted economic merits of the project.
At the end of the day, I believe the motivation to pursue a business has to come from a genuine commitment to serving a cause that’s bigger than ourselves. There has to be a responsibility we feel to serve others in a certain way. From my experiences I learned that even the best business plan can become a burden if you don’t believe in what you are doing. Our motivation can’t just be about benefiting ourselves, because when the company’s prospects diminish, most of us will be inclined to quit and do something else.
History is filled with tales of people risking their lives for causes in which they believe. By comparison, very little is written about mercenaries performing such acts of courage. Those who perform the greatest feats do it for reasons which hold deeper meaning to them, not just for money and accolades. Therefore, an entrepreneur should choose a purpose for his business that comes from someplace deep inside of him. Unfortunately, that was not something I did. Rather, I was simply trying to make money, so I could “cash out” and move on to something else.
That’s why I believe an entrepreneur with a long-term dedication will ultimately reap the benefits of his commitment. The right opportunity will eventually present itself. The long-term players will weather the storms and be in better positions to take advantage of the new opportunities when the clouds finally part.
There is an interesting poem from the Tao Te Ching that I have come to appreciate since my experiences as an entrepreneur. It follows:
“With a wall all around
A clay bowl is molded;
But the use of the bowl
Will depend on the part
Of the bowl that is void.
Cut out windows and doors
In the house as you build;
But the use of the house
Will depend on the space
In the walls that is void.
So advantage is had
From whatever is there;
But usefulness arises
From whatever is not.
–The Tao Te Ching
Like the poem from the Tao Te Ching, entrepreneurs must see the importance of emptiness, which requires a different way of looking at the world. While emptiness can be uncertainty, it can also represent opportunity.
As an entrepreneur assembles the pieces of his business into place, there will inevitably come a time when the viability of his company is in doubt. New markets are difficult to break into, customer needs are always changing, and the threat of new competition always seems to be lurking about. Sometimes, it’s hard to look into the unknown and see opportunity. It’s easy to doubt ourselves and be scared.
As a 22-year old entrepreneur, I looked into the unknown and I saw only two possibilities. I saw the possibility for personal success or failure. Working at my desk until the early hours of the morning, my mind’s eye was able to craft detailed scenarios for each. Either sleeping on the office floor was going to be part of a story I would tell guests on my yacht one day or I was wasting my potential with a business that would never succeed.
Unfortunately, I didn’t understand there was more an entrepreneur could see in his unknown future if he focused on something other than his “personal success.” He might also see the opportunity to fight for a cause that inspires him, regardless if he wins or loses. Whether he becomes rich or not, the future represents an opportunity to make a difference in the world.
That’s why the true “fire in the belly” of an entrepreneur should come from a vision that the future, while uncertain, holds possibilities for each of us to make an impact on the lives of others. To have maximum power, our vision shouldn’t be just about our own success or failure. It’s not about personal greed. To be truly inspirational, we need to see how our efforts will benefit the lives of others. By sharing that vision, we’ll be able to influence those around us to join our cause.
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