This post originally appeared on The Distillery, a blog that covers the real experiences of entrepreneurs in New Orleans.
In 1995, Chris Reade walked out of his office in downtown Manhattan, just blocks away from One Exchange Plaza on Wall Street, when he had an “oh shit moment.” Reade, who at the time had just started Avalon Internetworking, which provided outsourced email services for clients, says he was downright young and stupid. He did all of the things you shouldn’t do when you start a business, he says. But we’d argue that ‘inexperienced’ is the better term for this entrepreneur who has now started and grown several successful companies.
At the time, the Brooklyn native had graduated from Rutgers University just a year earlier, started the company with seven of his friends, and had signed a ten year lease on their new office. Just four months after they launched the company, they had quickly run through the funding they’d raised, and were about to run out of money.
So, what did he do?
He packed up and got the hell out of there. The partners cut the team down to three people and focused on what was working—selling the product they’d created. That saved them and they were able to grow the company.
That would be the first of many moments to come. Fast forward through 20 years of growing and starting nearly a dozen companies. I meet Reade at his latest venture, LookFar, a software development company offering startups a myriad of services from product design, to strategy and financial modeling, where I find him vigorously competing in a game of PacMan with one of his team members before we get down to business.
Reade told us some good, bad and scary stories as he took us through his long and windy path as an entrepreneur. He also shared some critical pieces of advice that we think every entrepreneur should know.
SS: What is your take on the entrepreneur experience?
CR: Being an entrepreneur is like anything else. You get experienced at it, and then you know what to do. People think it’s an inspiration thing, and it really isn’t. There really is a skill to it. There is a practice and a skill, and it takes time, and frankly, it takes mistakes.
SS: What are some of the mistakes you’ve made as an entrepreneur?
Looking back at a lifetime of mistakes, out of 100% of mistakes that a person can make starting a business, 10% of those mistakes are required.
“I can tell you that you should never put a person that works for you in a position where all they can do is fail. Never do this. It’s in every business book. It’s commonly said.” I don’t think it’s possible for a person to understand that, especially an entrepreneur, until they do it. Until they burn a perfectly good staff member who was working for you, who you loved, who was great, and it didn’t work out because you put them in a position that they could never do, that they were not capable of doing, or was set up in a way that was not capable of being done. I’d burned probably three sales people before I realized that I was doing this. I don’t know how you don’t make that mistake. I think you have to make that one in order to realize what it means not to put people in a position where they will only fail.
But other mistakes, like if you have a tech product, absolutely get an IP attorney involved, and make sure you clarify 100% who owns what’s being created. You don’t have to make that mistake. That’s not a required mistake. You don’t have to screw that up to learn it. I’ve seen several startups where they didn’t have that “i” dotted, or “t” crossed, because everybody is your friend until there’s money involved, and suddenly there’s a deal on the table, and the freelancer you got to build the product, or your partner is suddenly saying, wait a second, I want to change the deal a little bit, now that there’s some money involved, because this is my intellectual property or software that I built for us.” And the company says, “But you’re a part of the business, and they go, “Maybe, but I didn’t sign anything over to the company about my work. I’m just an owner in this LLC. My work doesn’t have anything to do with that.”
SS: What are some of the lessons you’ve learned through all of your entrepreneurial experiences?
Within a year or two, every single person who goes out on their own, experiences what I refer to as the paralyzing fear. It’s what happens when you realize for the very first time that you’re not going to pay your bills, you’re not going to have a car, or an apartment, or go out, or do anything, maybe not even eat, if you can’t make this business succeed. What happens is, it feels like somebody takes two steel plates, and squeezes you in between them.
SS: Tell us more about the “paralyzing fear”.
CR: For me, this happened when I realized that the little bit of money we had raised in 1995 was rapidly running out, because I was stupid enough to have an office in downtown Manhattan and dumb enough to have eight friends as partners. I didn’t know anything. We were in striking distance from running out of all the money we had, and I didn’t have any money either. And two of my partners were roommates of mine, so I was like, uhh, we’re not going to be able to pay our rent on our apartment. What the hell are we going to do?
SS: What do you do when the “paralyzing fear” strikes?
CR: Even for experienced entrepreneurs, the paralyzing fear comes to get you every now and then, and rears its ugly head, like surprise! You forgot about me, but here I am again! It’s never like the first time, but it does come back again every once in a while. It’s not like you’re immune to it suddenly, but you know what to do.
What happens the next day is how you know you’re going to stick with it. It happens to everybody who jumps out on their own. And when they face it, it is immediately a conversion event. Either they continue or they don’t.
When people talk about working on their own, they’re afraid of a lot of things, but they don’t know what they should be afraid of. Well, what happens if all of the things go wrong? You can never move forward if you are constantly being cautious about it. Because then you’d be 60 before you got anywhere. You have to at some point make that jump. When you make that jump, if you’re really awesome, you’ve given yourself 6 months of financial runway, which means you’ve got your bills paid for 6 months.
But it doesn’t matter, at the end of the year, you’re going to come to that same paralyzing fear. It happens to everyone, and sometimes it’s unwarranted. Sometimes they’re actually doing a lot better than they think they are, but it still comes and gets them. It’s one of those hallmarks of entrepreneurship. Because you take on responsibility that frankly, you really don’t understand.
SS: Can you give us practical and real advice that our readers can take away from reading this and apply right now?
Always have two signature checks if you have partners. I don’t know how many people I have watched who have had partners steal money from them because they don’t have two signature checks. It’s the kind of thing you don’t think about. You don’t have to lose money to learn that. In fact, the bank asks you if you have multiple signers on the account, if you want two signatures required. The answer is always yes. In finance, if you have a partner and you don’t have two-signature check required, you are just asking for trouble. Charles and I worked together for ten years, and for those ten years our lives were intimately tied. Everything, win or lose, was tied together. And we still had two-signature checks, because you never know what drives people. And even though we’re super close, you never really know what somebody’s capable of, including yourself, frankly. So you don’t want that temptation in anybody’s head. If you have partners, do two signature checks, absolutely, every time. You must do that.
Know your money in and out. Finance is the hard one. You need to know how much money you have, all the time. All the time. I could tell you close to the penny all of my liabilities right now, and all of my outstanding revenue at a macro level. And I can tell you what’s in every one of our eight bank accounts right now. I learned that by almost going out of business enough times. You get screwed enough times, and you starve enough, and you go, you know what, maybe I should be aware of what’s going on. Understand the difference between gross profit and net profit, and what drives it in a particular business. That one, I think you have to experience. Because I can say it, and every accounting class you take in college is going to say the same thing, but you have to understand the real drivers. The only way you know this is if you learn your businesses’ way of operating. That’s one of the mistakes that I think you have to burn yourself on before you realize the prime drivers for your business. My first attorney, Bernie, said this to me and I quote it to people all the time: “What can you do but try and not be naïve?” and “Everybody’s your friend until there’s a little money involved.”
Keep a reserve. My friend Matt makes fun of me all the time. He says, you’re like one of those depression people who keeps shit in coffee tins and under mattresses. Well, I keep it in banks. Every once in a while, if the shit hits the fan, you can say, okay, I’ve got this extra $50K over here in a credit line, just in case. You only have to experience a cash flow crunch once. If that happens once, you’ll never let it happen again. When your bank accounts and your company suddenly drop to zero. It’s when you literally have no money. If that happens once, you’re like oh shit, I’m never letting that happen again. That’s when you end up with random credit lines and chunks of money that you keep in places, just in case bad shit happens. You never know. Bad shit happens to good people, all the time.
Don’t ever do your own payroll. I could say that a hundred times to every young entrepreneur, because they all do it. And every one of them will get into tax trouble. The same thing applies to doing payroll, and payroll tax is incredibly complex. You also have to know what your true financial position is at any moment. If you don’t know what it is, you’re screwed, because you’re making decisions that you hope are right, but who knows if they are.
Don’t screw around with the IRS. Fighting with the IRS, you’re going to lose. Bill Foster was my first accountant and he told me that you should never fight with the IRS, because you’re going to lose. They will always get their pound of flesh. That’s why you pay tax accountants. I haven’t done my own taxes in 23 years, because I don’t even come close to knowing the rules.
Now that’s real. Reade is already working on his next project – a mortgage company that caters to the self-employed. After finding it both difficult and discouraging for entrepreneurs and the self-employed to own property, Reade has set out help change that. He says this project is a labor of love, and we expect to hear some more good stories and advice soon.
Editor’s Note: Want to find out more about financial literacy resources? One way is through the Goodwork Network that offers training programs in financial literacy.