Deciding to go on your own

By James Nelson
06 May 2011

The dictionary tells us that an entrepreneur is one who undertakes to carry out any enterprise. This is not a very good definition. Most people would define an entrepreneur as one who takes the necessary risks to initiate and grow a new venture or enterprise. In addition, in the real world we see that there is no set pattern that fits all entrepreneurs, even though most of them share some common characteristics, such as aggressiveness, willingness to take risks, ability to get things done, won´t take no for an answer, etc.

Should you be an entrepreneur?

Or should you work for someone else for a bit longer and then strike out on your own? Or are you someone who is not well suited for entrepreneurship? These are questions only you can answer. Hopefully, what you glean from my comments will help you in your decision process.

Most people are not well suited to be entrepreneurs, and that´s good. After all, if everyone were an entrepreneur, it would be quite difficult to hire people to staff your company as it grows. On the other hand, without entrepreneurship progress would come to a screeching halt. So a balance is necessary.

What motivates an entrepreneur and why do they opt for the entrepreneurial environment rather than the safer harbour of working for someone else? The most important motivation for the entrepreneur is creation and growth. He or she is primarily motivated to create an entity, and to grow that entity. Contrary to what might be considered conventional wisdom, very few entrepreneurs are primarily motivated by the desire to become rich. Such an outcome can frequently be the result of a successful endeavour, but those for whom economic gain is the prime motivation seldom succeed, although as with most generalizations, there are exceptions. I generally classify the exceptions as opportunists rather than entrepreneurs. You´ll find a lot of this type on Wall Street.

Entrepreneurs are also motivated to be their own boss. However, you should realize that this can be illusory. If you have partners, investors or shareholders, you will not always be able to chart your own course. The ideal situation is to have none of these, but in the real world such arrangements are more common than not.

“Focus on doing a few things well; don´t try to be all things to all people.”

What are the risks of being an entrepreneur?

There is the risk you could lose everything you have invested and everything others may have invested. If you have accepted loans or equity from friends or relatives, and these investments become worthless, you may find yourself being treated as if you had leprosy.

A second risk is time. There will never be enough of it. Most entrepreneurial ventures will consume every minute you have, to the exclusion of your family, friends, hobbies, etc. Such an environment is not for everybody. While I have not seen any statistics on this topic, it would not surprise me if the divorce rate for entrepreneurs wasn´t higher than the norm.

You may, after jumping into the entrepreneurial fray, find that you are just not cut out for it, for example, you don´t want to spend the necessary 12 – 14 hour days, 6 or 7 days a week. Or you find it´s a lonely existence that just isn´t your cup of tea.

All this may sound a bit harsh and discouraging, but the more you know about the environment and its risks, the better chance you have of being successful, should you choose the entrepreneurial route.

POINTS TO PONDER

If you decide it is time to go out on your own, here, in no particular order, is my list of points to ponder. Hopefully, these will serve you as good advice on your journey:

Manage your time, and don´t ever let anyone be the judge of how your time is spent or who you will see and who you won´t. Since you never will have enough time, you will have to set priorities, and you will have to learn to say no, frequently, to people who will want to intrude on your time, which will be your most precious asset.
Have a sense of urgency on everything. This is particularly important when you realize that a member of your team isn´t producing, or the job has outgrown them. Pull the trigger sooner rather than later, even if the person is a friend or relative. While this might sound like a version of shoot first and ask questions later, most of us wait far too long before terminating a non-productive employee, and then we always wish we had done it sooner. You won´t have the luxury of tolerating sub-par performance, so you´ll have to move quickly.
Pay attention to details. Lack of attention to detail can sink a venture just as surely as lack of attention to the big issues.
Be fanatical about controlling expenses. Avoid frills, share secretaries, fly coach class, don´t hire any administrative assistants, and know where every penny is spent.
Focus on doing a few things well; don´t try to be all things to all people. Peripheral opportunities can be seductive, but they drain resources and managers’ time from the more crucial issues. Stay away from them.
Know and understand the competition. It is frequently difficult to get a firm handle on how many competitors there are, along with details of each, but you don´t want to jump into a market that already has too many players.
Pay attention to strong sales organization and adequate financing. The lack of this is the most common reasons that business fail.There is nothing more frustrating than an entrepreneur who must spend their time trying to meet the next payroll rather than on the business. And remember, no matter how good your mousetrap, you´ll need very good people to sell it.
Don’t overestimate sales forecast. Even with a good sales force, your people will always overestimate their sales forecasts. Don´t put your business in a position where you will go under if the optimistic forecasts aren´t reached.
Most of your problems will be people problems. Along the way you will have financing problems, sales problems, production problems, and problems that you never imagined could exist. Nevertheless, most of your problems will be people problems. It is difficult to succeed as an entrepreneur without very good people skills. You must be, and be viewed as, tough but fair and compassionate. By compassionate, I mean giving a less-than-adequate performer four weeks’ severance pay rather than two weeks pay if there are mitigating circumstances. You can´t be Santa Claus and a successful entrepreneur at the same time. But, you also must be able to get people to like and respect you, whether it´s employees, customers, suppliers, stockholders, or whatever.
Don´t be afraid to change your business as your business grows. Change the organization, individual responsibilities, products, marketing programs, etc., to adapt to changing situations. While I don´t recommend change just for change´s sake, in a growing entrepreneurial environment an appropriate slogan is “if it ain´t broke now, it soon will be.“ The most successful companies anticipate problems so they can be pro-active, not reactive.
The entrepreneur needs to be blessed with a healthy dose of realism. Rose-colored glasses represent a surefire formula for failure. Be sceptical when you hear:
- Your check is in the mail
- The computer program is 98 % complete
- We are sure to close the contract next week
- And so forth …

Funding your venture

I´d like to give you my very biased views on the subject of funding your venture.

First, should you accept venture capital (assuming, of course, that you can raise it )? You are much better off if you can avoid it. Venture capitalists will extract several pounds of flesh, and eventually will force you to sell out or go public, neither of which you may wish to do, or at least you won´t want to do it when they want you to. If accepting venture capital is the only effective way to start your business, then take it, but have an experienced professional on your side during the negotiations. Seemingly innocuous provisions can come back to haunt you later.

Is venture capital better than debt? Sometimes the answer is yes. Borrowing money from friends and relatives that they can´t afford to lose is not a good option. If you are borrowing from a financial institution, which is unlikely, given their conservative nature – but let´s say you got lucky, you will frequently find that bankers are even more difficult to deal with than venture capitalists – although I know you´ll find that hard to believe. Venture capitalists, at least, will show some flexibility. If you are a day late with a bank payment, you risk losing your whole operation.

Whether you accept venture capital or not, if your business is successful you will inevitably face what is probably the most seductive scenario of all, the Holy Grail of commence, the rallying cry of Wall Street – going public. The silver tongued orators from Wall Street, those investment bankers who have given new meaning to the term “the world´s oldest profession,“ will descend on you if you´re in a successful growth phase. They will try to convince you it is unpatriotic to keep your enterprise private. They will tell you that you owe it to your country to share your success with all those investors who are dying for a piece of your company.

When they look you in the eye and tell you to put yourself and your company in their hands, they mean that rape is still legal in the lower part of Manhattan. If you have ever studied the profits made by lawyers, accountants, printers, and, most of all, by investment bankers as they guide you through the passage from a private to a public company, you´ll know exactly what I mean. Unfortunately, it sometimes seems we are in danger of raising a generation of entrepreneurs who would rather “go public“ than go to Heaven.

What are the benefits to going public?

There are some. First, you and some of your colleagues might become wealthier, at least on paper. Second, you sometimes can raise equity capital for expansion at less cost than debt. And third, you can be in for a real ego trip. Most companies go public to create wealth for the founders and investors if venture capital is involved, and secondly to raise funds for the company. However, many times the game is not worth the candle. You often can create considerable wealth remaining private.

There are many disadvantages to being a public company. Your expenses will be higher for regulatory and shareholder reports, and for legal expenses. Your employees will be depressed every time your stock price is depressed. Much more of your time will be spent stroking investors and potential investors, and answering questions every time your stock price rises or falls a fraction of a point. You will be under relentless pressure to keep earnings moving up on a quarter-to-quarter basis, even when good business might dictate reduced profits in the short term so you can invest for the future. You can do this easily as a private company. It´s almost impossible when you’re public. To keep earnings moving you may be tempted to try some creative accounting. Don´t ! Those chickens always come home to roost.

Sudden wealth will make it more difficult to motivate key players, and statistics tell us you will lose a lot of them within a year or two of a public offering. And if your stock price dips and stays down, there can be a devastating long term effect on morale.

All this may sound very cynical. But I firmly believe many companies are better off remaining private, or at lease remaining private until well into their growth phase. At Shared Medical Systems, we were eight years old when we went public, and we did so only because a venture capital agreement required us to do so. Today, venture capitalists and investment bankers push companies into the public arena far too quickly, and for one very simple reason – greed. They only make money by taking you public.

Conclusion

I´ve been asked if entrepreneurship has been fun. I guess it depends on your definition of fun. My definition of fun is negotiating white water in a canoe, hauling in a 22 inch trout, and whistling an ace past an opponent on the tennis court. Entrepreneurship, on the other hand, is hard work and demanding, but it is also interesting, educational, rewarding and satisfying. Would I do it again if I had it to do over? You bet I would.

About R. James Macaleer

R. James Macaleer spent 30 years building Shared Medical Systems, Inc., located in Malvern, Pennsylvania. SMS provides data processing and software to hospitals and physician groups in the USA and around the world in over 20 countries. Macaleer and two partners left IBM to found SMS in 1969, with 2 million dollars in venture capital funding. They took the company public in 1976, and eventually sold SMS to Siemens in 2000, when the company had annual revenue of $1.2 billion and 7,700 employees.

These days Macaleer is a Director of Boy Scouts of America and serves as Director General of the Philadelphia Museum of Natural Science. Drawing on his experiences in building SMS, he is a popular speaker on entrepreneurship to business groups.

How to move on
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