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Five Rules to Follow on Your Entrepreneurial Path

by | General

Earlier in my career, deciding what to work on seemed so easy.

“Fail fast and fail forward,” they said.

After some trial and error, I ended up leading a company that has been quite successful to date. That is not to say it’s been easy, but it has worked out well – for myself, for investors, for employees, and customers.

Today, the choice seems much more difficult. Blogs and Twitter make nearly every business opportunity look enticing for its own reason. Everyone seems to have found their niche and have a clear perspective on how and why it will work.

Maybe it’s my age – or maybe I’m just being indecisive – but opportunity cost feels very real. “What if I choose the wrong thing to work on?” Time, of course, is the only thing we don’t get more of.

So I forced myself to think deeply about these feelings and come up with a framework on how I (and you) should be spending the time and money we have.

Rule 1: Invest in Yourself

Always bet on yourself.

Choosing to be responsible for your outcomes opens your mind and your possibilities.

The statement, “It’s not my fault, but it is my problem” will become your motto. You will learn to find solutions and take actions that lead to results.

From a financial standpoint, investing in yourself enables you to build businesses that generate future value in the form of equity. Ownership is one of the fastest ways to wealth. Returns made from investing in yourself will almost always be higher than investing passively in other businesses.

Rule 2: Cash is King

The only reason companies go out of business is because they run out of money. Conversely, “revenue solves everything.”

This is a shorthand way of saying that finding a quick and clear path to profits is a near sure way to get your company to the “next level” – whatever that level may be.

Without future cash flows, there is no opportunity to pay yourself or investors back on the investments you make. Without cash, you can’t expand your product offering or hire more people. Without cash, there is nothing to invest or buy other companies with. Without the prospect of cash in the future, there is no opportunity to raise money today.

That doesn’t mean a business has to be profitable from day one – especially if you are founding a brand new concept. But it does, in my opinion, mean applying an appropriate amount of capital to an idea based on its current stage. Not all companies should be bootstrapped, but responsible capital goes much farther than raising and spending a hundred million dollars on a hundred thousand of revenue.

This calculus changes a bit for growth companies who have the opportunity to expand their user base now and monetize later, like Instagram before the Facebook acquisition. But most companies aren’t the next explosive social network.

Always keep your breakeven point and payback periods in mind well before deciding to raise your next round.

Rule 3: Pick the Right Game

Resources and attention are finite. It is better to buy a so-so business in a growing industry or sector than be the best company in a dying industry.

Every business is hard, so don’t make things more difficult than they need to be. Work on the ones that have a chance for disproportionate upside.

I have felt the pain of trying to push a boulder up a mountain. I have seen team members bang their heads against the wall wondering why their efforts aren’t making an impact. I have made the mistake of trying to grow a product in a struggling category. Don’t fall into the trap of transforming your house into the nicest one in a terrible neighborhood.

Rule 4: Look for Upside

There are lots of companies for sale with untapped potential. Local small businesses that have yet to be “modernized” with cloud-based software are a good example.

Others may be under-monetized, have adjacent product opportunities, process deficiencies, or unexplored revenue potential. These improvements could generate additional future cash flows to return the original investment more quickly.

Of course, you will need to decide how confident you are in that upside before founding or purchasing a company. Should you bet the farm on growth and pay accordingly, or should you buy on a multiple of the trailing twelve months (TTM) profits?

In other words, protect the downside, maximize the upside. 

This is what Enduring Ventures did with their acquisition UpCounsel. They saw an asset with a loyal customer base, steady revenues, and a durable advantage (organic SEO) for acquiring high-intent customers. But they also knew there was meat on the bone and believed they could grow the business in the future with proper management.

Look at your opportunity, look into the future, and determine what customers will want more of in the future. Then go build toward that future state to maximize your upside.

Rule 5: Invest in Sustainable Growth Strategies

Don’t build your house on rented sand – unless you think you can quickly sell it for a premium.

I have seen many businesses get built on the backs of Google and Facebook advertising. I’ve watched massive ecommerce companies grow through Amazon’s marketplace. I have watched new restaurants and venues take off thanks to positive reviews on Yelp.

The ability to quickly launch a brand and acquire customers efficiently gives early marketers and operators a significant advantage over the competition.

But I have also seen fast-growing brands tumble as customer acquisition costs (CAC) soared, operating system (iOS, Android) changes impacted their app’s functionality, algorithms changed, and modifications to terms of service or commission rates destroyed business models.

More simply: avoid platform risk.

Instead, focus on activities that produce durable advantages over time. This means building things that compound, that support themselves, that are difficult to replicate and, therefore, create a competitive moat.

Classic examples of moats include:

  1. High switching costs – Customer data should improve the user experience and make it tougher for people to leave
  2. Cost advantages – Low-cost production means savings can be passed on to customers
  3. Network effects – The more densely populated your customer base, the better their experience. This may be good for growing the number of users, but may not lead to an actual moat (think WhatsApp or Uber)
  4. Intangible assets – Branding, good will, customer experience, and more form a positive emotion in the minds of prospects and customers
  5. Other more web-based examples include content (library), community, addictiveness to the product

Do the Work

Do the hard work now, the work that no one else is willing to do.

Do the work that takes time now, the work that is difficult to replicate and emulate and that can’t be “turned on” overnight.

Do the work that only you can do, the work that highlights your personality, expertise, and reflects your company’s ethos.

Do the work that will last, the work that no platform or competitor or customer can take away from you. Build up your war chest of assets and goodwill so that your corporate fortress is strong and impenetrable.