The real challenges of being an entrepreneur
I've been thinking a lot lately about the way I've come in building my consulting firm, and came to some interesting conclusions. While it is entirely possible that my experience is unique to me - in fact, to some degree and flavor, I'm sure it is, as it is for anyone else doing this - I suspect strongly that the main themes are identical to those in the experience of all others.
First of all, building a consulting firm is the most typical way for an individual to start a business (assuming it's not a franchise business, of course). A product company is a completely different animal, requiring a solid idea that can be commercialized and is free of intellectual property violations. The latter is becoming increasingly difficult to achieve in these days of overly broad patents that are continually misused and abused by patent holders who, it often seems, only register them so they can block creativity and nothing else. Yes, I despise the current patent system in the US, but that's a topic for another post (I wish all the luck from the bottom of my heart to the EFF for their patent busting efforts, as Don Quichottic as they are).
Indeed, when we talk about the vast number of small business in this country, we refer largely to the sole proprietor shops, maybe with a few helping hands, folks who were good at something when they worked somewhere, and who then decided they could live better if they did it themselves and offered those same services to several companies at once. They usually start by quitting and making their former employer the first client, and often, keep them as clients for years. Companies, of course, are happy to shed expensive labor that is only becoming more expensive as states add new laws and rules to protect employees, trading them for capped costs in the form of a fixed-fee or hourly rate, and generally improved results. The latter comes from the simple yet instinctively grasped principle that the people who do this are usually the better skilled ones who get tired of corporate politics, just want to do a good job, and have to be generally much more efficient when their 40 hours per week are spread across 3-5 clients rather than just 1.
That works pretty well for everyone. However, a few of these same folks end up growing their business to be much larger than they themselves - which is how larger consulting and services firms get born. They have a range of motivations to doing so, and they all share certain traits, and they are the classic entrepreneur. I won't go into the traits, because many a word has been written about those, and it's not what I wanted to discuss. Instead, I want to talk about another aspect of this role that I have not seen discussed often if at all. For you see, my company is now growing firmly around and beyond me. And I think it's important to share.
Anyway.
When you start out, you have a well-defined set of challenges, mostly revolving around replacing your income as a wage-earner. Usually, this problem is solved to a significant degree by signing up your last company as your first client, but it is not always the case (it wasn't for me). I have to believe that this is the source for most entrepreneurs well documented and highly persistent sense of paranoia; suddenly, you have to learn to be a sales, marketing, legal, finance and operations person, in addition to actually doing your job. Then you realize you've acquired the worst boss in the world - you - and that your new boss can be kinda fickle about paying you regularly. And that's only the beginning. Don't take me wrong; it's a great feeling when you are able to go out there and sell yourself, rather than somebody else's product, because it is the ultimate ego-builder: the people and companies who pay you - your clients - are paying you for you. But no matter how good you are at what you do, there are others who are just as good, and unless you are one of the very rare few who have a truly well established name before you go solo, you'll be fighting all of them for business.
Luckily, there is normally quite enough of it to go around. And no, you are not fighting the large consulting firms; they target a much different client base, because when you grow beyond a certain size, the cost of making a sale becomes a significant factor in establishing a floor around the dollar size of an engagement. In other words, they can't serve smaller business effectively. But you can. So you're not competing against them. You are, however, competing against the army of professionals like you, some of whom may have already built a small business around their services and have been around for years. So you gotta hustle, but if you try to hustle too much you'll end up running on empty and exhaust yourself. I'm gonna say something that's borderline heresy. Get ready for a year or two of mostly free time. Use it to have fun, not just for the business. It takes time to build, and it's a process that can be optimized, but not rushed.
I guess that's again a topic for another post. But I do want to rush forward a few years, to the point where you suddenly realize you're quite popular, you have built a substantial client base, you're doing well, but are still in constant panic because you have become a battle-hardened veteran of competition and you know how quickly you can lose it all. You have learned about reputation, reached the inevitable conclusion that it's all about your reputation, and then the even more advanced conclusion that unless you do something truly egregious, it's difficult to really harm it (go ahead, tell me how wrong I am, and I'll point you to the 5 million businesses in this country that have 10-20 employees and can use your services).
And now let's assume you are ambitious. You want more. You didn't go into this just to replace your wage-earning job; you wanted to build a legacy, an enduring business, a company that is far more than just you.
And now I finally get to the main point of my post.
You get dirty.
Hold on. What? Who said anything about getting dirty? Don't service businesses grow organically, on the strength of their service and customer loyalty and all that? Well, yes, they do,
but guess what; if you're trying to win enough business to become a business, you have to, well, get down to business.
What do I mean by that? I mean that you can no longer keep the moral high-ground to the nth degree, because you'll be eaten alive by small companies who have taken the next step. Have you ever wondered why there is typically a disconnect between sales folks in organizations - even really good ones - and the services staff? Thing is, when there is somebody else making the sale, they bring their own view to the table, and their view is that they need to sell as much as possible so they can earn as much money as they can. They don't own the place like the founder does (that's you), they don't usually have a vested interest in keeping the moral high ground, they just want to sell. So no matter how great of a job the "company" does, and how fantastic its people are, the sales process will become a little more oiled and smooth as it should. Which means all sorts of things: for example, full disclosure is no longer a priority, just enough to make the sale. The prospects no longer hear about reservations you may have that aren't material to the discussion, or pay you what you think you're worth but rather what your sales person can charge (this is - normally - a good thing for you, because most good people underestimate themselves), or god knows what.
I remember my big dilemma about referral commissions. In my line of work, I end up recommending products and services regularly to my customers, which they end up buying based largely on my recommendation. In other words, I serve as a pretty effective outside sales rep for a surprisingly large number of companies. But for the first three years of my life in consulting, I steadfastly refused to take commissions from those vendors. The theory was that it was a conflict of interest; if I took the commissions, I would be more likely to recommend those companies who were paying them.
This is quite a legitimate argument - but it's quite shallow, too. It makes a lot of hidden assumptions. For example, it assumes that the person making the recommendation is not an expert, just someone out there for the money. In other words, an outside sales rep. But this fails when you're dealing with a founder of a consulting business, who is (typically) an expert, and who already understands quite instinctively the value of their reputation and the happiness of their clients. In other words, such folks (that's you) generally come from such a moral high ground that they can take years to descend to a level that mere mortals (not you) can aspire to. They take the long-term view on things, they take their clients' interests to heart usually more than the clients do, and they generally get very upset if anyone even gets the slightest impression of favoritism.
Another thing that is assumed is that the buyer gains no added value from the transaction except the product they buy. This is a terrible assumption, and one that comes from the fact that people writing and thinking about business in this country are so used to thinking and writing about large companies, not small ones. Large companies have staff that is dedicated to comparing products, they can afford to run 6-12 months bakeoffs where they analyze things to death until they find - supposedly - the best solution for their needs. Thing is, most companies aren't large. Most companies hire you, the expert, to provide them with a very powerful shortcut around these very expensive processes. In fact, I've found in my years as a consultant that companies hire me precisely because they can trust me to give them the best recommendation possible for their specific needs, without needing to compare multiple products and solutions and run bakeoffs and do a whole lot of stuff that distracts them from doing their core business. The value-add, for them, is tremendous.
These are powerful arguments, but the thing that finally convinced me was a chat I had with one of my mentors. He suggested to me, quite plainly, that by refusing to take those commissions, I was cutting my nose to spite my face. How so? because most vendors have two very distinct buckets: one on the sales side where dollars come in, and one on the marketing side where they go out. And these do not mix. In other words, the commission I'm paid is paid as part of a marketing expense, not the replacement of a sales discount. He was absolutely right. I was already getting the best possible discounts for all of my clients, because the vendor clearly understood the value of having a non-attached but highly trusted outside sales rep at a client site, so they were willing to give up some margin. But they would not discount further even if I didn't take a commission I was generally entitled to. Different dollar buckets. The other aspect of this is that by taking commissions, my firm can get exposure and opportunities that it didn't have before, because the vendor's money people suddenly have very clear visibility to the business the firm brings them - by having to sign those checks.
But it sure feels dirty. So I did my best to tell the clients where I was and wasn't compensated. But the clients all started getting anxious about it, because they felt - erroneously - that my judgment was compromised. What to do? so now we disclose all relationships on our site, and we mention which vendors we have a relationship with when we make recommendations (we recommend others regularly too), but we don't make a big deal about it.
And this is just one example of getting dirty (in the entrepreneurial sense). Here's another one: "placing" your friends as contractors and taking a margin on their services. Oh, how I hated that one. Think about it: you've known someone for years, know how good they are, and then you detect a contract opportunity for them with a client of yours. Instinctive response: connect the two and everyone's happy. But at some point you realize that you are driving a lot of value for both your client and your friend. A recruiter charges 20% of first year's salary. A placement firm takes 30%-40% off the top for their contractors. There's a reason for that. So you shut your eyes and put your friend on a 1099 with you, then resell them to your client with a 20% markup. But your friend now knows that you are making free cashflow off their backs. Trust me, it feels much dirtier than the other one. I solved it by creating a strict policy of fixed margins that are fully disclosed to my friends; we charge whatever they want + $20 an hour which we keep as margin. Since most of them earn more than $100 per hour, our cut is 20% or less, and it keeps everyone happy (if slightly smellier than before). For now, that is. I'm sure as we grow this will change, too.
The question of course, remains: why even do it?
Simple. To grow the business beyond yourself you need money for support and administration and to pay folks in advance (because you get paid on your invoices much later than your folks get paid by you on theirs, another little trick of being a business owner). You can get that money by taking it out of your own billables, of course, but that doesn't really work unless you don't need to make money. Why? because remember, when you start this growth, you're the only one growing the firm. You still have to generate the billable hours, but you also have to sell them, and you also have to do all the support and administration yourself. So you need some sort of growth engine, and I know that you already maxed out all your credit cards just to get to the point where you think you can grow the business. Where is the free cashflow coming from?
Commissions. Margins. You know, dirty stuff.
Now, to be perfectly honest, none of these little things are really dirty. They are established and well respected business practices. They just feel dirty to the high-minded entrepreneur. They feel like compromises on their integrity (it sure did - and still does - to me). But they are, as they say, a necessary part of growing up. I think the one thing that really matters is not to lose your gut. I now have the luck of several people being involved with the business that are helping to grow it, and I no longer control everything, but I still put up a damn good fight if I don't like something, and it helps because I get fresh viewpoints and ideas and perspectives I didn't have before. But in the end, if it makes sense, I'll concede, usually adding my own flavor to the new practice or process to mask my memory of the rotten smell. I guess it's the main source of sarcasm for experienced entrepreneurs.
First of all, building a consulting firm is the most typical way for an individual to start a business (assuming it's not a franchise business, of course). A product company is a completely different animal, requiring a solid idea that can be commercialized and is free of intellectual property violations. The latter is becoming increasingly difficult to achieve in these days of overly broad patents that are continually misused and abused by patent holders who, it often seems, only register them so they can block creativity and nothing else. Yes, I despise the current patent system in the US, but that's a topic for another post (I wish all the luck from the bottom of my heart to the EFF for their patent busting efforts, as Don Quichottic as they are).
Indeed, when we talk about the vast number of small business in this country, we refer largely to the sole proprietor shops, maybe with a few helping hands, folks who were good at something when they worked somewhere, and who then decided they could live better if they did it themselves and offered those same services to several companies at once. They usually start by quitting and making their former employer the first client, and often, keep them as clients for years. Companies, of course, are happy to shed expensive labor that is only becoming more expensive as states add new laws and rules to protect employees, trading them for capped costs in the form of a fixed-fee or hourly rate, and generally improved results. The latter comes from the simple yet instinctively grasped principle that the people who do this are usually the better skilled ones who get tired of corporate politics, just want to do a good job, and have to be generally much more efficient when their 40 hours per week are spread across 3-5 clients rather than just 1.
That works pretty well for everyone. However, a few of these same folks end up growing their business to be much larger than they themselves - which is how larger consulting and services firms get born. They have a range of motivations to doing so, and they all share certain traits, and they are the classic entrepreneur. I won't go into the traits, because many a word has been written about those, and it's not what I wanted to discuss. Instead, I want to talk about another aspect of this role that I have not seen discussed often if at all. For you see, my company is now growing firmly around and beyond me. And I think it's important to share.
Anyway.
When you start out, you have a well-defined set of challenges, mostly revolving around replacing your income as a wage-earner. Usually, this problem is solved to a significant degree by signing up your last company as your first client, but it is not always the case (it wasn't for me). I have to believe that this is the source for most entrepreneurs well documented and highly persistent sense of paranoia; suddenly, you have to learn to be a sales, marketing, legal, finance and operations person, in addition to actually doing your job. Then you realize you've acquired the worst boss in the world - you - and that your new boss can be kinda fickle about paying you regularly. And that's only the beginning. Don't take me wrong; it's a great feeling when you are able to go out there and sell yourself, rather than somebody else's product, because it is the ultimate ego-builder: the people and companies who pay you - your clients - are paying you for you. But no matter how good you are at what you do, there are others who are just as good, and unless you are one of the very rare few who have a truly well established name before you go solo, you'll be fighting all of them for business.
Luckily, there is normally quite enough of it to go around. And no, you are not fighting the large consulting firms; they target a much different client base, because when you grow beyond a certain size, the cost of making a sale becomes a significant factor in establishing a floor around the dollar size of an engagement. In other words, they can't serve smaller business effectively. But you can. So you're not competing against them. You are, however, competing against the army of professionals like you, some of whom may have already built a small business around their services and have been around for years. So you gotta hustle, but if you try to hustle too much you'll end up running on empty and exhaust yourself. I'm gonna say something that's borderline heresy. Get ready for a year or two of mostly free time. Use it to have fun, not just for the business. It takes time to build, and it's a process that can be optimized, but not rushed.
I guess that's again a topic for another post. But I do want to rush forward a few years, to the point where you suddenly realize you're quite popular, you have built a substantial client base, you're doing well, but are still in constant panic because you have become a battle-hardened veteran of competition and you know how quickly you can lose it all. You have learned about reputation, reached the inevitable conclusion that it's all about your reputation, and then the even more advanced conclusion that unless you do something truly egregious, it's difficult to really harm it (go ahead, tell me how wrong I am, and I'll point you to the 5 million businesses in this country that have 10-20 employees and can use your services).
And now let's assume you are ambitious. You want more. You didn't go into this just to replace your wage-earning job; you wanted to build a legacy, an enduring business, a company that is far more than just you.
And now I finally get to the main point of my post.
You get dirty.
Hold on. What? Who said anything about getting dirty? Don't service businesses grow organically, on the strength of their service and customer loyalty and all that? Well, yes, they do,
but guess what; if you're trying to win enough business to become a business, you have to, well, get down to business.
What do I mean by that? I mean that you can no longer keep the moral high-ground to the nth degree, because you'll be eaten alive by small companies who have taken the next step. Have you ever wondered why there is typically a disconnect between sales folks in organizations - even really good ones - and the services staff? Thing is, when there is somebody else making the sale, they bring their own view to the table, and their view is that they need to sell as much as possible so they can earn as much money as they can. They don't own the place like the founder does (that's you), they don't usually have a vested interest in keeping the moral high ground, they just want to sell. So no matter how great of a job the "company" does, and how fantastic its people are, the sales process will become a little more oiled and smooth as it should. Which means all sorts of things: for example, full disclosure is no longer a priority, just enough to make the sale. The prospects no longer hear about reservations you may have that aren't material to the discussion, or pay you what you think you're worth but rather what your sales person can charge (this is - normally - a good thing for you, because most good people underestimate themselves), or god knows what.
I remember my big dilemma about referral commissions. In my line of work, I end up recommending products and services regularly to my customers, which they end up buying based largely on my recommendation. In other words, I serve as a pretty effective outside sales rep for a surprisingly large number of companies. But for the first three years of my life in consulting, I steadfastly refused to take commissions from those vendors. The theory was that it was a conflict of interest; if I took the commissions, I would be more likely to recommend those companies who were paying them.
This is quite a legitimate argument - but it's quite shallow, too. It makes a lot of hidden assumptions. For example, it assumes that the person making the recommendation is not an expert, just someone out there for the money. In other words, an outside sales rep. But this fails when you're dealing with a founder of a consulting business, who is (typically) an expert, and who already understands quite instinctively the value of their reputation and the happiness of their clients. In other words, such folks (that's you) generally come from such a moral high ground that they can take years to descend to a level that mere mortals (not you) can aspire to. They take the long-term view on things, they take their clients' interests to heart usually more than the clients do, and they generally get very upset if anyone even gets the slightest impression of favoritism.
Another thing that is assumed is that the buyer gains no added value from the transaction except the product they buy. This is a terrible assumption, and one that comes from the fact that people writing and thinking about business in this country are so used to thinking and writing about large companies, not small ones. Large companies have staff that is dedicated to comparing products, they can afford to run 6-12 months bakeoffs where they analyze things to death until they find - supposedly - the best solution for their needs. Thing is, most companies aren't large. Most companies hire you, the expert, to provide them with a very powerful shortcut around these very expensive processes. In fact, I've found in my years as a consultant that companies hire me precisely because they can trust me to give them the best recommendation possible for their specific needs, without needing to compare multiple products and solutions and run bakeoffs and do a whole lot of stuff that distracts them from doing their core business. The value-add, for them, is tremendous.
These are powerful arguments, but the thing that finally convinced me was a chat I had with one of my mentors. He suggested to me, quite plainly, that by refusing to take those commissions, I was cutting my nose to spite my face. How so? because most vendors have two very distinct buckets: one on the sales side where dollars come in, and one on the marketing side where they go out. And these do not mix. In other words, the commission I'm paid is paid as part of a marketing expense, not the replacement of a sales discount. He was absolutely right. I was already getting the best possible discounts for all of my clients, because the vendor clearly understood the value of having a non-attached but highly trusted outside sales rep at a client site, so they were willing to give up some margin. But they would not discount further even if I didn't take a commission I was generally entitled to. Different dollar buckets. The other aspect of this is that by taking commissions, my firm can get exposure and opportunities that it didn't have before, because the vendor's money people suddenly have very clear visibility to the business the firm brings them - by having to sign those checks.
But it sure feels dirty. So I did my best to tell the clients where I was and wasn't compensated. But the clients all started getting anxious about it, because they felt - erroneously - that my judgment was compromised. What to do? so now we disclose all relationships on our site, and we mention which vendors we have a relationship with when we make recommendations (we recommend others regularly too), but we don't make a big deal about it.
And this is just one example of getting dirty (in the entrepreneurial sense). Here's another one: "placing" your friends as contractors and taking a margin on their services. Oh, how I hated that one. Think about it: you've known someone for years, know how good they are, and then you detect a contract opportunity for them with a client of yours. Instinctive response: connect the two and everyone's happy. But at some point you realize that you are driving a lot of value for both your client and your friend. A recruiter charges 20% of first year's salary. A placement firm takes 30%-40% off the top for their contractors. There's a reason for that. So you shut your eyes and put your friend on a 1099 with you, then resell them to your client with a 20% markup. But your friend now knows that you are making free cashflow off their backs. Trust me, it feels much dirtier than the other one. I solved it by creating a strict policy of fixed margins that are fully disclosed to my friends; we charge whatever they want + $20 an hour which we keep as margin. Since most of them earn more than $100 per hour, our cut is 20% or less, and it keeps everyone happy (if slightly smellier than before). For now, that is. I'm sure as we grow this will change, too.
The question of course, remains: why even do it?
Simple. To grow the business beyond yourself you need money for support and administration and to pay folks in advance (because you get paid on your invoices much later than your folks get paid by you on theirs, another little trick of being a business owner). You can get that money by taking it out of your own billables, of course, but that doesn't really work unless you don't need to make money. Why? because remember, when you start this growth, you're the only one growing the firm. You still have to generate the billable hours, but you also have to sell them, and you also have to do all the support and administration yourself. So you need some sort of growth engine, and I know that you already maxed out all your credit cards just to get to the point where you think you can grow the business. Where is the free cashflow coming from?
Commissions. Margins. You know, dirty stuff.
Now, to be perfectly honest, none of these little things are really dirty. They are established and well respected business practices. They just feel dirty to the high-minded entrepreneur. They feel like compromises on their integrity (it sure did - and still does - to me). But they are, as they say, a necessary part of growing up. I think the one thing that really matters is not to lose your gut. I now have the luck of several people being involved with the business that are helping to grow it, and I no longer control everything, but I still put up a damn good fight if I don't like something, and it helps because I get fresh viewpoints and ideas and perspectives I didn't have before. But in the end, if it makes sense, I'll concede, usually adding my own flavor to the new practice or process to mask my memory of the rotten smell. I guess it's the main source of sarcasm for experienced entrepreneurs.
posted by Blinkered at 5:02 AM
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