Monday, June 01, 2009

Knowing When to Close the Doors

In the last few months, I've encountered entrepreneurs who've risked it all - house, RRSP, bank balance - in order to keep their fledgling businesses alive. Some of them (most of them) either have or are going to fail, and I can't help thinking that they could have avoided this result had they worked with experienced investors or solid mentors.

Why? Because experienced investors and advisors invest in a business on the basis of acceptable risk. They have invested their time (or provided services) because they have bought into a business plan which de-risks the major challenges of building the business with the funds on hand. Outside investors establish metrics that measure progress of the business and allow them to determine whether the risk is diminishing or increasing. An investor knows how to measure when a risk is too great, and also when to close the doors.

When entrepreneurs rely on friends and family money alone, they often don't build that kind of reality-check into their business. They reckon, even when the market is telling them otherwise, that if they can bootstrap just one more month, they'll make it to the next level. Founders who have bet the farm can be unwilling admit defeat until it's too late to try and recoup any losses.

Outside Silicon Valley there are fewer mentors with who've been in the start-up game long enough to have ridden out the last two boom and bust cycles in the industry. If that's the case in your area, then you need to practice self-help and start adopting some basic rules for how you invest in yourself:

1. It's never a good idea to bet all of your assets on the success of your business, unless you're 19 years old. You cannot assume that there is a white knight investor out there who will take you to the next stage if you just find a way to keep going.

2. If you cannot find some mentors or investors to engage with you, this may be an indicator that it's not such a great idea to begin with. At the least, (in Toronto)go to MARs and use the resources all your taxes have paid for to validate your assumptions.

3. If you are not measuring your progress in an objective, multi-faceted way, then you are engaged in an emotional endeavour. Emotional endeavours have a 50% divorce rate.

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