Lessons Learned From a Failed Ivy League Entrepreneur

A "Case Story" By Chris Cononico
 

Chapter Forty-Three

“Avoid putting yourself before others and you can become a leader of men.” – Lao Tzu

On the surface, it can be said that my company failed because of the way we mishandled our direct mail campaign. Our branding strategy was too aggressive, our execution was too rushed, and we took too many unnecessary risks. While our marketing strategy may have been the final straw that broke the camel’s back; it wasn’t the underlying cause of our downfall. As 21-year old entrepreneurs, we put ourselves on a self-destructive path that only could have ended badly. It was just a matter of time.

Fundamentally, the failure of my company stemmed from inadequate leadership among its founders, not because of marketing mistakes. We were so obsessed with financial projections and sales growth that we didn’t understand what it meant to be “leading” a company and its stakeholders. I thought entrepreneurship was about identifying unfulfilled needs in the marketplace, meeting those needs, and earning a profit. That was as deeply into my responsibilities as I cared to delve.

Before starting a company, I think all entrepreneurs should identify what being a “leader” means to them. After years of reflection, my understanding follows:

A leader is someone with good judgment, strong character, and a sense of responsibility for the welfare of others. A leader builds a strong team and motivates its members towards a common purpose, provides hope in times of uncertainty, and helps the organization adapt to an ever-changing environment.

While some degree of technical competence is necessary, these leadership attributes mostly stem from heightened self-awareness. It was Sun Tzu who said, “Know your enemy and yourself and you will win 100 battles; know the enemy and not yourself and you will lose every time.” Unfortunately, as a first time entrepreneur, there was a lot about myself I didn’t know. While a lack of self-knowledge isn’t so unusual for someone in his early twenties, it’s a huge problem for an entrepreneur.

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 manuscript, I wanted to create another mnemonic to help me remember the leadership mistakes I made so I don’t repeat them in the future.

I have categorized these entrepreneurial mistakes into five elements (the “E CODE”). These five areas are as follows:

Egotism
Corporate Governance
Objectivity
Devotion
Emptiness


1. 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

“The pest of society is egotists.” – Ralph Waldo Emerson

“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 wealthy 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 these men 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 developed of life. I became enthralled with the idea that I could be the next Bill Gates or Michael Dell. At 21 years of age, I was convinced that entrepreneurship was the single greatest wealth-building opportunity available to me. By starting my business, growing it quickly, and selling my stake, I believed I could make “success” meet my timeline. I also wanted to be my own boss and to feel like I had a financial stake in the outcome of my work.

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 also entitled to the rewards. It made me greedy to protect my share of the mountain of profits I envisioned. As a result, I was very controlling about who I allowed to get involved with my company. Even if recruiting a larger team of people added benefits, I hesitated. After all, I didn’t want to share the upside unless it was absolutely necessary.

Eventually, I began to substitute egotism for self-confidence. At the time, I equated "not knowing" with weakness. To admit I didn't know something felt like I was admitting I didn’t have what it took to be a CEO. My way of coping with uncertainty was to shut others out. I tried to remove all doubt from my mind about being right. It was almost as if I believed I could use “positive thinking” to will the world to bend to my needs.

Boris Yeltsin once said, “Power should be open to criticism.” Being a CEO is not about knowing everything. It's about assembling the right team of people to best serve a company's stakeholders. There were people who raised legitimate questions about my company’s business plan, but I was too quick to dismiss them. Unfortunately, my false beliefs about the infallibility of being a CEO kept me trying to prove that I didn't need other people.

In retrospect, my egotism also surfaced in more subtle ways that had equally dire consequences for my business. After a year or two, I became embarrassed to show people I worked in a small office with a handful of employees. At the time, I had the belief that managing a small operation meant I was unsuccessful. It made me feel like a novice. So, I felt pressure to rent larger office space and grow the company more quickly, which also meant expanding the business prematurely.

At the end of the day, an entrepreneur has the responsibility to steward his company and its many stakeholders, not just his own interests. Entrepreneurship isn't about looking good. It's about creating value for other people. There’s no room for a founder's ego, because it interferes with the real mission of any company, which is to serve its customers. This ability to focus on the needs of others requires a very high level of self-confidence, not egotism.

Entrepreneurship is not so different from other career paths as many of us would like to believe. It still takes many years to build a reputation and a strong client base. It still requires the founder to start at the bottom and slowly rise. If anything, it’s less glamorous, because there are fewer people around to help and a lot less resources at our disposal.

2. Corporate Governance

My partners and I had little corporate governance and no written policies or procedures. We worked on everything together and we lacked the independent perspective necessary to critically evaluate our thinking. “GroupThink” was rampant within our company, whereby everyone was entranced by the same views, so no one was thinking independently and challenging 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 for us to recruit these “well-connected” people, we gave up looking.

As founders, we couldn't afford to pay ourselves high salaries, so we were financially 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 financing 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 also 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 all of my stakeholders. I couldn’t just behave however I wanted. Therefore, I needed to be willing 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.

3. Objectivity

After becoming an entrepreneur, I often compared my life with those of friends who accepted the types of jobs I turned away. While I slept on the floor of my office, ate the cheapest thing on the menu, and was buried beneath a mountain of credit card debt, my peers had apartments in the city, corporate expense accounts, and were improving their credentials in the job market. I began to fear that my friends were developing better resumes than I was, while I worked twice as hard for a fraction of the pay.

Comparing myself to others created a lot of unrest within me, because I was a competitive person and I didn’t want to feel like I was “falling behind.” Although I think it’s natural for entrepreneurs to contend with self-doubt, these emotions only impaired my judgment. They made me impatient to become successful quickly, because I was scared of “wasting” years of my life as an entrepreneur, but never becoming “successful.”

After the initial excitement of writing a business plan and setting up my company, I was almost depressed to be sitting in my small office and handing out debit cards to college students. I didn’t really have an appreciation for the work. In my mind, I had earned my degree from Wharton to become the manager of a tiny debit card office, but I probably didn’t even need to go to college to do that. It made me feel as if I wasn’t living up to my “potential.” Therefore, I wanted to put my head down and focus on growing my business faster.

Maintaining objectivity is critical for successful entrepreneurs. By “objective” I mean that an entrepreneur must see the facts as they are and rationally interpret them. The meaning of x = x, nothing else. A founder can’t afford to lose clarity and make x = y or z. Therefore, he must remain “emotionally detached” from the facts. Either through fear, greed or insecurity, by assigning any false meanings to the events unfolding around him, an entrepreneur can destroy his ability to make reliable decisions.

For example, I frequently observed the career stability of my non-entrepreneur friends with the instability of my own path. I interpreted my lack of income to mean that I was “falling behind.” In reality, all it meant was that I had made a different set of career choices with less financial stability - nothing more. Unfortunately, I made it mean something else. I made my income differential with my peers into a barometer of my success. It’s ridiculous, but I had set up a game for myself that I was bound to lose in the short-term. The worst part was that these comparisons were 100% in my head. That’s why I was putting myself under constant pressure!

Likewise, when I was managing our office on Penn’s campus, I interpreted this to mean that by running a small operation, I couldn’t possibly be “successful.” I could have just as easily told myself that managing a small office is a natural part of growing my business and even Microsoft started that way. Instead, I made the number of employees or the number of offices our company had into a barometer of our legitimacy as entrepreneurs. Again, it was a complete falsehood and extremely unhelpful because it motivated me to grow the business at a faster pace than was realistic.

In a similar way, early success sometimes became blinding to me and I construed it to be “proof” that complete victory was inevitable. This caused me to behave foolishly. I began to ignore risks because I wanted to believe my efforts had been justified and the profits I had envisioned were all but in the bank. Again, anything that can prevent a founder from observing and rationally interpreting the facts can only end in a bad way. By constantly making unhelpful associations, I wasted a lot of my energy. Even worse, I didn’t give myself the mental break I needed to take a step back and reevaluate with a fresh perspective.

We all need to walk away from a problem sometimes, so we can clear our heads. That’s something I had a lot of difficulty doing because I was so attached to my business. 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.” Learning detachment is essential for a leader to remain effective. It affords each of us the ability to see clearly and keep making good decisions even when those around us become frazzled. That’s why learning to maintain objectivity is one of the most critical attributes of a successful entrepreneur.

4. Devotion

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 success for new entrepreneurs, so a founder’s reasons for choosing his path have to be about more than the allure of financial gains.  I believe that an entrepreneur must choose a “cause” to which he’s willing to devote himself, even in the face of total failure. It was Benjamin Disraeli who said, “The secret of success is a constancy of purpose.” It should be a broader purpose that’s worth the fight regardless of the outcome. 

In fact, there is so much volatility embedded in entrepreneurship that it can be difficult for founders to stay motivated by the prospects of riches alone. Too often the company will be in peril and the founder will be forced to reinvent aspects of the business. If the entrepreneur is only motivated by financial success, then he’ll 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.

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.

At the end of the day, I believe the motivation to pursue a business has to come from a genuine commitment to serving a cause that’s bigger than we are. There has to be a responsibility we feel to serve others in a certain way. From my experiences I learned 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 benefiting ourselves, because when the company’s prospects diminish, most of us will be inclined to quit and do something else.

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. I think people who perform the greatest feats 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. Unfortunately, that wasn’t something I did with my business. Rather, I was just trying to make money, so I could “cash out” and move on to something else.

If I had a longer-term commitment to a broader cause, I would have been less likely to embrace a “gunslinger” management style. I would also have been more protective of my reputation in the industry and less likely to adopt a strategy that made so many enemies. Unfortunately, I wasn’t afraid to shake things up in my market because I planned to leave as soon as I could cash out.

5. Emptiness

"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 inevitably 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 always seems to be lurking about. It’s easy to doubt ourselves and be scared.

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 an entrepreneur could see in his unknown future. As entrepreneurs, it’s easy to lose perspective and not be able to see past our present situation, but an entrepreneur’s success does not depend on any one single idea. Like Henry Ford or Thomas Edison, we can fail many times before we finally find our brand of success.

Money and material success may come to us, or they may not. We may invest years of our lives on a project and it may succeed, or it may fail. Whether we becomes rich or not, the future always represents the possibility for us to make a difference. 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.

As entrepreneurs, we have to be able to walk away from our failures to see where life will take us next. Success will eventually come to us, but it may not be the way we first imagined it. For some, it may be the amassment of personal wealth. For others, it may be the simple knowledge that our efforts have had a positive impact on other people’s lives. The point is that every entrepreneur must maintain hope 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 faith that the future, while uncertain, holds possibilities for each of us to make a difference in the world. Unfortunately, we won’t always know how it’s going to happen. What may seem to be our biggest disappointment often turns out to 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.

Final Thoughts

This manuscript 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. The E CODE 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.

When you consider the many scandals that have plagued corporate America in recent years, I think these incidents are indicative of people with good intentions that never took the time to define their values, principles, and integrity. That’s why people often succumb to an end justifies the means mentality and take shortcuts at the expense of others. That’s also why I think it’s important every person develop his own “code” of conduct and live by it, whatever it may be.



 

Copyright  2005 by Chris Cononico
All rights reserved. No part of this manuscript may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the author, except by a reviewer who may quote brief passages in a review.