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3 early mistakes in building my business

When I talk to entrepreneurs who have a “side hustle” — a side venture to their full-time employment — many times they ask when to leave their “safe” job and focus entirely on their sideline. Last month I chronicled how it happened for me.

In this post, I’ll describe the three huge mistakes I made in the process. Everything worked out and FringeSport is stronger than ever. But hopefully you can avoid these screw-ups if you’re contemplating leaving a full-time job to focus exclusively on your side hustle.

Mistake 1: Consumer Debt

Mistake number one was for me was consumer debt. I quit my job while I still owed money on my house, my student loans, my car, and even some debt on credit cards that I carried over month after month.

When I was working a six-figure corporate job, I had a keep-up-with-the-Jones mindset. I had an M.B.A. and many of my business-school friends drove Porsches and BMWs. When we would meet for drinks at a bar after work, what would we talk about? Many of them had boring but highly-paid jobs, so we’d talk about their cars!

So instead of driving my economical little hatchback, I bought a luxury S.U.V., financing most of the purchase price.

I also ate out a lot. You’ve have to frequent the newest cool restaurant in town with your friends, right? In Austin, Texas it’s not too difficult to get a reservation at even the hottest restaurants. So my family ate out several nights a week and I typically paid for those meals with my credit cards.

And finally, an executive has to go on expensive, exciting trips, right? I certainly did that. And I paid for it all with my credit cards.

Student loans can be paid off over 10 years or longer, and the interest rates are fairly low. I felt no need to aggressively attack those loans. My employer even had a plan to help me pay off my $80,000 in business school loans.

If I had to do it over again, I would not have bought the luxury vehicle. I would have eaten at home far more, and I would have travel-hacked the trips — or eliminated many of them — and put my income to use retiring debt and then saving.

Mortgage debt at a low, fixed rate is fine if you have a significant chunk of equity in your house. But everything else is corrosive if you’re starting a business for your main source of income. The name of the game is to minimize your personal burn rate. And debt creates a burn that typically doesn’t benefit you now or in the future — since it is from past utility — and raises your required minimum income (to service the debt).

Mistake 2: Personal Guarantees

My second mistake was poorly assessing the downside and adding needless risk. When I quit my corporate job, I thought that the worst-case scenario was to fail at FringeSport and return to the job market.

That was true, initially. But as FringeSport grew, our vendors and suppliers required me to sign personal guarantees on the company’s debts and obligations.

At business or law school, students learn that a corporation limits personal liability. Instructors go into length discussing ways that the courts might “pierce the corporate veil” and hold individuals responsible for a corporations actions or debts.

But a surprisingly small amount of time is spent explaining how a company can hold an individual responsible for corporate debts: get the individual to sign a personal guarantee.

In practice, many vendors — banks, vendors, service providers, landlords — ask for personal guarantees. And if you balk at signing the documents, most will treat you like you are low-level crazy.

“You won’t sign? Huh, no one has ever refused before.”

Interestingly, author and entrepreneur Seth Godin stated in the excellent Start-Up School podcast that he never signs personal guarantees.

Certainly I use to sign them. But now I never do, unless there is no way around it. Many banks won’t issue a credit line without a personal guarantee. Many landlords won’t rent to you without one. And business credit cards for sure require a personal guarantee. But other than those, I no longer sign personal guarantees. I have even negotiated them out of leases.

And remember this about personal guarantees: Most have language that makes signees jointly and severally liable. This means that each partner or party who signs a personal guarantee is individually liable for the full amount of the debt. Thus, if you have more assets than a partner, and you both sign a personal guarantee that is jointly and severally enforceable, the creditor will come after both of you for 100 percent of the debt, but it will almost certainly focus on you, the signee with more assets.

Mistake 3: Advertising

My third mistake? I should have focused on low-cost and high-value marketing channels from day one.

In the early days, we grew much of the business on Google AdWords. We neglected collecting email addresses and email marketing. Now, email is a cornerstone of our business, and we have taken email marketing seriously for just the last 12 months. (I addressed, last year, how we dropped Google AdWords, in “Our experiment in eliminating AdWords.”)

Facebook ads are now huge for many digital marketers. But, building an email list and finding an email style that resonates with subscribers is like a lifetime annuity. Your AdWords or Facebook ads are gone the instant you stop spending the money.

What mistakes have you made in building your business?

Peter Keller
Peter Keller
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