Momentum Podcast: 542
by Alex Charfen
Entrepreneurs who bootstrap and entrepreneurs who have taken money from investors or venture capitalists have two completely different experiences in business. In 99% of the cases where I've worked with entrepreneurs who have taken the money, it doesn't work out to their advantage. They feel a completely different level of pressure with debt and investors over their heads. Tune in for a conversation on loans, partial sales, majority sales, complete sales, and negotiations.
If you're an entrepreneur and your thinking about taking money from investors or venture capitalists, listen to this podcast first. When it comes to taking on funding, loans, or money always do so with caution. Because when you do, it completely changes the way you interact with your business. There's no pressure like taking on money and having investors.
Full Audio Transcript
In my career, I've worked with entrepreneurs who have bootstrapped, built their own business and grown organically. I've also worked with entrepreneurs who've taken on investment funds, worked with venture capitalists, with bankers, and have taken on investments. There is a clear difference for how it is for entrepreneurs in each of these scenarios. Let me share it with you.
I'm Alex Charfen, and this is the Momentum Podcast made for empire builders, game changers, trailblazers, shot takers, record breakers, world makers and creators of all kinds, those among us who can't turn it off and don't know why anyone would want to. We challenge complacency, destroy apathy, and we are obsessed with creating momentum so we can roll over bureaucracy and make our greatest contribution. Sure, we pay attention to their rules, but only so that we can bend them, break them, then rewrite them around our own will.
We don't accept our destiny, we define it. We don't understand defeat because you only lose if you stop, and we don't know how. While the rest of the world strives for average and clings desperately to the status quo, we are the minority, the few who are willing to hallucinate there could be a better future, and instead of just daydreaming of what could be, we endure the vulnerability and exposure it takes to make it real. We are the evolutionary hunters, clearly the most important people in the world because entrepreneurs are the only source of consistent, positive human evolution, and we always will be.
This weekend I went to a friend's birthday party and and we had a ton of fun. We were having a conversation about he and his wife selling their business and the possibility of having an equity deal, and we were talking through options and he was saying he has a ton of options. Option number one, is he could just continue to grow his business organically and not take any money. Option number two, is he could take a loan against the equity, have some money, take some off the table, and then wait and sell the business in the future. Option number three, is he could sell a minority share of the business and then own the majority share, get some money off the table, and then grow the business, or another option is he could do a majority sale, sell 60%, 70%, 80% of the business, continue to work in it, and then maybe in a few years, the business goes public and he could cash out again, or he could just sell the business outright.
A lot of different scenarios for us to talk through, and we ended up having a conversation about all of them this weekend, and I want to share with you my experience of working with entrepreneurs who are bootstrapped in organic growth, and my experience of working with entrepreneurs who've taken money. The overriding experience is pretty clear. I've heard a lot of stories. Usually when somebody is on stage, or in a book, or in a retelling of a story where an entrepreneurial has taken money and they've had great investors or an incredible venture capitalist group behind them, they've helped them grow the business, they supported the entrepreneur, gave them advice, help them do what they needed to do, and they ended up all making a ton of money and loving each other and the entrepreneur is so glad that they took money, well, I want you to know something, in my career, I've never had that scenario. I've heard it, I've seen it on stage, I've read about it, but up close and personal, I've never personally seen a single entrepreneur who's doing backflips and excited over the people that they took money from.
In fact, let's be candid. In 99% of cases where I've worked with entrepreneurs who've taken money, it is a tenuous, difficult relationship at best. Because once you've taken money, you feel a completely different level of pressure. In fact, let me give you an idea here. So first, if you haven't taken any loans, any money in your business, you don't feel the pressure of having debt over your head, you don't feel the pressure of having investors over your head. That is the least amount of equity pressure that an entrepreneurial can feel. Now, it gets a little bit higher when somebody takes out loans, like if you're using credit card debt, or if you're using loans, or if you've gotten a loan from a company like Kabbage, the pressure in your business definitely goes up. It's more than having no loans and having no debt.
If you do a partial sale, if you sell 20%, 30%, 40% of your business, that is exponentially more stress than having loans, but it's still nothing like a majority sale where you sell 60%, 70% of your business. That is the most stressful place I've ever seen entrepreneurs except for entrepreneurs that have sold their business outright and are going through a buyout, like a three or four year buyout. That is the most stressful place I've ever seen anyone, but let's talk about a few of these.
So first, if you take on loans, you take on some money, you're going to feel some pressure, be cautious and be careful so that you can get out of it fast. Run your company with as little debt as you possibly can so that you're cash rich, take the cash out of the business so that you make money, and don't try to take on a ton of debt. There's certain businesses where, fundamentally, the business process requires you to take on debt. I'm not talking about those. I'm talking in the average business, you don't need to go out and encumber your business with a ton of debt in order to grow. It just creates pressure, it creates noise. You don't need to do it. Unless you're in real estate or something where debt is just a part of the business, then it's different.
Second, when you do a partial sale, things change. When you do a partial sale, you now have investors to talk to, you now have a different level of pressure, you have the pressure of having taken someone's money and having to perform for that person. And whether you like them, whether you know them, it doesn't really matter unless you have no feelings at all, it is going to create a different level of pressure than you were feeling before.
Now, when you do a majority sale, that's where everything changes. This is where entrepreneurs feel a noose tightening around their neck. And I know that that sounds dramatic, but I want you to know it's not. When an entrepreneur does a majority sale and stays in the business, I've never seen a scenario where they're happier afterwards. Here's what I have seen. I've seen entrepreneurs take tens of millions, sometimes over nine figures out of the business in a majority sale, stay in the business and be miserable, have a huge bank account, and in my... And again, this is just my experience, this isn't every entrepreneur, but I've watched a lot of people create a massive bank account, be a minority owner in the business they were just the number one person in, and it is excruciating.
I've had a lot of friends who've become extraordinarily wealthy and completely and totally fundamentally depressed, because here's what happens when you do a majority sale of your business. On Monday, you are in charge, you are the decision maker, the buck stops here, and you report to no one. You complete your sale on Tuesday, Wednesday, somebody is calling you and saying, "Hey, here's how we do things around here. This is the reporting structure we're going to have. Here's how you're going to push your information up to me. Here's what I'm going to need from you. Here's how often we're going to talk." And for the first time, an entrepreneur... A lot of the times entrepreneurs are having for the first time a conversation about how they're going to be an employee.
You know what's interesting when there's a massive check in front of you as an entrepreneur? Oftentimes, we don't think about what it's going to feel like the day after. I remember when I sold my business, it was one of the single greatest one day losses of momentum I've ever had in my life. I don't talk about this often. When I sold the consultancy, the day before I sold the consultancy, it was mine. I was important. People in Latin America would listen to me, my clients would listen to me. I was getting things done, I was making things happen, I had a team. I sold the business and the next day my phone didn't ring, literally didn't ring. The significance I had the day before, it went to literally nothing the day after. I was 31 or 32 and I was going to retire, and it was the longest six weeks of my life. I think I almost drove Katie crazy. I was terrible at retirement. I was terrible at not having anything to do.
Selling my business was supposed to be this massive accomplishment, achievement, super exciting, and it was horrible. And in my experience working with entrepreneurs, I've seen it happen over and over again. I did a complete sale, so the majority sales where you stay working in the company, and then I did a complete sale. I sold the entire thing, I took a bargain price, and I just walked away from it and I did not want to be encumbered in the business. I didn't want to have to do an earn out. I'd already tried to do that in my 20s and it was terrible, and so I just walked away. I did the majority sale. And even in the majority sale with cash in the bank, with money to invest, I felt like I was in a retirement place, I still felt this... not majority sell, complete sale, I felt this massive total loss of momentum and loss of significance.
So if you're an entrepreneur who is running a business, really consider these things before you even start taking on money or thinking about taking on money. What's crazy today is I talk to a ton of entrepreneurs who they have a business plan that starts with taking on money. Now, there are some businesses out there that need to do that and there are some companies out there that need to do that, but the reality is that is the highest pressure way to start a business, it is the most difficult way to start a business, and you need to know going in, if that's what you're going to do, that the cards are already stacked against you.
Most businesses fail. Most businesses fail. What that means is most entrepreneurs fail. Most entrepreneurs fail because there's too much pressure and noise in our lives, and there's too many things going on, and we lack the presence and awareness to make the right decisions over and over again. And every time we add pressure and noise to our lives, every time we add a liability, every time there's somebody else looking over our shoulders, it gets harder for us to see the future, it gets harder for us to create the future, our peripheral vision narrows, we literally go into fight or flight.
In my experience, one of the things that can get any entrepreneur I've worked with who's taken money into fight or flight is an email or a phone call or a text message from their investors. With my clients who have taken on investment dollars, there has been more than once where I've been in a room watching them, they've gotten a text message, and I could tell it was from their investors by the way their physiology and energy shifted. So while it sounds exciting to go out and take on money, while it sounds exciting to go out and sell part of your company, while it sounds exciting to go out and get an equity deal, you have to know that it is not the easiest thing in the world to do and there's challenges that come with it.
So if you're going to go out there and do one of these things, just know up front that the decisions you make in the process will affect you directly after the process. So if you are going to do a partial sale of your business, make sure that on the conditions that you maintain control and that you know exactly what's expected from you. And if you're going to do a majority sale or a complete sale with a buyout period, make certain you negotiate your involvement in that buyout period. I've been involved in dozens of these deals and the deals that I've seen that have been most egregious are the ones where the entrepreneur has been really excited about how much money they're going to make and they didn't put the effort and energy into making sure that the terms and conditions of the deal were clear so that they knew what they were doing.
I remember, I'm not going to share who it is, but I remember when one of my close friends who sold the business for over nine figures had over nine figures sitting in a bank account. Can you imagine what it would feel like to have several hundred million dollars in a bank account? I remember we went to an ATM and he took out money and the balance was so big it didn't fit on the receipt in the balance section. It was like a joke that he had all this money in one place and he was figuring out where to put it. And I remember when he got the ATM receipt, I remember saying like, "Do you realize that FTIC insurance only covers $250,000 of the several hundred million you have?" He was in the process of moving around and doing something after he just sold his business and he was working through a buyout.
Here we were, he's showing me this receipt where he has so much money, the balance doesn't fit in the space on the ATM receipt, and that night all we talked about was how terrible things were, how depressed he was, how frustrated he was, how it didn't matter, how having money felt like a curse more than excitement, and how he really felt like doing this deal was going to change everything, and now he couldn't run his business the way that he wanted to. He was frustrated with the people who were around him, and now somebody for the first time in a long time in his life was pulling his strings, somebody was telling him what he needed to do, putting requirements on him, asking him where to show up, and he absolutely hated it. It was a very weird experience to be sitting with somebody who had literally hit the lottery and was the most depressed I've ever seen him.
So when it comes to selling your business as an entrepreneur, think about these things before you do. And when it comes to taking on funding or loans or money, do so with caution because it will absolutely change the way you interact with your business. There is nothing like the pressure of taking on money, and there is nothing like the pressure of having investors. So if you're going to do either one, do so with caution and think through these things first.
If you're ready to start growing your business and you want to understand more about yourself and who you are and how you are in the world, go to freemomentumbook.com. I wrote a book called The Entrepreneurial Personality Type, and it's about people just like you and I, our personality, our strengths and why we show up the way we do in the world. I think it will be a game changer for you to understand yourself better, stop limiting behavior and go create as much momentum as you possibly can. Go to freemomentumbook.com, download The Entrepreneurial Personality Type and circle back. Please let me know what you think. Freemomentumbook.com.