“No one ever got fired for buying IBM,” might have been one of the most successful marketing slogans in corporate history. Buying IBM computers was playing it safe. Making them, however, wasn’t: IBM ran into some serious trouble getting their PCs off the shelves in the 90s. IBM eventually solved the issue by changing from being a company that makes PCs, into a company that makes lawyer AIs.
You’d think small businesses and entrepreneurs would be faster to adapt to change than a multinational corporation. After all, you can turn a small boat way faster than a large ship. In practice though, entrepreneurs struggle with change – often in the same way larger organizations do. Just instead of organizational politics, it’s internal dissent and anxiety. It’s not the boat, it’s the captain. It’s not the change that’s hard, it’s accepting the need for it.
I was painfully reminded of that when a company I had founded in 2012 had run through the USD 50,000 that I had put into it. Looking back today, it’s painfully obvious that there was a mismatch between the growth plan and the available funding. It simply was not possible to grow that fast with the money I was willing to put into it. The company should have grown much slower or should have had several times the funding it had.
I think one main factor for the unrealistic expectations back then was simply prior experience: I had managed to launch significantly larger companies with significantly less funding. Of course, those were in areas where I held a lot more expertise, had invested much more sweat equity and, admittedly, may just have gotten way more lucky.
And while this experience has taught me to be a lot more critical with liquidity plans (rather than just tinkering with the numbers until the spreadsheets match what I hope for…), there were other lessons to be learned in this scenario of a sinking ship. Seeing for myself why change is hard, and finding out what can be done to overcome these mental barriers.
Sunk Cost Fallacy
It takes a lot of time, effort, energy and money to build a ship. Walking (or well, swimming) away from one isn’t easy. In fact, as long as you’re still on board, you can hope for things to get better. The moment you abandon ship, you have to look at it from the outside, recognizing that your investment is lost.
It’s one thing to set out a budget for company. It’s another to be willing to go through with it when things get serious. Sticking to your guns and not throwing good money after bad money is anything but easy. You are invested in something. Changing course is giving up. Giving up is losing what you did.
But in a way, at that point you’ve already lost. You are like a cartoon character who overshot the cliff and is now running in the air. You are waiting for a miracle. Of all of mankind’s pursuits, waiting for a miracle may be the most pointless one.
Sunk cost fallacy is an issue because we only focus on the numbers we know (what we invested already), rather than on the numbers that we have influence over (what we still need to invest).
If I were to encounter myself in a similar situation, I’d advise him to write down expected future expenses item by item for a best case and a worse case scenario. Not only does this reveal assumptions (making it possible to get feedback on from others), but it’ll also reveal later on if the plans were realistic to begin with.
Admission of Own Mistakes
It’s not just about numbers though. Especially for entrepreneurs, there is a strong identification with the success or failure of their own company. Back when that company was running out of money, I had to dissolve the office we had rented and sell off its furniture.
Advertising the sale of the company’s desks and chairs on my own Facebook was a tough status update to write. It was a bit like announcing my own personal failure to the entire world. Of course, everyone knows that most new companies won’t make it. It’s one thing though to know the theoretical odds. It’s another to not only experience it, but also have to announce it.
Change means doing something different than in the past. What you did in the past is no longer good. Worse, what you did in the past might have been wrong in the first place. Admission of being wrong is tough. It means you have to see yourself in a new, less flattering light. The stronger you identify with your work – be it the financial success it yields, the quality it creates or the recognition it gets you – the harder it will be to accept that you might have gone about it the wrong way.
If I were tasked with giving my past self some advice, I’d go for the following:
- Distance your current self from the self that got you into that mess (you are no longer the same person).
- Rationalize your behavior (there was a lesson learned, an insight gained).
- Focus on steps you still need to take rather than on those you’ve taken already (that’s what you can influence).
Maybe you think that sounds like going easy or making excuses. Being used to my own, rather harsh, inner monologue though, I feel that giving myself a break in that situation is a good way to go about it. What matters is that future decisions are better, not that I feel the worst way possible about mistakes I’ve made in the past.
In my eyes, there are very often a great number of reasons to be cautious about getting committed to a new business venture. Often, it’s less about the likelihood of failure then being worried about the workload and investment it may balloon into for years to come. Starting something new requires answering a lot of hard questions. A major one being how much time and attention you can bring to the table. Usually we underestimate the requirements and overestimate the availability of these mental resources.
The very first company I started was my only company at the time. I was fully committed – not only financially, but also personally. The company held a monopoly over my time and attention. That may have been a big success factor that becomes more difficult as you get older: Other priorities creep into your life – from family obligations to existing ventures.
Sometimes the issue can be solved by taking things one step at a time before taking the big plunge. Gradually increasing your investment of time, attention and money into an issue provides a soft way to overcome entrepreneurial commitment anxiety. For people thinking about becoming an entrepreneur, that can mean they start preparing or running a business on the side while they continue to hold a job.
On other occasions, that doesn’t work. You can’t cross a chasm in two small leaps. In these all or nothing situations, it helps if you can put things in perspective: Comparing the greenness of the grass on the other side with the depth of the chasm so to speak. It comes down to how much better or worse will your life be in the case of success or failure?
My past self could have done with one or the other: grow the company slowly and on budget to an acceptable base level and expand from there. Or make it a big leap. But in that case, make sure to commit the necessary energy (and money) to make that big leap in one go.
Your Own Acceptance of Change
You might think once you are aware of the above issues, it would make it easy to handle them. Unfortunately, that’s not always the case. Many times there is a reason to be anxious, a reason to be skeptical or a reason to stick it out. Being able to tell when change is required and when it’s not – that’s the hard part.
Providing general guidelines – like in the form of a blog post – is tough. Every entrepreneur is different. Some might have a tendency to jump ship way too early, others never leave the sinking ship. Your individual situation and how you might improve it varies.
The suggestions provided above are a starting point. Deep seeded beliefs and values won’t change in the course of hours, days or even weeks. Changing yourself takes time. Don’t fret if it doesn’t work out right away. Any small improvement, any small change towards handling change will help.
Oh and that company I had to shut down? I ended up putting another USD 10,000 into it before eventually pulling the plug on its funding. Turns out talking (or writing) about change is a lot easier than going through with it.