I have been very fortunate to work with entrepreneurs over the last 20 years. The energy, enthusiasm and inspiration is intoxicating.
Just last week, I was coaching a group of new startups and they make it seem so easy. One lady in the group started a branding business in her basement less than three years ago, and by this November she will eclipse $1 million in sales. She is navigating the trials of entrepreneurship flawlessly.
But it never ceases to amaze me how quickly the struggle is forgotten once success happens. Once a business superstar is born, I can almost predict the financial catastrophe in advance just by how they approach success. They climb up the high dive with perfect confidence, walk to the end of the platform and perform the most beautiful swan dive right into an empty pool.
The probability of successfully starting a company is minute. Entrepreneur Organization, a support group for entrepreneurs, estimates that less than 4% of businesses achieve $1 million in revenue. Or said another way, 96% fail to scale. Fast Company and Inc. magazine would be the size of 10 phone books every month if they listed all the failures, too. I love both magazines, but the survivorship bias frustrates me. People that succeed are at the right place, right time, right vision and work unbelievably hard. Only one of those things you can control.
Each and every product in existence today will likely be replaced by a better idea tomorrow, which means the company either adapts or dies. Very few make the turn. To make matters worse, most of us are one-hit wonders. We are really, really good at one thing. Once that one-thing becomes ubiquitous, our reason to exist in the marketplace disappears.
Many successful entrepreneurs turn into venture capitalists and consultants for the same reason football players turn to coaches and music artist turn into music producers. They can’t do it anymore, plus it is much easier (and safer) to support someone else efforts.
Once success happens, perspective must change because you move from the position of something to gain into the position of something to lose. Here are four important suggestions to help protect your success.
1. Force Scarcity. When success happens, the world becomes an endless concierge desk. You can do anything you want whenever you want. Banks are quick to lend money (because you don’t need it), friends approach you with endless ideas, and family members suddenly reconnect. If you don’t have the money, it is easy to say no – you have no other choice.
But with the barrier removed, you have to say no and no hurts. In my own business and at home, I had to force a process to let excitement of the idea fade. If I thought it was a good idea week later, I would force myself to come up with every reason why it was a bad idea. I would continually poke holes until I had exhausted every reason until saying no was the mistake. It does mean I have missed some opportunities in my life but as Richard Branson says, “Opportunities are like busses. There is always another one coming around the corner.” And it is not the missed opportunity that creates regret, it is the “opportunity: I can’t extract from my life that I regret.
Everything you do at this point should bring satisfaction and/or protection to you and your family. Figure out what makes you happy and impose a process to protect it. Only those people or ideas that follow your process will get a yes. A rule of thumb – you should say “no” 99 times for every time you say “yes.”
2. Get a Board of Advisors. Our perception of reality is more like a painting than a photograph – sort of like the difference between a Van Gogh landscape and a photograph of the same landscape. The reality we think we see is a combination of our mind’s interpretation and fact. Our brains are so good at creating this landscape that it is hard to spot when it is a fake.
This is especially problematic for the entrepreneur with business, family, and employees at risk. To protect yourself from the cavalier, the impetuous and the sane (which is really insane idea), assemble a team of advisors you respect. My support network includes clients, consultants, fellow entrepreneurs and even some of my competitors. Most are surprised by the number of people I rely on to slow me down. Other people see my problems with a clarity I just can’t. And clarity is something the entrepreneur can’t afford to live without.
3. Create a Safety Net. Think of liquidity like an airport runway. The longer the runway, the more room for error exists. Jets taking off from an aircraft carrier only have one chance to get it right. Liquidity lengthens the runway. Entrepreneurs must have two lines of defense against catastrophe – business liquidity and personal liquidity.
Business owners must be able to cover both business overhead and their family’s lifestyle to be in the safest position. In Greg Crabtree’s book “Simple Numbers, Straight Talk, Big Profits!”, he believes every business should have two months of expenses in cash. He calls this Core Capital. Unfortunately, cash is an after-tax asset. When success happens, people hate paying tax and CPAs enable clients to make bad decisions by showing them to how to buy new equipment they don’t really need or funding retirement plans. Retirement plans are useless to a 40 year old entrepreneur with a cash flow problem in the business.
The next line of defense is personal liquidity. In my book, “You Should Only Have to Get Rich Once,” I discuss the Cash Flow Stress Test. Your lifestyle cash flow is the after-tax money per year the family requires to survive. The Safety Net is the amount of assets that are available to pay the family bills if all income stopped tomorrow. Stocks, bonds and cash in after tax investment accounts count toward the Safety Net but houses, college savings plans, and retirement plans don’t. Divide the Safety Net by the Lifestyle Cash Flow to arrive at the number of years the family could survive on after-tax resources without adjusting lifestyle. You pass the Cash Flow Stress Test if you have three-plus years of liquidity.
Fight the urge to save tax until you build up your after-tax liquidity both in business and personal life. It is the difference between people that survive financial hardships and those that don’t.
4. Perpetual Income Streams. Perpetual income streams are critical to your survival. Netflix, Comcast, Verizon, your power company and the government for that matter are great business models. Every month or every year, they get a check whether you use the service or not. Imagine this situation – you could not work and pay your bills forever. Recurring revenue models make business life simpler – why not bring them home?
The entrepreneurial wealth gap usually does not expose itself until it is too late. Cash flow from the business create an illusion because the rate of return on yourself is exponentially big. It requires a multiple of capital to create the same level of income outside of your business. They are expensive and they are boring which is why most entrepreneurs don’t have them. To increase the likelihood of permanent financial independence, focus on building these alternative income streams. Once the perpetual income streams are in place, you don’t have to worry as much about the next paycheck.
These simple guidelines are not easy to implement. It will take a great deal of discipline, commitment and determination, but balancing these four principles is the key to keep success rolling.