November 17, 2011
The information contained in this blog post is based on general principles of law and is intended for informational purposes only. I make no claim as to the comprehensiveness or accuracy of any of this information. None of this information should be considered as legal advice, and this blog post is not offered for the purpose of providing legal advice to any party. The information contained in this blog post represents my own personal views only, and does not necessarily represent the views of my law firm or any other lawyer in my law firm. My provision of the information in this blog post does not create an attorney/client or any other relationship between me or my law firm and the readers of this blog post or any other party. All readers of this blog post should consult their own legal counsel and other advisors before taking any actions or making any decisions based on any aspect of the information contained in this blog post. I am not certified by the Florida Bar as a “specialist” or “expert” in any area.
I’m going to list some of the primary causes of failure that I’ve encountered in my travels. This is by no means an exhaustive list, but it hits the high points. Here are five items to consider (no particular order of importance):
- We’re Not Changing – the Market is Wrong. This is a very common situation. You’ve got a great business model and you’ve spent a lot of money and enormous amounts of time deciding how to develop your business and attack your markets. Why change now? I understand this, but you need to be keenly aware of what’s going on and adjust your model accordingly. I’m definitely not saying to follow the crowd – resisting that impulse is the heart and soul of innovation and entrepreneurship. The overall economy and the markets in which you are working are very powerful external forces, however, and you clearly need to keep on top of them and evaluate whether you need to change or adjust your model.
- Who’s the Boss? This is often a difficult topic in a growing business, but it’s a common source of serious problems. The problem here is that in many entrepreneurial situations there is no clear cut decision making process. Sometimes you don’t need one in the very early stages because every decision is a consensus (thought this never lasts long). This can be further complicated because in many situations people each bring different skill sets or assets to the new business (e.g., technology, business expertise, money). In many cases, none of these people may feel comfortable stepping out of their particular area to exert control over other peoples’ areas. You need a very clear decision making process, and you need to have someone in charge. This is not to say that you must have a dictator with absolute power – the decision making power should normally be subject to some checks and balances. It’s critical, however, that a decision making process exists and that the power that is given to each person is clear and well documented. The best time to do this is normally very early in the business entity’s life cycle. In these early stages people are much more likely to have a consistent idea of the dynamics of the company and the contributions of each individual, and they are much more likely to agree on allocations of decision making power and the value of an individual’s contributions. It’s amazing how quickly a person’s perception of their value to the business entity can change, especially when money is involved. Consider getting a clear and well-documented decision making process in place as early as possible.
- Who Owns What? It’s amazing how many times this very crucial subject is neglected: People quit their jobs and put all of their savings and time into their new company, but they don’t know how much of it they own. This is a mistake that can lead to serious and expensive litigation. Sometimes people don’t think they need to deal with this subject because they have longstanding relationships with the other participants and they believe everyone will “do the right thing” when it matters. Unfortunately, my experience says that this doesn’t always work. To protect the interests of each participant in a business entity, you need to determine up front who owns what and what rights and obligations they have relative to this ownership. Get agreement from all participants up front, and document these items very well to avoid future controversies. Clearly define if anyone has any rights to acquire additional ownership in the future and the requirements for such additional ownership. Get agreements in place that govern the rights and obligations of each participant. As discussed above, these items should be done very early in the business entity’s life cycle since this will be when the participants are most likely to be in agreement. If there is a disagreement or controversy, it is also much better to either resolve it up front or deal with it as necessary before the business entity has spent much money or built much value.
- How Did We Spend So Much Money? Running out of money may be unavoidable, but you should at least anticipate that it can happen and plan for it. This is especially important in the current environment as any kind of financing for early stage companies has become extremely hard to get. Bank financing for most early stage companies is very difficult or impossible to obtain right now, and private equity and venture capital financing is not much better. Even angel financing has been very difficult to obtain for many of the companies that I see. I don’t believe that financing an early stage company is ever easy (even in good times), but it has been easier in the past than it is now. In any case this means that there is an even smaller margin of error in managing your company’s cash. Stay on top of your company’s short and long-term cash requirements at all times, and develop as many feasible contingency plans as you can.
- No One Told Me We Would Have To Sell This Stuff. This problem can arise anywhere, but it is often seen in technology companies. The principals are sometimes so smart and so technically oriented that they either refuse to focus on the mundane concepts of marketing, branding and sales or they are just not aware that a company eventually has to sell a product or service to survive. This concept cuts across all industries and spaces – it doesn’t matter if your company sells shoes, stocks or genetic mapping software, at some point the company has to sell something. This doesn’t mean that you personally have to do it, as some of us are terrible at sales and many of us don’t have the requisite skills anyway. If this is your situation, acknowledge it and hire the right people to manage and develop your marketing, branding and sales functions. I would do this early as it’s vital and it can be a time consuming process.