Objective Entrepreneurship

Getting Through the Rough Spots: Think Like an Investor

Over the last few weeks, I’ve received a handful of emails, many of which are from entrepreneurs who are facing the same problem: they have started their business, gotten off to a good start, but now they’ve stalled. They’re frustrated and are unsure how to proceed.

I’ve definitely been through this – in fact, I’m going through the same situation with Shortcut to China. Businesses will always go through rocky patches. At times it seems that your business is doomed to fail and there’s no end in sight. The most commonly repeated adage in these situations is “stick with it,” because things will inevitably get better. Obviously, there are many times when that advice is crap – your business is screwed so you should bail. But how do you know when you should bail?

Entrepreneurs can make a simple shift in their thinking to drastically impact the way they look at their business and the natural business cycle. The way of thinking can be summed up as: think of your business as you would a stock you own and your time as the currency invested in the stock. I know, I know; this seems terribly mundane, but hear me out.

Successful stock market investors are discaplined and objective. They decide at the outset of their investments at what point they will buy, sell or hold a stock. Investors who inevitably lose money are emotional and do not adhere to an investment plan. Investment plans needn’t be elaborate – often they are as simple as planning to sell the stock if it loses 20% of its value so as to limit losses.

Just like a stock, your business will inevitably experience undulations. Many entrepreneurs fail because they act the same way as emotional investors and don’t adhere to a predetermined plan.

What is invested?

The currency employed by stock investors is money. Entrepreneurs tend to invest both money and their time.

How is return measured?

Return is a relative measurement. An investment is generally regarded as successful if it is relatively more profitable than available alternatives. This means if stock XYZ performs better than the stock market as a whole, then it is considered  a good investment.

Investors measure the performance of a stock as a return on their investment of funds, whereas an entrepreneur must view their business from the point of view of the return on their investment of money and time. There is a third measure of success when running a business which is very extremely subjective: quality of life. To the greatest extent possible, you must attempt to quantify this element of running a business.

When to Buy

You buy a stock when you determine that it will provide the best return on your money. Likewise, you will start a business if you believe that the business will provide the best return on your money and time. You cannot let emotion get in the way of buying into a stock or starting a business. You’d never buy stock in a business that makes VHS tapes, because you know that technology is doomed to fail. Likewise, even if you are extremely passionate about producing VHS tapes, you must be objective and realize that you will not be able to start and run a profitable business producing VHS tapes.

When to Hold

When a stock loses value or the revenue from a business you’ve started slows down, you’ve got to ask yourself why this has occurred. You may want to hold onto your business or stock if you think the slowdown is only temporary. Is there a better option available for your investment? Could you shutdown your business and invest in a better, more profitable business? Is there any way to improve your business model to increase revenue? If not, you should hold on to your business and continue running it as is – but limit additional investment. Don’t dump large amounts of cash or time into your business.

When to Sell

There are many reasons why people hold when they should sell. Believe it or not, people develop an emotional attachment with the stocks they own. This attachment leads stock owners to treat their stock as much more than an investment, which it is not. I don’t think that it comes as much of a surprise that entrepreneurs become emotionally attached to their businesses, but that’s no excuse to remain indefatigably devoted to a dying business! When a stock’s value or a business’s revenue is plummeting with no end in sight, run! Investors should sell the stock and get their money out before they lose any more. Likewise, entrepreneurs should cease investment in their failing business. Many entrepreneurs can’t withdraw any money from their business (i.e. sell it to another person) so we’ll consider a “sale” in this instance to mean no longer investing time or money into the business.

Unlike the typical stock investor, there are two things that the entrepreneur can “sell.” The most obvious sale is the business itself. Entrepreneurs in this position stop working on their business entirely, winding it down until it no longer exists. On the other hand, maybe it’s not the business itself, but the business model which needs to be sold. The “sale” of your business model frees up entrepreneurial capital (time & money) to invest in a business model that provides a higher return. I’m using the “sale” of the business model generically – it could mean actually adopting a new approach to the business, purchasing a new piece of equipment, or anything else that materially changes the business.

Diversification

Investors in the stock market who have limited funds to invest, but an entrepreneur is given 24 hours each and every day that can be invested in a business. A slowdown in your business can be an excellent sign that you need to diversify your income. You can “hold” your current business, but focus your new investments (meaning your time) on a different source of income; effectively diversifying your income stream.

Double Down

In some cases, there may be a reason why a stock loses value but is still fundamentally a fantastic stock. In these cases, investors do what is called “doubling down,” meaning they invest more money in the stock at a lower cost. Doubling down increases an investor’s holdings in a stock but decreases his cost basis. For example, if you bought 100 shares of ABC stock at $100 and then you buy 100 more shares when the stock price dips to $50, you now own 200 shares for an average price of $75. This is a great way to get additional exposure to a great stock and make the average cost of your investment much more favorable.

If your business model is exceptional, and you think the decrease in your business’s revenue is temporary and out of your control, you may be able to double down. Many entrepreneurs cannot double the amount of time that they spend on their business. However, you may be able to use a slow down in your industry to hire other professionals at a discounted rate. Alternatively, equipment that can increase your productivity may also be significantly cheaper during a slowdown.

Bringing it all together

Before starting a business, or invest in a stock, you’ve got determine your investment parameters. If you’ve decided to sell a stock if it under performs against the S&P 500 index over three months, then you’d better stick to that plan or risk losing a lot of money. Entrepreneurs need to devise a plan as well. There’s many ways to do this, such as judging the success of your business based upon the amount of money made per hour or number of hours worked. It doesn’t matter what parameters you use, but you must identify them and they must be objectively measurable.

When faced with a slowdown, be objective when comparing your business’s current position to your investment goals and your alternative investments. Be honest with yourself about whether it’s time to sell or hold.

Image by Krissyho

Tagged as: business, entrepreneur, Entrepreneurship, goal, start-up