by Derek Lidow
Most successful entrepreneurs and almost all bedrock entrepreneurs choose to start businesses that are inherently profitable. Think of “profit” as meaning the same thing as, “each sale brings in more than enough money to build and deliver the next one.” Every entrepreneur profiled in this book chose a business, whether software, computer, retail, food, investment banking, entertainment, or otherwise, that they expected to become profitable quickly. They felt they would be able to provide such great happiness to their customers from the get-go that they could receive in return more than enough money to pay their employees, feed their families, and grow. Most of these entrepreneurs spent frugally and hired conservatively (Walt Disney being an exception before he teamed up with Roy). They planned their businesses based on how much money they had immediate access to rather than planning the business and then finding the money. They all chose, including Walt Disney, not to take the high-risk path.
Some businesses can only become profitable after many years of investment. Drugs, medical devices, and businesses that build physical or digital networks require extensive investment and years of losses before they can become profitable. They are among the riskiest of all companies, but if they succeed, they often wind up with few competitors. These are excellent businesses for high-risk entrepreneurs.
How Many Mistakes
Because virtually all entrepreneurs learn their leadership skills on the job, screw-ups are inevitable. Key team members can also screw up when called on to perform an ill-defined task under pressure.
Because we recognize screw-ups only after their unexpected and unfortunate consequences appear, they often require large amounts of money and time to repair. The loss of that money and time can result in a significant and enduring competitive disadvantage. Some screw-ups can be fatal. Most are survivable.
As we saw in chapter 6, Sam Walton’s failure to get an option to renew the lease for the bankrupt store he bought was near fatal. Fortunately, Sam had saved the profits he made in running his store, anticipating that someday he would open a second one. An entrepreneur in a similar situation who had not saved his profits to grow the business and cover his mistakes might have enjoyed a better standard of living for a couple of years, but would have lost it all in the end.
That’s why savvy entrepreneurs sock away their profits to cover for mistakes. Consider the worst possible scenario that could happen to your business once it’s established, and put away enough of your profits to be able to fix the problem or start over.
How Much of a Jerk
There’s a common myth that goes along the lines of, “To change things you have to break things.” I hear this often in the entrepreneurial world, particularly in the high-risk world—to succeed you have to be a jerk. Don’t believe it. There are many empathic and kind entrepreneurs.
Some entrepreneurs behave like jerks to compensate for their inability to lead change. As we discussed, in order to succeed, an entrepreneur needs to be able to lead many other people to change, and to change fast. That’s a tough skill to master. Indeed, mammals, particularly dominant males, have evolved to react with emotion and anger to get others in their tribe to do what they want. Fear can work. The less skilled you are in leading change, the more of a jerk you need to be to get other people to change quickly to accommodate your needs. Walt Disney was often a jerk, and his animators felt stress when he was around. They put up with Walt because they felt he could help make them successful animation artists or film directors, and some of them were right about that. But not all successful entrepreneurs have aggressive, domineering personalities. Sam and Stephanie didn’t, nor did Jordan or Vidal; they all focused on making and fixing things rather than breaking them.
All entrepreneurs need a collection of assets to be successful in the entrepreneurial league in which they intend to compete. Where an entrepreneur starts can also make a difference, but not in the way most people think. Let’s explore the impact of location in the next chapter.
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[19] If the customer is a business then you’ll need to count everyone at that business with enough influence to veto the buying decision.
[20] 37signals has been renamed Basecamp after the company’s most successful product.
CHAPTER 9:
Where
Silicon Valley doesn’t come close to being the most entrepreneurial place on the planet. Uganda and Peru are far more entrepreneurial, with over 70 percent of the population between the ages of eighteen and sixty-five running their own, albeit small, businesses. Due to a lack of available jobs at established businesses, the people in these countries are forced to be entrepreneurial in order to survive. In general, entrepreneurship takes hold wherever jobs are scarce or where the number of jobs is shrinking. This inverse relationship between jobs and entrepreneurship holds everywhere, in both developing and developed countries. This relationship makes sense because many people, wherever they are in the world, prefer to have a steady job in an established business than deal with the stress of a startup and being their own boss.
Even in the United States, Silicon Valley is still not close to being the most entrepreneurial place. We find the highest density of entrepreneurs in Miami, Florida, with a rate of entrepreneurship 50 percent higher than in Silicon Valley. Because Miami is a major tourist center and the gateway to the Caribbean and Latin and South America, entrepreneurial opportunities, large and small, abound there. Miami’s new businesses might not grow as fast as the VC-backed firms in Silicon Valley, but Miamians are certainly entrepreneurial. And for sheer numbers of entrepreneurs, the greater New York metropolitan area ranks number one. That’s not surprising—the city attracts a steady flow of people from all backgrounds and from all over the world looking for a better life.
Silicon Valley is not even the top place to start a fast-growing company. That honor goes to Washington, DC. Why? Political parties require lots of help tuning their messages. The US government constantly needs new consultants, contractors, and research to support its initiatives in health, education, and defense. If you’re tuned into what’s happening in the government and in politics and are willing to set up shop in DC, then you’re in a good position to create a business that can grow quickly and profitably.
Nonetheless, Silicon Valley is the best place in the world to start high-risk venture capital-backed companies. But as we saw, the odds are heavily against you winning big in Silicon Valley.
While these statistics may be interesting, they are ultimately irrelevant for any given individual. After all, entrepreneurship is about being different. Where you should embark on your business is therefore an intensely intimate question. It deserves an individualized analysis, not a recitation of statistics. And it’s actually a two-part question: Where is it best to prepare to be an entrepreneur? Where is it best to start your own business?
A good place to begin your search for the skills, support, and mentorship you think you may need is right where you live.
Where Mentors Are Plenty
Estée Lauder the company sprang into being as both a reaction to, and a result of, the life and events Estée Lauder the person experienced growing up. As with Jordan and millions of other entrepreneurs, entrepreneurial identity is often discovered and molded within the extended family. Estée found what she wanted to do—and not do—by working with her aunts and uncles. From her aunt, she learned how to sell. From her uncle, she obtained an expert knowledge in the chemistry of the skin and skin creams, though she had only a high school education. But from working in the store, she also glimpsed what it would be like to be part of a higher stratum of society. And as we saw, a personal insult shocked her into taking control of her life.
You could say that the “pre-Estée” Estella was merely lucky to have relatives who taught her critical skills and opened her eyes to possibilities beyond her neighborhood. But that misses the point. Estella saw opportunity wherever she was and with whomever she encountered. More importantly, she grasped opportunity whenever it pr
esented itself. She made herself; the world didn’t make her.
Where do you prepare to be an entrepreneur? You prepare wherever you can work with highly skilled people who excel in an area that interests you and who will let you practice your skills in an innovative environment that embraces change. This is true whether you are a bedrock or a high-risk entrepreneur.
Learning to be an entrepreneur always starts with the opportunities that surround you, wherever you may be. And if you don’t like the opportunities you find nearby, you can do what millions of others do and look elsewhere.
Where Challenges Are Met
Ken Marlin broke the news to his shocked parents: he was dropping out of college after less than a year. He had received good grades, but the work didn’t answer his deepest question: “Who am I?” He sought the answer by enlisting in the US Marine Corps. He loved and excelled at the challenges of being a marine, and as a result he was invited to enter officer training. As an officer, he learned how to lead people under stressful conditions, how to distinguish real strategy from wishful thinking, and how to make judgments of character that could directly impact the success of a mission. Every time Ken was promoted the Corps offered to augment his education, enabling him to complete college and business school over the course of his military career.
Feeling he finally knew himself after ten years, he left the service. Former Marine Corps officers with combat training and business degrees typically have plenty of job offers from businesses, especially when they're still young, like Ken. From among several interesting offers, he chose the most personally compelling: becoming a member of a small group that assisted the CFO of Dun and Bradstreet (D&B) overseeing projects the CFO considered most critical to the company’s success.
When Ken joined Dun and Bradstreet, it was an old and venerable firm going through a major restructuring—a big reason that Ken took the job. He knew he would learn different skills every day. A significant part of the restructuring involved D&B buying other companies that the CEO thought would enable them to expand their data-gathering expertise into new businesses. At first Ken merely supported the CFO by following up on action items required to make deals happen. Soon, he began to anticipate the CFO and CEO’s needs and initiate relevant actions, sometimes even completing a task before he was even asked to undertake it. Within three years, the CEO let Ken lead major aspects of transactions. Ken sometime worked with investment bankers, but other times he orchestrated deals without them. He even helped develop strategies as part of the process of deciding which deals to pursue. And many of the acquisitions Ken worked on were international in scope.
Making deals, developing strategies, and ensuring they were properly executed were the most exciting things Ken had ever done. But after ten years, D&B’s focus began to shift away from acquisitions, and the CEO offered Ken the presidency of one of D&B’s divisions. He turned it down. He felt he was ready to be a CEO of his own company, so instead he found a job running an independent, fast-growing US-based division of a major Swiss financial information technology firm.
After several months in the position, time enough to have settled in and to have gotten a feel of the people he now worked with, Ken discovered that his definition of an “independent” division differed sharply from that of the Swiss owners. As a trained marine, Ken didn’t leave, but instead hatched a strategy to induce the Swiss to sell him a part of the US division—a part they didn’t seem to care much about. Because Ken was adept at structuring and financing deals, he was able to find Wall Street financial partners willing to back him, and the Swiss were happy to let him buy their non-strategic asset.
Although Ken had considerable experience working with Wall Street investment bankers in fashioning deals to buy and sell companies, this was his first experience working with venture capitalists, private equity firms, and other “financial sponsors.” To get his company off the ground, he had willingly taken money from a fund that had been recommended by a close friend. Ken was happy and proud that he had struck a deal to make him the undisputed leader of his own company, but in putting together the financing, he had willingly taken money from strangers without doing much investigation on who they were, their financial goals, and the culture of their investment firm. It was only after completing the purchase that Ken discovered that his new financial partners were not actually willing to support his aggressive plans to grow the business—they wanted to grow slowly. In Ken’s view, growing slowly would lead to failure, and that was incompatible with his philosophy.
The relations with his financial partners quickly became contentious. Ken’s marine training again came into play as he consciously chose which battles he would fight with the investors on his Board and which battles he would leave alone. Instead of viewing the circumstance as a long-term assignment to grow his company into something large, profitable, and dominant in its market, Ken would focus on making his company more valuable so he could sell it. Three years after buying the business, he sold it to another big financial technology firm for about three times what it had cost him. His financial partners did well with the deal and Ken did all right, too, but he didn’t make enough to retire on, and being his own boss had not been the experience he had expected.
Ken realized that he had been naïve. He had not done his homework on his financial partners before taking their money. He had not properly understood enough about the intricacies of how financial sponsors structure their investments to get control. So after his employment contract with the acquiring firm expired, he decided to try being a financial advisor himself. With his experience of making money for financial people, and having been involved with dozens of deals, Ken had no problem in finding a small boutique investment bank that was willing to offer him a partnership. But Ken received his offer shortly before the dot-com bubble collapsed in 2001, after which all dealmaking stopped.
We read a great deal about all the money to be made in investment banking. In reality, investment bankers earn little in salary and make a lot of money in the form of large bonuses, but only if they personally initiate large transactions. If there are no deals to be had, investment bankers starve.
Within a few months of the bubble bursting and with no immediate prospects for making big bonuses, Ken took matters into his own hands. He launched his own investment banking firm. Most of Ken’s colleagues thought he was crazy. On Wall Street, conventional wisdom holds that starting an investment banking firm requires a large amount of money. Investment banks need fancy offices with fancy furniture, expensive artwork, and an army of Ivy League–trained analysts to impress potential clients. And that’s not to mention the hundreds of personal relationships with major CEOs that any firm needs to be “in the game.”
But Ken wasn’t looking to create a normal investment bank. Knowing few CEOs outside of the information business, Ken decided to concentrate there. No other investment bankers focused only on the information business, considering it way too small a market. Also, in contrast to standard investment banking practice, Ken rented a single office from a New York law firm that had just laid off a bunch of their lawyers and didn’t need the space and wanted extra income. In the single office, Ken set up his business with three junior colleagues who all were willing to work only on commission (no salary!). All four of them spent their time making phone calls to find CEOs that wanted to meet with an investment banker who could tell them where to find investors or buyers. When a prospective client wanted to meet, they met at the CEO’s office or a restaurant.
Ken calculated that he could survive for two years without doing a deal. He also projected that within that time, many information businesses, in order to survive, would have to find investors or bigger companies to acquire them. He figured he just needed to stay in close contact with the CEOs he knew, and perhaps others he could meet, in order to make some deals coalesce. But it didn’t happen that way. In the next three years, Ken landed only four small deals, and the fees he earned covered neither rent nor expenses. But being
a marine meant that he was disciplined. Ken stuck to a strict budget and spent money frugally. Fortunately, his new wife Jacqui fully supported his efforts and was happy to make sacrifices. In order to afford to paint their small house, Jacqui returned their wedding presents. Eating pasta for dinner almost every night, Ken and Jacqui figured they could survive even another year.
The pasta dinners came to an end in 2005, when Ken started to win a steady stream of deals. The CEOs he had cultivated during the downturn were convinced that Ken knew more about the information business than anyone else, so he became their go-to person to help them put together their deals. I was one of those CEOs.
In 1999, I had founded iSuppli to sell information and services that would enable companies in the electronics market to more effectively mange their supply chains. For the first nine years, we didn’t need any outside capital or investment bankers to help us with the few small acquisitions we made during that time. But in 2009, we did need help to buy some additional companies that possessed proprietary information that would complement the information we had already developed about the tech world. So in late 2009, I unconditionally recommended Ken to the Board of iSuppli to help us raise the funds. As it happened, our fundraising didn’t actually turn out the way we expected. Instead of buying other companies, we wound up receiving an offer to buy us that was just too good to turn down. Ken helped us get a deal that became a legend in our space and that led to even more clients and deals for him.
