It has become a cliché that entrepreneurs should try to turn problems into opportunities. The question is, how? That depends, of course, on the nature of the problem, but there are always clues. The tricky part is identifying them. We tend to become so used to viewing things one way that we miss the signs pointing in the opposite direction.
I'll give you an example. A woman I know started a bakery in Brooklyn several years ago. She had acquired the capital to build the company by selling equity to a group of angel investors, who owned just over 50 percent of the stock and thus controlled the board. The bakery had retail and wholesale customers and attracted a loyal following but was barely profitable. The founder, whom I'll call Judy, and her two operating partners recently came to me with ideas that would significantly increase the bakery's profitability. They also felt strongly that the business needed to expand. Judy was ready to invest an additional $100,000 of her own money and to raise $150,000.
The problem was the board. Its members refused to authorize the expansion and were blocking her from raising more money. They didn't want their investments to be diluted. They wouldn't even let her take out a loan. One of them told her they would get out of her way if she would return their original investments--buy them out--but she felt every nickel should go into building the company. She asked me for ideas to help her get the board to loosen its grip.
I told her that she was looking at the situation the wrong way. "When investors tell you they'll leave if you just pay back the money they invested, they're saying that they think they've made a bad investment," I said. "This is a vote of no confidence."
"So what should I do?" she asked. The answer was an easy one: Buy out her investors. Judy, however, was so focused on growing the business that the thought had never occurred to her. "Listen, this is a chance to get out of a bad partnership," I said. "If you're having these problems with your investors now, you'll have even bigger ones in the future. These are the wrong investors for you. Go ahead and raise the money, but don't spend it on expanding. Use it to buy them out."
Judy was taken aback. She asked what I thought about her plan to outsource the wholesale baking, which would drive up profits. "Don't do it," I said. "It's a good idea, and you probably should have done it a long time ago, but now is not the time to increase your profits. If you do, your investors might change their minds about cashing out. Then you'll be stuck with them."
Judy viewed the idea of paying investors to leave as a step backward. "No, no," I said. "Don't look at this as a negative. Look at it as a great opportunity. You've got to move quickly. The sooner you regain control of your company, the better off you'll be. Then you can take a deep breath and tighten your operations, and in a couple of years you'll be ready to raise the money to expand." Next time, I told her, she should make sure it's a loan. When entrepreneurs are starting out, they think equity is cheap because it doesn't yet have value, but it will become valuable if your business succeeds. In fact, it's the most expensive thing you can give away. So borrow the money if you can and pay interest.
Whatever Judy ultimately decides to do, I give her full credit for getting an outside perspective. Often the main obstacle to seeing the opportunity in a problematic situation is that we're too close it.