it’s a well known saying in business that the best entrepreneurs think of ways to turn failure to success by finding opportunities where problems exist. But sometimes that’s easier said than done. Spotting a problem is usually easy enough, but the solution?
“That depends, of course, on the nature of the problem, but there are always clues. The tricky part is identifying them.”
In one of my vintage Inc. Magazine columns, I tell the story of “Judy,” a dedicated entrepreneur with a bakery business in Brooklyn, New York. She raised the capital to start her business a few years prior through a handful of angel investors. With just over 50% stock ownership, her investors controlled the Board. The bakery had a solid customer base, but was pulling very low profits. Judy was adamant that they needed to expand. She was even willing to invest a large portion of her own money in addition to raising more capital via other means to do it. The Board disagreed, and blocked all attempts at expansion. A couple even offered to bow out IF she returned their original investment amount. Judy came to me for advice.
“The answer was an easy one: Buy out her investors.”
My opinion came as a surprise to Judy. She had some great ideas about how to increase profits and grow the business, but I cautioned her not to do any of that yet. Instead, I advised her to get a loan and buy out her investors first. To put it bluntly, the blocks on expanding the business and offers to be easily bought out amounted to a vote of no confidence from her Board. They didn’t want to risk their investment and were standing in the way of Judy growing her bakery. If she wanted to put her ideas into play, the investors had to go. First. Before she saw a measure of success, and got stuck with them.
It’s a problem that I see a lot with startups. They need capital, and sell off equity to raise it.
“They think equity is cheap because it doesn’t yet have value, but it will become valuable if your business succeeds.”
If your investors aren’t as dedicated as you are to the business’ success, you’ll run into problems like Judy’s.
You can read my article in its original form at Inc. Magazine’s website.