The
Entrepreneurial
Code
Lessons from an
Ivy League Entrepreneur
Author's Lessons Learned
“Know your enemy and yourself and you will win 100 battles; know the enemy and not yourself and you will lose every time.” --Sun Tzu
I’ve found that good acronyms have always helped me to remember things. For example, “ROYGBIV” and “Please Excuse My Dear Aunt Sally” have locked the colors of the rainbow and the mathematical orders of operation into my brain since I was a high school student. As I was writing this story, I wanted to create another mnemonic to help me remember the mistakes I made so I don’t repeat them in the future.These five areas (“E CODE”) are as follows:
Egotism
Corporate Governance
Other Possibilities
Dualism
Effecting Change
Egotism
“It is natural to man to regard himself as the object of the creation, and to think of all things in relation to himself, and the degree in which they can serve and be useful to him.”
-- Johan Wolfgang van Goethe
“Once we’ve lost our confidence, the whole universe is against us.” -- Ralph Waldo Emerson
As a college student, I heard stories how Michael Dell started his company from his college dorm room, and how Bill Gates dropped out of Harvard to start Microsoft, and how many of the famous benefactors of my university were entrepreneurs. I latched onto their larger than life images of “success.” While I couldn’t possibly know the hardships and brushes with failure they faced, I wanted to believe I could accomplish anything with my future. I wanted to believe in the unlimited potential of entrepreneurship.
In my mind’s eye, these tales were all that came close to meeting the “extraordinary expectations” I had of life. I became enthralled with the idea of becoming the next Bill Gates. At 21 years of age, I was convinced that entrepreneurship was the single greatest wealth-building opportunity. I wanted to be my own boss and to have a greater stake in the outcome of my work. By starting my business, growing it quickly, and selling my shares, I believed I could make “success” meet my timeline.
Slowly, I began to lose perspective. It was Bill Walsh, former head coach of the San Francisco 49ers, who remarked that “ego” is a misused word in the United States. He said, “We Americans throw that around, using that one word to cover a broad spectrum of meanings: self-confidence, self-assurance, and assertiveness… But there is another side that can wreck a team…That is being distracted by your own importance… [It] ends up interfering with the real goal of any group.”
As a young capitalist, I considered it my right to serve my own self-interest. Since I was “taking the risk,” I believed I was entitled to the rewards. I became greedy to protect my share of the profits I envisioned. Therefore, I became controlling about who I allowed to get involved in the company. Even if recruiting a larger team increased my chances of success, I hesitated. I didn’t want to share the upside or the glory unless it was necessary.
A professor in college once told me, “Equity is like manure. Sometimes, you need to spread it around to help things grow.” His words apply to co-founders, employees, and strategic institutional partners. The reality is that no entrepreneur or group of founders, no matter how talented, can grow a business in isolation. To ensure success, founders need the support and sponsorship of key customers and partners within the industry. The price of recruiting “allies” is a share in the economics of the business. However, as the old saying goes, “It’s better to have a smaller piece of a bigger pie than 100% of nothing.” A bird in hand is truly worth two in the bush as any failed entrepreneur will tell you.
My partners and should have worked harder to partner with other established players in the industry. Even if we couldn't team up with the colleges and universities, it behooved us to line up a Bank of America or an American Express to be on our side. We needed a 500-lbs gorilla to want our company to succeed. That meant creating a situation whereby it was in their best economic interest to help us. In the end, it would have been a much wiser strategy than competing with everyone as a start-up.
I also realized that every entrepreneur should know the difference between egotism and self-confidence. An egotist copes with the stresses and strains of uncertainty by convincing himself he knows everything. He may remove all doubts from his mind, shut others out, and plow ahead. Boris Yeltsin once said, “Power should be open to criticism.” If you think you know everything, trouble probably lurks around the corner.
Extreme conviction and the belief that a strategy “has to work” are telling signs of an egotist mentality. That’s why it’s so dangerous because the egotist has committed himself to one path. He is no longer considering backup plans. Instead, he’s ready for the all or nothing bet. The egotist masks his weakness with a false show of confidence and inflexibility. Unfortunately, the immediate future calls for adaptability and contingency plans, not obstinacy.
For me, self-confidence is a long run belief about our ultimate success. Unlike an egotist who tries to pretend he can control every step along the way, a self-confident entrepreneur doesn't need to. He understands that to win the war, many battles are lost along the way. This acceptance allows him to be more malleable with his strategy. This confidence in the long run also allows him to incorporate the right touch of paranoia and humility into his frame of mind, because he can accept adversity. Challenges and roadblocks suddenly can be viewed as bumps on a road to success. As a young entrepreneur, I succumbed to pressure to grow my company too quickly. A more self-confident founder could have resisted such temptations for the best interest of the business.
Finally, every entrepreneur must recognize his responsibility to steward his company's stakeholders, not just his own interests. Entrepreneurship isn't about looking good. It's about creating value for others. There’s no room for a founder's ego, because it interferes with the real mission of any company, which is to serve its stakeholders. This ability to focus on the needs of others requires a very high level of self-confidence, not egotism. It took me many years to understand the difference.
Corporate Governance
My partners and I had no formal policies or procedures as it pertained to corporate governance. Since there were only three partners, we worked on everything together and the majority vote ruled. Unfortunately, “groupthink” was rampant within our company, whereby we eventually became entranced by the same views, so no one was thinking independently enough to challenge key assumptions.
Although we didn’t think we needed advice from others, my company would have benefited greatly from including independent directors on our Board. It would’ve forced us to share our assumptions with outside professionals. Inevitably, we would have had to test our theories, identify potential risks, and slow down our growth plans. At the very least, independent directors would have forced a system of checks and balances on us as managers.
Although no entrepreneur wants to create bureaucracy or lose control of his company, having some structure in place is essential to a healthy organization. Unfortunately, my partners and I thought the primary value of having independent directors was to tap into their business contacts. We weren’t concerned about corporate governance. Instead, we wanted directors that could help us get financing or drum up new business. When it became difficult to recruit these “well-connected” people, we gave up looking.
As founders, we couldn't afford to pay ourselves high salaries, so we were dependent on the value of our stock. While our ownership stakes might have been nearly worthless at the time, we assured ourselves that “equity” was the best motivational tool for entrepreneurs. Unfortunately, being solely dependent on the value of our shares made us more inclined to embrace riskier strategies. After all, we had almost no down side because our stock could never be worth less than zero. In that sense, it resembled a “call option,” so adding volatility to our business was a way to boost our equity value.
Ultimately, I grew so concerned with protecting my ownership stake that I turned away venture capital. I didn’t want to sell such a large chunk of my company’s shares. Instead, I preferred to embrace a highly leveraged operating strategy with little financial cushion. Now, I realize that anyone can bet his entire company on a risky strategy. The real whiz can capitalize his business in a way that doesn’t “sink the boat” if things take an unexpected turn for the worst.
I also realize that my company’s corporate culture lacked discipline. My partners and I were generally unkempt - we showered everyday at the gym and we slept on the floor of our office. We didn’t keep regular business hours and we had no planned schedules. As a result, the environment we created lacked professionalism. Unfortunately, our lack of discipline manifested itself in a negative way whenever we faced stressful situations.
Tense arguments between founders would often turn into screaming matches. We became hotheaded and this habit spread into the way we managed our business. We were prone to knee-jerk reactions and quick changes of strategy. Although we viewed our nimbleness as a competitive advantage, we lacked the emotional intelligence to realize when we were behaving irrationally. Unfortunately, we lacked the balance in our culture to keep us grounded.
A big influence on the culture of any company stems from the common values shared by the people in the firm. As founders, it was our job to mold the company’s value system after our own beliefs. Unfortunately, we listed corporate values in our business plan, but they were just words on paper for us. Now I realize that corporate values are not pieces of PR fluff that companies put on their websites to appease investors. When these values are held deeply by managers, they help in making difficult decisions during times of uncertainty.
I think of the nationwide Tylenol recall by Johnson & Johnson whereby 7 people in the Chicago area died in 1982 because their Extra-Strength Tylenol had been laced with cyanide. J&J made a $100 million decision to do a nationwide recall and take its products off the shelves until the situation was under control. No doubt, it was a difficult decision for J&J, but senior management relied on the company’s corporate values to guide them in a speedy reaction to the crisis. J&J wanted to send a strong message to its stakeholders that customer safety came before profits.
During times of pressure and incomplete information, it’s critical for entrepreneurs to have a strong sense of their own character. This character will guide their decisions in times of crisis. A strong entrepreneur will also infuse his value system into his businesses and the thinking of his employees. At the end of the day, values are a much more reliable way to control behavior in unpredictable situations than are extrinsic controls.
Undoubtedly, part of the allure of self-employment had been the feeling of freedom from not having a boss to which I was accountable. However, the reality was that such freedom didn’t exist for me, because I was still accountable to my stakeholders. I couldn’t just behave however I wanted. Therefore, I needed to put checks and balances on my activities for the good of my company. That meant being clear about my company’s values, creating more structure in my organization, and including independent directors on our Board. In short, I needed to take corporate governance a lot more seriously and make it just as important of a goal as my quest for profits.
“The road that is built in hope is more pleasant to the traveler than the road built in despair, even though they both lead to the same destination.” --Marian Zimmer Bradley
As an entrepreneur assembles the pieces of his business into place, there will come a time when the viability of his company is in doubt. New markets are difficult to break into, customer needs are always changing, and the threat of new competition constantly seems to be lurking about. It’s easy to doubt ourselves amid such uncertainty.
As a 22-year old entrepreneur, I looked into the unknown and I saw only two possibilities. I saw the possibility for personal success or failure. Working at my desk until the early hours of the morning, my mind’s eye was able to craft detailed scenarios for each. Either sleeping on the office floor was going to be part of a story I would tell guests on my yacht one day or I was wasting my potential with a business that would never succeed.
Unfortunately, I didn’t understand there was more potential an entrepreneur could see in his unknown future. As entrepreneurs, it’s easy to lose perspective and not see past our present situation, but an entrepreneur’s success does not depend on any one business idea or company. It’s not a binary outcome because no single event defines us. For me, hope is about acknowledging the long run possibilities. Like Henry Ford or Thomas Edison, we can fail many times before we finally find our success. We just can’t give up.
We may invest years of our lives on a project and it may succeed, or it may fail. Whether we become rich or not, the future always represents the possibility for us to take what we learned and apply it to new projects. That’s why entrepreneurs need to have FAITH that things will eventually “work out.” No lost business deal or failed company can ever take our possibility away. While we are all 100% guaranteed to encounter both failure and disappointments in our lives, an entrepreneur must cultivate the belief that in the LONG RUN everything works out for the best, even if we can’t see it right away. If a founder believes this and combines it with the idea of “dualism” that I discuss in the next section, I believe he will be in a position to withstand whatever life throws at him and eventually come out a success.
As entrepreneurs, we have the choice to walk away from our failures with our heads held high and see where life takes us next. Success will eventually come to us, even if it may not be the way we originally imagined it. For some, it may be the amassment of personal wealth. For others, it may be the simple knowledge that our efforts had a positive impact on the lives of others. The point is that every entrepreneur must believe that his brand of success is waiting for him. It just may take longer than he expected.
The true “fire in the belly” of an entrepreneur must come from his belief that the future, while uncertain, holds other possibilities for each of us as long as we keep showing up every day and fighting. Unfortunately, we won’t always know how it’s going to happen. What may seem like our biggest disappointment may be the catalyst for our greatest success. Other times, we may get what we wanted and realize it wasn’t what we needed at all. Everything has a reason and a purpose, even if we don’t understand it yet. That’s the key to hope in my mind, recognizing the infinite possibilities that exist for each of us.
4. Dualism
"To have long-term success as a coach or in any position of leadership, you have to be obsessive in some ways." --Pat Riley
“Our greatest foes, and whom we must chiefly combat, are within.” -- Cervantes
As young entrepreneurs, my partners and I often slept on the office floor, ate the cheapest thing on the menu, were buried beneath a pile of credit card debt, and paid ourselves just enough for sustenance. I remember thinking that our sacrifices were rites of passage for successful entrepreneurs. I wanted to devote myself to my company and be consumed by it. At 22 years old, it was that important to me. Much of the other areas of my life I simply shrugged off as distractions.
In retrospect, it was immature to allow my life to become so totally consumed by work. Ultimately, it harmed my ability as a manager. Entrepreneurship is difficult enough without adding more imbalances to your life. There’s nothing wrong with taking a few days off, leaving work at the office some nights, or keeping other hobbies and interests outside of the new venture. It’s not only healthier, but it will help you to make better decisions.
For me, taking time away from my company was easier said than done. I always wanted to make it a sprint to success, never a marathon. The truth is that managing a start-up feels more like climbing Mount Everest and you need to pace yourself or you’ll burn out and risk your company.
A young company can’t afford to have its managers lose clarity, that’s why I believe entrepreneurs should NEVER be incentivized with equity alone. It is the rare entrepreneur that can build a business living in anxiety from pay check to pay check. Now, if you are already rich then God bless you and do it for the equity, because you won’t have the pressure of weekly living expenses. For the rest of us, I think we either need to save up enough money before striking out on our own, so that we can still live a normal lifestyle, or we need to raise money from investors and pay ourselves reasonable salaries. It may mean giving up some founder’s equity, but I believe it’s the only way to have the kind of staying power required to stick with the business for however many years it takes to make it work.
Choosing to live a balanced lifestyle is a discipline that needs to be mastered by those of us who become obsessed with our projects. It’s hard for us to leave the office, especially when we are our own bosses. But the alternative of living under the gun is just not a viable long-term strategy. Entrepreneurship requires dualism. Like the yin and yang, a founder needs to balance his work life with his personal life. This balance is not something you can put on hold until the company completes its first IPO! Believe me, it’s way too long to wait, you’ll make yourself miserable, and if for some reason things don’t work out you’ll wonder what you did with all those years. Like anything else, entrepreneurship is a journey as well as a destination.
I tried to make myself into a work “machine,” but my humanity still found its way out, usually at the worst moments. It was John Keats who said the most important attribute of a leader is the ability to be in “uncertainties, mysteries, and doubts, without any irritable reaching after fact and reason.” Maintaining a balanced lifestyle is essential for a leader to remain effective. It affords each of us the ability to see clearly and make good decisions when those around us are frazzled.
5. Effecting Change
“Be the change you want to see in the world.” – Mohandas Gandhi
Of the approximately 1.8 million new businesses incorporated every year in the United States, less than a few thousand receive venture funding and a fraction of those ever go public. Clearly, there are no guarantees of financial success for entrepreneurs. So, why put yourself through it?
With so much volatility embedded in entrepreneurship, I believe it’s impossible for founders to stay motivated by the prospects of riches alone. Trust me - there are a lot easier ways to make money in this world than starting your own business! An entrepreneur who is only motivated by financial success will probably lack the staying power to guide the company through its darkest times. In fact, most new ventures would probably never get started if a founder’s motivation were based purely on the risk-adjusted economic merits of the project. When the going gets tough, leaving your start-up to work for a big company offering a generous salary, 4 weeks of stress free vacation every year, and the option to take on more responsibility later will start to look pretty attractive to a war-torn entrepreneur.
An entrepreneur can expect to feel even more conflicted every time he is forced to reinvent aspects of his business. From my experiences EVEN THE BEST BUSINESS PLAN CAN BECOME A BURDEN IF YOU DON’T BELIEVE IN WHAT YOU ARE DOING. Our motivation can’t just be about short-term personal benefits, because when the company’s prospects diminish, most of us will be inclined to quit and do something else. We just won’t have the wherewithal to keep at it. It was Benjamin Disraeli who wrote, “The secret of success is a constancy of purpose.” By first asking ourselves, “What positive change do I want to effect on the world?” I believe we can begin to uncover that sense of purpose. Then we can begin to recognize the causes worthy of our talents and dedication.
It’s a little known fact, but Henry Ford failed with his first two ventures in the automobile industry. For years he worked 12-hour days as an engineer at Edison Illuminating Company, while perfecting his invention at night in a shed. However, Ford was persistent and committed to the concept of the automobile, not just to the idea of getting rich. He had a long-term commitment and was willing to dedicate many years of his life without any guarantee of success. In fact, he didn’t start the Ford Motor Company until 1903 at the age of forty.
History is filled with tales of people risking their lives for causes in which they believe. By comparison, very little is written about mercenaries performing such acts of courage. As an entrepreneur, I was just trying to make money, so I could “cash out” and move on to something else. Unfortunately, I lost sight of the opportunity my partners and I had to create something more enduring. I think people who perform the greatest feats do it TO EFFECT POSITIVE CHANGE IN THE WORLD. They do it for reasons that hold deeper meaning to them, not just for money and accolades. For that reason, an entrepreneur should choose a purpose for his business that comes from someplace deep inside of him. Without a doubt, it will be the motivation that keeps getting him out of bed on those cold mornings long after the novelty of his new business has worn off.
Final Thoughts
The Entrepreneurial Code was intended to be a way for me to share my experiences and shortcomings as a young entrepreneur, so others might benefit from the lessons I’ve learned. The E CODE has also become a way for me to remember the mistakes I’ve made, so I don’t repeat them in the future. It identifies some of the troubles an entrepreneur can expect if he doesn’t acknowledge his responsibilities as a leader and allow his company’s mission and vision to flow from within.
For me, the E CODE also represents a turning point in my life when I decided to take responsibility for my actions and understand the mistakes I made. The demise of my company became an opportunity to reflect deeply about the person I was and who I wanted to become. By finding meaning in the events, they became my “wisdom notches” and I was able to grow stronger. In that way, from lemons we can all learn to make lemonade.
Copyright 2005 by Chris
Cononico
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