A tennis friend of mine built a flourishing direct marketing firm, with over 50 employees—flourishing, that is, until the economic crisis hit. Despite weakened demand, high fixed costs and a 50-person payroll, he soldiered on, optimistic things would get better. He and his wife even raided the family nest egg to keep the company going. By 2011, however, the game was over: they had to shut their business and, at the age of 50, file for personal bankruptcy.
The failure meant a significant setback in his family’s lifestyle, made worse by the knowledge that he had passed on a chance to sell the business for a nice profit in 2007.
Knowing that I recently wrote the book Brilliant Mistakes, he asked me how to convert his failure into something positive. Before answering, I asked what lessons he saw in all this. His reply:
- When things get really tough, downsize. Hard as it is emotionally to let long-term employees go, you must control payroll.
- Be very cautious about investing personal funds to keep things going. Don’t throw good money after bad, especially when nearing retirement.
- Sell at the top!
These are good insights that illustrate common decision traps. Lesson 1 is about acting too timidly–thinking incrementally when bold action is needed. Lesson 2 is the well-known trap of loss aversion, which tempts you to double down on a commitment when it is better to pull the plug. Lesson 3 is about overconfidence and the illusion of control. When things go well, people tend to take credit themselves; when things go badly, people blame events. In reality, in business you are lucky if you control even 50% of your destiny. That is why you need to do some scenario planning and remain humble when you are on top of your game.
Although these lessons are valuable, they won’t help my friend regain his footing. He still plays a mean game of tennis, and when I recently complimented him on his ability to pivot quickly and make winning shots even when off balance, he lamented, “Why can’t I do this in business?”
He can, of course, but he needs to reframe what happened. So, here are the lessons I would add to his list—for him and other entrepreneurs who have stumbled.
- A bad outcome doesn’t necessarily mean you’re a loser. Take the long view – almost all great entrepreneurs face setbacks.
- Maintain a winning attitude. Exude confidence and position yourself for the next wave.
- When you take big risks again, think through the worst-case scenario so you recognize it sooner when it starts to unfold.
- Although confidence is important, at the moment of decision you need to be realistic. So, seek the advice of seasoned advisors or board members
Another friend went through a similar experience 15 years ago. He also turned down a lucrative offer for his company and then waited too long to downsize when the tide turned. However, he did not risk any personal funds and managed to get back on his feet in three years. He now runs a well-respected marketing company, with time for hobbies, multiple homes and more than enough wealth to retire comfortably. He learned from his mistakes and credits several of the above lessons for his successful rebound. May the same happen to my tennis friend.