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If you are lucky you will have mentors that have done well in their own business and can help you navigate the path to success. If you are really lucky these people will be in your industry and will add more than just anecdotal support for your decisions. Then there are the extraordinarily lucky few who will have a mentor that will change the way they think about business forever. Several years ago I came across such a mentor. In a series of chance connections I came face-to-face with a billionaire that was ready to share his wealth of experience. In less than 2 hours this person was able to change almost everything I knew about business. Even the most fundamental ideas about how I thought businesses work would be set on their head.
My partner and I had been working together in an online ad sales company that was over capitalized and growing mostly because of the hype surrounding the Internet. He was my boss and I was selling ad space. We quickly realized that we would be having more fun and making loads more cash if we were running our own business outside of the corporate clutches we were in. Once we made the decision to leave, our education began. In a frenzied period of deal making and late nights over our laptops we were able to attract the attention of a very wealthy investor. He invited us to meet him and some of his lieutenants in his hotel suite with instructions to “leave behind any business plans and bring just your heads”.
Although the first meeting was no more than a couple of hours the time seemed to accelerate past us. The meeting was basically a series of well-considered questions aimed at my partner and I. What was surprising though was that these questions were very simple and quite basic in nature. We had been expecting some tough questions about corporate financing and international arbitrage; instead we were answering questions about whom we were and what we thought we did to help the company better. Over the next few months the relationship became financial and we struck a deal with this investor. The deal was done but the questions kept coming.
The most interesting and benign question was asked of us almost once a week on the phone and at every face-to-face meeting. Without fail I would get a call from our new investor that would start with the question “What do you do?” At first I thought this was a joke and played along by describing the company and what we did for our clients. As time drew on it occurred to me that the question was a loaded one and that my answers were not getting to the heart of the matter. Eventually I came around and asked our billionaire investor “You keep asking that question and I know you are not stupid so it can’t be that you don’t know the answer. What’s the point of asking the question?” He chuckled as he explained, “I ask it all the time because it’s the best question to get a sense of how focused people in the business are.” My silence prompted him to continue, “You see, if someone can’t answer that question confidently and in fewer than ten words they probably don’t understand what’s the real value of their service or product.”
To test how true this might be try asking yourself that question and giving the answer in ten words or less. Do you feel clear about your response or do you feel confused? The next time you get the opportunity to ask the question of someone else watch carefully how he or she answers the question. Do you need to sit down and take a break after their long-winded explanation or do you get it immediately? It’s obvious to me now that if you need a whiteboard, a PowerPoint presentation and forty-five minutes to sell your product you’re in deep trouble.
Over the period that we were in contact there were many more questions. Each question has the ability to cut directly to the problem and make sense of complex situations. Here is a list of the questions that kept on coming up.
1. Who will be involved? What are the reputations, integrity and potential of the people involved? Will these people set the company up for success or failure? The key here is to make sure that you not only get bright people with lots of energy and passion but also be sure to get a group that together is ten times the sum of it’s parts. You might have the smartest people on your team but if there is no chemistry between them nothing will get done correctly.
2. Is this a people thing or an idea thing? If you run into problems evaluate whether they are caused by people or by the idea that they are working towards. Good people can turn a bad idea into a good idea but bad people almost never change bad ideas into good ideas. Even the most well considered business ideas might turn out to be flawed but it’s easier to manage the obstacles when you have good people.
3. Are they the same people that will ultimately run the company?Starting a business and running a business for the long-term can be compared to sprinters and long-distance runners. Not everybody can be an entrepreneur and a long haul expert. If you start a company be prepared to step down or move positions when the time is right. It’s common knowledge amongst venture capitalists that most start-ups never mature beyond the first few years because the original leadership gets in their own way.
4. How much money will you need before you make a profit? Oh, and you can cut the forecast bullshit.If you plan to finance your company with other peoples money you had better be very honest with them. Expectation management is the key to all successful relationships and its never more true than between a business owner and the investors they bring on board. Forecasts are nothing more than a really good guesses so be cautious when you present your plans to the people who will finance your company. Whatever you think it will cost, double that and you might just make it before the money runs out.
5. Do you really need a chief financial officer or can you get away with a good accountant? Generally, the biggest expense in a new company is the payroll. In the beginning do you really need to have the big guns doing basic work? If you can outsource non-strategic roles until there is enough justification and cash to do so you will save yourself good money.
6. Can you raise your capital from somewhere other than venture capitalists? Investors are important to get going but you need them like a hole in the head. This might be a paradoxical question coming from an investor but our billionaire was sensitive to the difficulties that these relationships cause. Their desire to get returns from their investment and their blindness to subtleties can cause great tension in the company. In his words, “Investors are driven by one thing and one thing only. Don’t ever convince yourself otherwise.” If you can raise the money from friends or family, or better yet from yourself, you will avoid having to deal with venture capitalists.
7. How can this business be scaled? This is my favorite question because I’m inherently lazy. Businesses that require me to work more as they get bigger scare me. I’m excited when I can see a company grow without having to increase the amount of resources needed to run it. I’ve heard it said that the best measure of a companies success is it’s ability to grow regardless of your day-to-day presence. E-Bay is probably the best model of a scalable business in the marketplace today. More customers and more transactions do not necessarily mean increasing staff or infrastructure.
8. What’s the difference between a hobby and a business? The answer is simple, “A business should have more money at the end of each month than it had at the beginning but with a hobby it’s just the opposite”. If you are doing something just because you like doing it even if it’s a terrible business then eventually it’ll make you miserable. The best case is to find something you are passionate about then make sure it’s a good business model too.
9. Are you wetting your bed and or are you facing facts? Business leaders and entrepreneurs have to make tough decisions. In one instance, after a particularly bad month we had to come to terms with the fact we had too many people and not enough work to justify their presence. Even though we had delayed the decision for months we would have to let some people go. “Ignoring these tough decisions is the same as wetting your bed and not telling anyone” our investor said. Our delay nearly cost us the company.
