Dr Jeff Cornwall

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End of a Business Does Not Have to be Failure

Sometimes an entrepreneur reaches a crossroad.  While the business that they have started shows potential, they may come to the realization that the only chance it has of being sustainable will require raising money to grow it to the next level.  Bootstrapping is always a good path to start a business, but sometimes a certain level of funding is still needed to get to a sustainable scale that can earn the owner an acceptable income.  

The first thing to determine is if the business can absorb the cost of any additional funding after it grows to the next level.  Run detailed budget projections based on the growth you are considering that include the cost of the outside money, be it interest and fees with any type of debt or expected returns if the money comes from an investor.  

If the cash flow of the business looks like it will be able support the cost of the outside money, the entrepreneur needs to make sure they are ready to deal with the changes that come with the funding.  Debt financing will probably require personal guarantees and may also come with certain restrictions that may limit decisions you can make about how you run your business.  And investors will likely expect to become involved in major decision-making about the business.  

The entrepreneur must carefully consider whether getting the business to the next level is worth the added hassle and risk that comes with outside money.  If it isn’t, it may be time to seriously consider working toward selling the business if they can, or possibly closing it down in an orderly way.

The decision of whether to continue operating a business can be one of the most painful experiences an entrepreneur can face.

As small business owners, we often consider the people who work for us to be more like family than employees.  Closing the business that has been how they have made their living can make you feel like you are abandoning them.

As entrepreneur, our identity and our egos become tied to our businesses and its success. 
Ending a venture that we have spent much of our waking lives working in and worrying about creates an emptiness and sense of real personal loss.

But there are times in the career of an entrepreneur when he or she has to find a way to set these feelings aside and make a rational, clear-headed decision about the future of the business.

Remind yourself that moving on from a venture that is not sustainable can be a new beginning.  While some may tell you that closing a business is a mark of failure, experts would disagree with that.  For example, venture capitalists will often favor funding entrepreneurs who have had failed businesses in the past, as they know they can take what they learned from that failure and avoid repeating past mistakes.   

Don’t think about a business that did not make it as a personal failure.  If you learned from the experience and can take those lessons into your next business — that is success.

Moving Beyond the Kitchen Table

Bootstrapping is the name of the game for most startups. By keeping their expenses low, particularly overhead costs, entrepreneurs are able to start businesses with limited initial funding. 

A bootstrapped startup also allows the entrepreneur to determine what the market really wants without having to lock in specific long-term expenses tied to a specific business model. 
Once the business model has been tweaked enough that it begins to attract a significant growth in new business, the entrepreneur needs to shift modes and begin to create more formal form and structure to the business. This stage of development usually involves two major changes: hiring employees and moving into a legitimate space for the business. 
However, walking over the threshold from bootstrapping and model testing to the commitment of adding fixed overhead expenses can be a frightening step. 
“I think one of the struggles of starting a bootstrapped company is when to finally make the call to take on long-term commitments,” said Kurt Nelson, a Belmont University alum and co-founder of Aloopma, a design firm with links to the Bonnaroo music festival. 
“In the bootstrap world you fight to survive. You watch every dollar very closely. You sign short-term leases, hire freelance contractors and buy inexpensive desks and furniture that may not match.”
But the extreme bootstrapping approach can only take a business so far. 
One of the first big decisions is choosing when to move out of the bedroom, kitchen, coffee shop, garage, basement or wherever a business was formed during its startup days.
“Making the move into a legitimate office space is something that we put off for quite some time,” said another former student of the Belmont University entrepreneurship program, Jake Jorgovan, co-founder of Rabbit Hole Creative, a firm that does unique digital advertising and event graphics. “The money we saved in overhead was money we were able to put back into our pockets and into growing the business.”
That penny-pinching approach allows for only limited growth. 
“Eventually we realized that we needed a legitimate office,” Jorgovan said. “It was somewhere around the time when we had seven people working out of a 150-square-foot apartment, and I was sitting on a box because we were out of chairs. That was the moment when we realized it was time to upgrade our space.” (The company moved to new digs on lower Broadway above a restaurant.)
Adding employees is the second major step that can be intimidating for entrepreneurs. The thought of being responsible for other people’s livelihoods can be daunting. 
“Pulling the trigger to bring on salaried positions is a tough spot for a bootstrapper,” Nelson admits.
Jorgovan agrees, adding, “It was a tough decision because when you hire your first employee you realize that someone is counting on you to bring in revenue every month to pay their salary. It’s a whole new emotional level when you’re responsible for other people’s financial well-being.”
But an entrepreneur working alone can’t do it all. Eventually he or she will have to begin adding employees to support the demands of a widening base of customers. 
I recommend that entrepreneurs never lose the bootstrapping spirit. But they also need to understand that some of the extreme steps that worked in those bootstrap days can actually strangle a business after it has left the starting gate.