The Accidental Entrepreneur- 8 Lesson From the Start Up
Getting started, the first three years
I am a researcher, that’s who and what I am. And I am a Hispanic researcher, dedicated to bringing the voice of the Hispanic population to the people who need to hear it including government, foundations, health care professionals, manufacturers and service providers. Being very frustrated with my work situation and needing to make a break, I did it. After ten years of working for other people, I decided to go out on my own and see if I could live not only my passion but fill a void in the research marketplace.
The decision required me to look at what was needed to not only hang out my proverbial shingle but build a company. I needed to think about the infrastructure that was needed to be able to work with real clients! Now I had to build it. So, I refinanced my house, which at the time had risen in value, and I had the princely sum of $35,000 to play with. I gave notice to my employer who begged me to extend my departure from two to four weeks so they could look for someone to replace me, which I did. I didn’t want to leave a trail of bad blood behind me.
I was determined to establish a real company, not just the semblance of a company, as I knew that the path to having a Hispanic research entity take hold was a long one. First decision to be faced: what would be my legal entity? So, I found a lawyer and got incorporated. I was so focused on the permanence of my company that I rejected the normal S-Corp option and founded my company as a C-Corp. There are many disadvantages of a C-Corp and many advantages of an S-Corp, but I went with the C-Corp for one simple reason an S-Corp has to have the calendar year as its fiscal year, and a C-Corp can be any date, so I went with that and picked March 1st as the start of my fiscal year. That way, when the inevitable profits would start flowing in (yes, I was that naive), I could take them in February and not have to pay taxes on them until April of the next year. Also, a C-Corp also allows you to have retained earnings to build the value of your company, but not everyone cares about that. This legal process cost money, but it was the foundation of my company thus it was well worth the expense.
In hindsight, if I were to advise someone on how to start up a company, I would suggest an S-Corp as this structure allows you to carry both profits and losses straight into your personal taxes which can be appealing to investors who most people are wise enough to seek. But ultimately you must consider your personal situation and listen to the advice of your legal counsel.
The next steps on infrastructure
The next step was building an accounting function. I was not going to go into this business without a firm commitment to keeping careful books that met legal requirements. This was an expensive decision, but honestly, I think it was the smartest thing I ever did and I kept that up for all 21 years. I hired an accountant, the first of only four in two decades, and one of my ex-colleagues soon joined me and she started to keep the books. What did I learn from this? Challenge the software decisions and stay involved with the accountant as your right arm! Our accountant picked a software package that was quite arcane and more complicated than we needed, but we followed his advice anyway. Ask why this and not that take the time to study the issue as it’s a big one.
Now I was on my way, yet the big decision was looming. Office space or no office space — that was the question. This was a scary step, as it was a big expense and an even bigger commitment. Yet, I did not want to just work off my kitchen table, even though that would have been cheaper, and on the expectation of needing space for employees, I decided to find real offices. First issue where? I was living out near my old job, but I wanted the company to be in town, near the Latino community and its large labor pool. I decided to go ahead and give myself an hour commute each way, but I figured I could sell my house and move at some point. That plan was thwarted when the market dropped and I was underwater on my house for a decade. So, I commuted.
As you can imagine, landlords are less than enchanted to rent to start ups, so to counter that I had to put down a hefty deposit (which I never got back, but that’s another story) and a personal guarantee. I found office space, cobbled together used desks and chairs and bought some cheap computers and printers. It isn’t really all that expensive to find this stuff if you are careful and clever.
A couple of mistakes I made one was willy-nilly renting in the City of Los Angeles. As much as I love LA, which I do, I didn’t investigate the various tax consequences of such a move, and I was surprised to learn LA has an odd tax set-up with a 1% gross revenue business tax. Yes, that’s gross, not net. So, you can lose money and still owe them lots. I corrected that by moving when our three-year lease was up, going into the city of Burbank, virtually across the street, where business taxes are low. Why do you think that Warner Brothers and Disney are in Burbank? Not to mention why Sony (the old MGM) and Columbia are in Culver City, Fox is in Beverly Hills, Universal Studios is in Universal City, DreamWorks is in Glendale, several of the artsy independents are in Santa Monica. Of the major studios, only Paramount is in the borders of the City of LA. I have even spoken to the mayor and his deputy mayor about this, but it is politically impossible to change this counter-productive tax structure.
Decisions and timing
Let’s step back for a second from the infrastructure discussion and talk about timing when is it right to make the jump to being an entrepreneur? Ah, timing. I started my company in March of 1990, just as a recession was starting this was the recession that G.H. Bush was unmoved by and Clinton was referring to with his famously effective mantra: It’s the economy, stupid. So, this made for a rough couple of years, but we survived partly because during a downturn, companies must be even more careful how they spend their money, so they invest in research to be sure they’re making the right move. And when the economy came back, we were there and ready. In retrospect I’m glad we started in a down economy as we developed good habits and didn’t grow so fast that we would be clobbered by the next downturn.
Some of the timing answer is surrounded by the biggest decision of all to fund on your own or seek business investors. I arrogantly started this operation without any investors, without deep pockets (I soon found out $35K is not a lot of money), I was single and had a car payment and a mortgage and child support to pay. Gasp. When I look back, I shudder at the risks I took, but it seems one thing every entrepreneur needs is ice water in their veins (or a big blind spot). Consumer research isn’t the kind of sexy business that easily attracts venture capital in any case, and we didn’t have any grand plans, just incremental dreams.
Also, being a Latino from a poor family with no money and few connections, I had no idea where to start, where to look, who to talk to or how the process might work. People in East LA didn’t discuss venture capital maneuvers at the Saturday carne asadas. Puts and calls weren’t the stuff of dinner conversations over lengua con arroz y frijoles. I should have studied those issues as I began my entrepreneurial journey, but it wasn’t as easy then as it is now with the internet. Check it out and familiarize yourself with the terminology and the common structures of venture capital investments.
As a free agent
A couple of colleagues from my old company did follow me, and not too much later a former client joined us too as well as my ex-wife who was doing the books part time (we stayed friends).
As soon as I was a free agent, I contacted every old client I had ever worked with and liked and several of them started giving me work. I did this because I was legally free to do so, as my former employer had never bound me to a non-compete or non-solicitation of former clients, but this upset my former employer nevertheless who had a letter sent by an attorney. I knew what this missive was the moment I saw it. I came home late and found a FedEx letter propped up against a corner of my front stoop, and a black widow spider had built a web across it. I’m not kidding. So, I disposed of the spider, read the letter and wrote one back — a letter from my heart without benefit of the advice of counsel. I explained that I was a Hispanic consumer researcher and that was what I did and that was what I was going to do, so leave me alone as I was not legally compelled to cease. I never heard back from them again. So, bit of advice check to see what you are legally bound to do or not do and abide by it.
Growth and profitability
My company was now real and in my hands to bring in business and grow. Now the decision was one of goals. My big long-term goal was to grow the company. Our first year in business we generated a modest sum in total revenues. Years later I would laugh about that as we regularly billed more than that amount in a month, and now it just seems weird as working for a huge company, we often win projects triple that amount in a single day. How times have changed! And my sense of scale, too!
To achieve short term growth, virtually every nickel I could spare was put into new computers and new employees. We added space upstairs and built our own focus group facility for qualitative research. We eventually added our own call center too. So, this company was no cash cow, it was a boot-strapped growth-focused operation from day one to our last day. Do I regret that? Not really, because this reflected my goals and the market demands. I do wish I had been a bit more balanced, more focused on building up savings than keeping my employees happy, but I am who I am, and I was never going to become a cut-throat mogul. Besides, I hate comb-overs. So, think about what you want out of being an entrepreneur and how much you want to take out and how much you can plow back in to grow your company.
Here is what those decisions could look like. Over time you will be confronted with choices during the inevitable business troughs. How I made them in the past could easily be seen as mistakes, yet I decided to stay the course and skate the line of profitability. I was always more worried about fulfillment than profitability. That meant as our business load fluctuated from month to month, I didn’t let anyone go even if it meant paying out all our profits out just to keep them on the farm. The result was we didn’t make much money but the work we did was always good. So, I was in effect buying a reputation for quality at the expense of any substantial profits. That hurt me then but helped me later.
Oddly for a company that worked in the field, marketing was always a weakness. I relied on personal connections and conferences, articles and speaking opportunities. But anyone starting a business must put this issue front and center if you want to thrive vs. survive.
Financing realizations
You will also be confronted with banking decisions which in my case was always a sore spot. We opened our initial accounts at the closest bank which was a Savings and Loan. I stupidly imagined that banks would want our business, that they would be interested in us and be excited to have a growing company among their customers. Sigh. Looking back, my advice is don’t assume too much about what your banking relationship will bring you or their willingness to loan your money. Your company health, your last three years of tax returns and the overall economy will drive what the bank will be able and willing to do for you, not your prospects moving forward.
Investors are an interesting set of people. At one point we danced with them, but their rules were very simple all the options were on their side, most of the advantages too. I was disappointed in the process, probably mostly out of naiveté. I imagined it would be a coronation, but that was just dumb. If you are interested in venture capital, talk to people who have been through the process, who know the process and approach, what you can expect and how you must play that game. Sorry, I can’t help with this one.
But our business was growing steadily, and we landed a lucrative account for a Mexican food company, and we did really good work for them in the Hispanic and General Markets. As that business grew, our team of 5 people realized we could aspire to build up a call center so we could do our own data collection and realize the dream of a vertically integrated company that did everything in-house rather than having to pay suppliers and must mark up their already marked up work. This was the catalyst for our move to Burbank and a 10,000 sq. ft. office. Key considerations for your entrepreneurial journey
Eight lessons from the start up:
- If you are committed legally to your former employer in the form of a one or two year non-compete agreement, you will have to wait that out before you can get started. If you have a non-solicit you can get started but cannot approach your past clients. Have your attorney look at what you signed BEFORE you act.
- Commit to a legal structure that works for you long-term. This will take homework and reaching out to colleagues in similar fields and establishing a long view plan.
- Make a solemn commitment to keeping careful books, no matter what the cost. One of my proudest days as an entrepreneur was the day we were audited by the IRS. They were impressed, and we taught them a lot about how consumer research companies work. Believe it or not, instead of getting mugged we got hugged as they left. It was easy to be calm through that process because we had nothing to hide and everything was laid out very clearly and transparently.
- It actually is a very good idea to develop a strategy and supporting business plan as it forces you to think. This doesn’t mean you have to stick to it slavishly you don’t because plans should be dynamic and adaptation to the world and your business change. It is also a very good idea to update your strategic plan on a regular basis, say, every three years while examining your business plan annually.
- Don’t expect miracles from a bank. If you need financing, talk to banks while also seeking venture capital or angel investors, but they’re in it for the return on their money, so even with the moniker of angel don’t expect them to behave angelically. Talk to people about this process, what you can expect in terms, conditions and amounts and what they will want in the way of returns.
- Keep up with your taxes, including all local, state and federal payments and especially all payroll taxes. If you slip behind, you might as well call it a day as that will become a steeper hill to climb. File your taxes on time (we sometimes took extensions, but only one at a time).
- Be a good corporate citizen join boards, help your local charities, clinics and clubs. Plan on charitable giving both in cash and in your time (your professional services which are not tax deductible but perhaps even more valuable than just small donations). Get involved in groups you can sincerely support political, religious, athletic, artistic, professional, whatever. Aside from the personal satisfaction, all of this will somehow rebound to your benefit. Call it good karma-in-waiting.
- Be conservative with your up-front expenses on space, furniture, equipment and even people. Lease rather than buy equipment if you can. Don’t bite off more than you can chew, or you may choke on it. Plan on growing slowly, and this can mean signing shorter term leases on smaller spaces, hiring people part-time to start, buying used furniture, buying cheap computers and small phone systems.
It’s good to look solid and big, but not to the extent of undermining the very foundations of your enterprise.
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