You’re an entrepreneur. You identify a problem, come up with a solution, and then launch a business to deliver that solution to the marketplace. And as the company grows, you continue to exercise control over every aspect of it, because after all, it is your idea and your solution, so there is no one better to ensure the vision of the company than you, it’s creator.
Until you’re not.
Many startup founders desire to maintain control as the primary means to achieving their goals with their business. One of those goals, of course, is solving that problem on which the company is built. However, many of the other goals are much more personal. Things like personal pride and wealth, for example, come to mind. Thanks to men like Jobs, Gates, and Zuckerberg, almost every first-time entrepreneur has aspirations of building something big by controlling everything and then gaining fame and a fortune when the company goes public.
It rarely happens.
Pride and personal recognition have fanned the flames of more crashing businesses, than the successful companies those same goals have fueled. Control is the problem for founders who, like Yertle in Dr. Seuss’s Yertle the Turtle, desire “to be king of all they can see” (Geisel, 1958). A king might see the wealth in the distance, but eventually, somebody sneezes, the king loses control, and everything comes tumbling down.
Being a king and building wealth are not mutually inclusive. Some research suggests that if you focus on maintaining control of your business you may become king, but it is unlikely you will ever create significant wealth. And if you focus on building wealth, it is inevitable that you will give up control (Wasserman, 2012). It is rare for an entrepreneur to maintain control and achieve wealth.
Here’s why: Like it or not, your business will inevitably outpace your skills, abilities, and expertise. If you believe controlling all aspects of the company will ensure your success, it is unlikely you’ll recognize when your company has outgrown you. You might be the king, but you’re likely to have little else. Plus, investors don’t like kings all that much. Particularly once you’re out of the startup phase.
Whereas if you give up control, delegating to those individuals with expertise in their designated areas of your business, while you focus on building the financial value of the company, you will be more likely to create wealth. Investors like delegation. It allows you, and everyone else in the company, to focus on those individual strengths that build wealth. Even Jobs, Gates, and Zuckerberg eventually learned the only way to create real wealth was to give up control.
Which is more important to you, wealth or control? Now, that you know, how will you structure your business to achieve your goals?
_________
References
Geisel, T. (. (1958). Yertle The Turtle. New York: Random House.
David Harkins is a business strategist, speaker, and teacher.
He is the founder and executive consultant at David Harkins Company. In his spare time, he writes hikes, explores, and creates art. Although, not necessarily in that order.
If you’re an entrepreneur and you’re not familiar with the term “sunk costs” you may have a problem.
A “sunk cost” is any past cost for something that you’ll not be able to recover. Typically, sunk costs are not included when making forward-looking decisions because those costs will remain the same regardless of what you may choose to do. In manufacturing, for example, a sunk cost might be the cost of equipment because it is a cost that has been incurred which will remain constant regardless of whether that equipment produces any product.
Think of it this way: It’s money you needed to spend that you’ll never get back.
The problem for most of us is that our forward-looking decisions become too tied to those sunk costs. We often become emotionally invested and the more investment we make, the harder it becomes to divest ourselves from those costs. In these situations, it is difficult to consider the pros and cons objectively. Instead, we try to recoup sunk costs, which makes us do irrational things.
Researchers Hal Arkes and Catherine Blumer argue that when we continue a behavior or work because of our previous investments of time, money, or effort, we fall victim to what has become known as the sunk cost fallacy (Arkes & Blumer, 1985). We place such a high value—either monetarily or emotionally—on those investments that we irrationally behave when faced with a decision that devalues those prior investments. Moreover, we look for ways to justify our choice rather than accepting the sunk costs as what they are—money we can never recoup.
Let’s look at it a more personal way.
Say you bought a quart of your favorite yogurt at the grocery store. It’s been in the fridge for a few weeks unopened, and putting away the dinner leftovers you spot it and realize that yesterday’s date is the “use by” date on the package. Concerned that it will spoil, you open and eat as much of the yogurt as you can—maybe even all of it—even though you’ve already had dinner because you’d rather do that than “waste your money” on food that will spoil.
The money for the yogurt was gone several weeks ago. You’re not going to get it back. But you’re emotionally invested with your favorite yogurt and your money. So, you chose to load up on the yogurt, which you didn’t enjoy as much this time. You only felt bloated and uncomfortable in the end. You made a decision that left you uncomfortable because of your emotional tie to money and your yogurt.
Make sense?
Consider another example. If you’re an artist, you invest a lot of time and energy in creating art. You might even have an MFA, so you have those education costs and maybe student loans to pay back. The time and energy to earn the degree, and the cost of your education are sunk costs. You will never get that time, energy, or money back. And still, you may be inclined to factor all those costs into the sales price of the art you create because you’re emotionally invested in those costs. But in doing so, your art rarely sells, or sells very slowly, because trying to recover the sunk costs will likely price your work out of range for your market. What you should really be doing is setting the price for the art based on the current market value of the art and perhaps the incremental costs to create it—paint, brushes, canvas—rather than all of the costs—sunk and incremental—you have invested in the artwork.
It’s important to remember that sunk costs can occur in any situation where what is invested cannot be recovered in any way. Sunk costs can be the 30 years we spent in an industry that has since evolved beyond our experience, skills, and perhaps relevancy, for example. Or trying to prove you are right about something when being right doesn’t matter. Maybe even ending a partnership that has long outlived its usefulness to all parties, but you keep hoping things will improve. Or maybe, doing everything you can to save a failing business because you’ve invested so much in it, hoping that things will turn the corner if you don’t quit. Those decisions are all based on the sunk cost fallacy and will become one of the causes of failure.
Making decisions about the future by basing them on backward-looking decisions of investments time, money, or effort, do not move the business forward. And many of us are guilty of spending too much time in the past for fear of wasting our investments. Psychologist Robert Leahy suggests that human beings fundamentally hate the idea of wasting anything. We have a desire to prove we’re right, we fear regret, we don’t want to feel bad, and we are unable to anticipate the positive side of giving up on the past or how others may view us if we chose to give up (Leahy, 2014). I would argue that for entrepreneurs, this is all about overcoming the social stigma of failure, a risk that every entrepreneur faces when he or she steps into the ring.
No one likes to fail. But it takes many entrepreneurs a long time to admit that they are failing, or have failed, especially if that failure is not public. Even in the midst of a failing business, many entrepreneurs don’t seek the help they may need, often for fear of judgment. Failure suggests you didn’t do your homework—you misjudged the market, the opportunity, the customers. Perhaps it suggests you didn’t manage your budget well, or couldn’t keep your employees motivated. Those things could be true, but it is just as likely that you have been—conciously or not—making forward-looking decisions that factor in your sunk costs. And putting sunk costs in proper perspective can make all the difference between swimming with the sharks, or being eaten alive.
References
Arkes, H. R., & Blumer, C. (1985). The psychology of sunk costs. Organizational Behavior and Human Decision Processes, 35, 124-140. Retrieved May 24, 2018, from https://pdfs.semanticscholar.org/e456/4b88ca2349962a707b76be4c75076ad6bd43.pdf
Leahy, R. (2014, September 09). Letting Go of Sunk Costs. Retrieved May 24, 2018, from psychologytoday.com: https://www.psychologytoday.com/us/blog/anxiety-files/201409/letting-go-sunk-costs
David Harkins is a business strategist, speaker, and teacher.
He is the founder and executive consultant at David Harkins Company. In his spare time, he writes hikes, explores, and creates art. Although, not necessarily in that order.
The following is an interview with Eric Hilferding, CEO of ClassB, a custom t-shirt manufacturer, and printer for my graduate coursework in entrepreneurship. Eric and I first met in 2005 when I was with the Boy Scouts of America. His company was one of the BSA’s first licensees in the revamped licensing program. We became fast friends and I have long admired his attention to detail, his creativity, and his commitment to service.
Q. Tell me a little about ClassB and your role with the company.
A. ClassB is a provider of custom decorated goods including t-shirts, embroidery and promotional products to primarily nonprofit organizations. The company started in 1982. We currently have 38 full-time employees. We focus on having a great customer experience. The internal motto is we sell service not t-shirts. I am the CEO of ClassB and one of the two company founders back in 1982. I have been formally running the company since the mid 1990’s.
Q. Did you have any entrepreneurial experience or education before launching the company?
A. I have zero business or entrepreneurial education – I have a BA in History. Luckily, learning about running a business was always a part of my life. I started working at around age 8 at my grandfather’s lumber yard. My parents often discussed business at the dinner table.
When my mother and I started ClassB, all immediate family members eventually were employed. I read profusely to fill gaps in my knowledge. I was very lucky to have my father with his extensive business knowledge available at all times. Without his experience, I would have failed many times over. Now I realize how right he was on everything.
Another key area is my Boy Scout experience. I learned so much by making lots of leadership mistakes in my Troop and working at Summer Camp. Having that sandbox to learn is one of the most valuable things I can imagine. If not for my parents and the Boy Scouts, my only business reference point would be work based sitcoms.
Q. What are you most passionate about and how does it tie to your work each day?
A. My main passion is that we treat customers right. It’s probably some of the Boy Scout indoctrination. However, most of it is driven by a sense of perfection and trying to avoid the guilt of an unhappy customer. I obsess over a bad customer experience and have to process thru it to be able to move on. I get lots of satisfaction by improving things. I lose interest if things stagnate or a task becomes repetitive and no longer optimizable. The idea of constant iterative change and the occasional disruption suits me. I also enjoy the new things I have to figure out. On some days I’m a scientist, engineer, investigator, lawyer, judge or a plumber, etc. It’s never the same every day.
Q. Business owners have many responsibilities during the day. Some of those responsibilities are more challenging than others. What are a few of the things you find to be the hardest to do? What are some of the easiest? Moreover, why are these things easy or hard for you?
A. The hardest thing for me is finding uninterrupted time. Every day being different is great – having so much to do is a problem. I have lost weeks just trying to finish something in 30 min increments. Kind of related: the most challenging thing for me is finding good people – they make all the difference. I have learned to hire people that fill my weaknesses not people who are like me.
I can’t tell if someone is a good fit in an interview. I have to hire them and then decide in 2 weeks at most so I can circle back to my 2nd option. The destruction to customers, profitability, and other employees that a single person who is “not a good fit for the job” can bring is incredible. As long as I remember that, firing people is easy. If I forget, firing is a drawn out, expensive, painful to all parties process – especially me. The easy stuff is fixing systems and things – why because I’m a systems guy, not a people person.
Q. As an entrepreneur, there are all kinds of things that can affect the business. We could spend all day, every day, worrying about those things. What are some of the things that “keep you up at night?” And what do you do each day to mitigate those worries?
A. I worry a lot – to the point of being unhealthy. I have a terrible fear of not doing things correctly – still a Boy Scout in some ways. I always strive to go above and beyond. I always play things straight – I assume that everything will always be discovered at some point – so it should be done in a way that would be correct from the get-go.
My biggest fears are someone taking advantage of us. This comes in two forms – frivolous lawsuits and unfairly instituted/ enforced regulations. I have seen a few ridiculous claims – I have a good family lawyer to pass them off. I also worry that someday an employee here makes a small mistake that destroys the company, puts all my employees out of work, and puts me in bankruptcy.
Many regulations often require academic-like responses, seem punitive, or meant for an unspecified situation—they are a time and soul killer. My fear comes in because they often seem to be unfairly applied. Unfortunately, you never know for sure how to comply or if the rule is real. You have to wait time to have an idea. It’s the uncertainty that gets me. The personal interpretation of a regulation by a single inspector has been devastating in time and money.
I mitigate these two things by trying not to think of them. I do all I can to do the right thing anyway and just hope.
Q. How do you motivate yourself each day? What do you do to let off steam?
A. Motivating is easy for me – I’ve worked all my life, so has everyone in my family. I’m a workaholic for sure. When things become overwhelming as they often do, I just have to remember to ignore the 100 things going on and move one thing forward at a time. Eventually, I can work out of the mess. I wish I could say being a business owner is glamorous – clearly, I’m doing it wrong, but my ‘letting off steam’ is maybe two days a year where I get to go hiking in the desert with not a soul in sight for miles.
Q. What’s your favorite customer story from your business?
A. For owners and managers, you really only hear the problems. It’s great you ask this question because it’s important not to lose sight of the daily things that go right. Ninety-eight percent of the time, things go good or perfect. The customer service people at ClassB get to hear all the good stories. I encourage them to share with everyone. We have the entire wall of the customer service area with photos and experiences that customers have shared with us.
I think my favorite situations are when we go out of our way big time to get the customer their shirts in time for an event that has special meaning for them. We have turned out shirts in a day and overnighted them because the customer made a mistake and we wanted to make it right for them. The best customer experiences come from looking for the customers best interests and ignoring the effect on any single transaction. Bake in some money to your price to be able to treat them the way you wish things worked.
Q. In your experience, what have you found works best to motivate employees?
A. Wow, have I worked the gamut on that! The one thing I have learned the hard way is don’t listen to what they say will motivate them. Money, benefits, and perks only work in certain market conditions or individual situations and are secondary or even a counter to the true motivator. The number one motivator is good managers. Those managers have to have people skills. They have to make the work environment-friendly, positive, professional, productive, fun and fair. They have to respect all the employees by having their fellow employees have a purpose and contribute to the team.
All managers have to pull their weight and show appreciation for everyone’s efforts. They also have to hold a high standard. If all that is in place – employees will be close to self-motivated and not look to leave. They are more productive, and guess what: Now those managers worth more, and they get more money. Try to work it backward, and it does not work at all. I personally am a horrible motivator – I am lucky that I have managers that are really good at that.
Q. Entrepreneurs are risk-takers. We know there’s a probably a more significant chance for failure than for success. Still, we move forward. As you think about your entrepreneurial plans, what is your worst-case scenario? What makes that the “worst” for you?
A. I always view the current situation as transitory. What is working today will not at some point. All I can do is keep moving and try my best to adjust.
I think my worst case scenario is that I get so caught up in the day to day issues of running my business that I lose the big view of where the market is going, and we fall behind. Know this always happening to an extent. I don’t want to fail my family or employees because of something I missed. I don’t want to look back after the failure and realize I spent too much time on ABC instead of XYZ.
There is a burden in having so many people and their families relying on you for their lively hood. I have maybe 60-100 people indirectly or directly relying on me. I do not want to fail them. If it was just me, failure is easy and guilt-free – plus the Boy Scouts taught me how to survive in the woods if need be.
David Harkins is a business strategist, speaker, and teacher.
He is the founder and executive consultant at David Harkins Company. In his spare time, he writes hikes, explores, and creates art. Although, not necessarily in that order.
Q. Tell me a little about ClassB and your role with the company.