Bouncing back from your mistakes
I don’t believe any successful entrepreneur has ever written a detailed business plan on day one, and looked back years later with no change at all to their initial strategy writes Mat Jacobson.
Entrepreneurship is about great business skills and a competitive product offering, sure. But it’s just as much about adaptability: the ability to move and respond to market changes and market opportunities. The flipside is that mistakes will inevitably occur in a volatile, fast paced environment. But learning from the mistakes you’ve made and growing from them plays a critical part in achieving success. The good news is it’s even better if you can learn from other people’s mistakes, including mine, instead of repeating the same mistakes.
Before founding tertiary learning organisation Ducere, I founded an education company focused on providing the highest quality certifications to the financial services sector. I brought in a venture capital firm very early into the business. They were a high profile firm and after the negotiations and due diligence, once the deal was signed, we thought we were then all on the same side with the common goal to build a great business together.
The structure was such that the investment amount and shareholding was agreed to, but that the investment would be spread over a number of payments. As fairly young and naive entrepreneurs, we saw no issues with this approach.
They were not a passive investor by any means. They actually operat-
is the founder and executive director
ed more as a contracted operations manager of the business. That was something that appealed to us as we thought that we would learn from their past experiences on how to build a big business and even go public.
Over the next few months we relied heavily on their recommendations, which were to greatly increase expenses (e.g. using PwC as accountants instead of a small suburban firm, using high profile lawyers, spending all our money on R&D and product improvement). The argument from their end was that we needed to think about setting up for an eventual public offering, not on profitability in the next few months.
We went along with that logic. We were working together on a day-today basis with all communications being very positive and no issues raised whatsoever. Until that is, it came due for the second tranche of
I can tell you with absolute certainty, even knowing the short-term pain of start up owners and having learnt from my own mistakes; it’s better to take no money than to take money from the wrong partner.’
funding – all of a sudden things took a turn for the worse.
We were brought into a formal meeting where we were presented with a long list of things that were not as our investors initially predicted, such as greater expenses on lawyers and accountants, far more money into R&D etc. We found this somewhat absurd as we were simply following their advice, however it was clear this argument wasn’t holding any sway. Very quickly we realised the game that was going on and lo and behold, the conclusion from the venture capital firm was; we will put in the same money but we want twice the shares as were originally agreed to.
We were being played, and as we were young, and they were holding the cash, they thought we would simply capitulate to anything they demanded.
We were very fortunate to have great lawyers (lesson number one!) as our legal contract didn’t allow for them to alter the shareholding and they mistakenly thought we would be desperate for their money.
It then became not only a commercial issue, but a moral one as well. We felt that we had been duped. If we had made the mistakes we would have taken it on the chin and accepted the consequences. But to be deliberately set up in such a way, there was no rectifying the relationship in those circumstances. We informed them that we wouldn’t accept further investment from them on that basis.
This was quite a surprise to them as they assumed we would have to take their money, but instead I decided to mortgage my house to pay for the on-going funding needs of the company, and in addition I bought out their initial funding round so that we fully terminated the relationship.
The whole investment exercise was a huge waste of time and money. In the end, we sold that business to a global public company for about 40 times their investment amount. If they had kept to the original deal I believe it would have been one of the best investments that company ever made.
I guess their school of thought was to try and screw people to get the best possible deal you can… but my philosophy is to work in a partnership that is fair and reasonable for all parties. Aside from being the right thing to do, having this approach also creates the environment where everyone is motivated to get the best outcome for the business.
This is a very tricky situation for start-up entrepreneurs. Often they need the cash desperately to get their dream off the ground, but the reality is that you need to do as much due diligence on the firm you are about to partner with as they will no doubt conduct on your business. We subsequently realised that they weren’t all they were cracked up to be, with very limited venture capital success. But start-up entrepreneurs are often blinded to the details and simply see a cheque with zeros on it as the vital funding they need to succeed. I can tell you with absolute certainty, even knowing the short-term pain of start up owners and having learnt from my own mistakes; it’s better to take no money than to take money from the wrong partner. Mat is a pioneer in the e-learning field. In founding Dūcere, Mat works together with Presidents, Prime Ministers, global CEOs and other prominent leaders to deliver on the vision of providing the most sophisticated tertiary qualifications. ducere.co