When you’re in college listening to your professor explain the tools and principles of business, you get the sense that there’s a particular formula to be followed.
This steady, consistent framework is a confidence builder. You begin to feel that if you follow this formula during the course of building your own business, it should be relatively easy to find success. Just do what you’re told, and life will be good.
It’s not just the students who come away from the experience feeling this way. University professors often believe this, too. They have many years of experience teaching students to be successful business owners, so they believe they have the necessary knowledge and skills to make a business work in the real world, outside the classroom.
I had much the same outlook, after teaching business topics at the Massachusetts Institute of Technology (MIT) for 12 years. Then my wife, Meredith, and I acquired and started running Randall Foods.
I was surprised to discover that much of what I believed wasn’t the way it worked in the real world.
That’s why I want to share the reality about what it’s like to move from learning—and teaching—world-class business principles and economic theory to actually running a successful company.
I wish I could say the business of running a business was easy. But I can’t. Running a business is really hard. Thankfully, I can say it is incredibly rewarding.
If you’re leaving school to build a company of your own, here’s some of what I think you need to know. This article is part of a four-part series that will explore various aspects of translating school knowledge into real-world knowledge.
Today, we’ll talk about the theories of financing your business versus the realities of actually securing financing.
What you were probably taught in business school about financing a business
What I taught at MIT—and what you probably learned in your own business finance classes—is that if you have a great business opportunity (“great” meaning the expected return on investment exceeds what an investor could get from the next best opportunity), then you should have no problem securing financing.
What you can actually expect in the real world
It turns out that securing financing is not guaranteed even if your business model is solid. Instead, you need to be able to demonstrate why a bank or an investor should be comfortable taking a risk on your fledgling venture.
When Meredith and I bought Randall Foods, we needed to borrow a large chunk of money to do it. This business was more than a hundred years old, and it had always been profitable. Meredith is the daughter of the former owner, and I had been on the board of directors for the company for 20 years. On paper, we should have been able to walk into any bank and successfully walk out with a business loan.
What actually happened was that we struggled to find a bank that was interested in issuing us a loan. Eventually, of course, we did find a bank willing to work with us, and we are very grateful for that. But it wasn’t easy. The experience was an eye-opening one.
The only loan we were able to get was one guaranteed by the Small Business Administration of the U.S. government. There we were, as strong contenders for being able to run the company well and the only way we could borrow money to operate our business was with a guarantee from the government. Worse for us, from a financial perspective, was that this guarantee came at the price of around $100,000 paid directly to the government, on top of the cost of the loan.
Why? Because we had no business history. Sure the business was over a century old, but Meredith and I were new to running a business. If you have no reputation at all, meaning this is your very first business venture, it can be hard to get the funds you need to get it off the ground.
Having advanced business degrees and being a tenured professor at a leading university doesn’t matter. When you start or buy a business with no actual business experience, you are, from the investor’s perspective, a risk. The level of uncertainty tied to your risk may fluctuate with the quality of your business and the promise of a large payoff at the end of the day. But you’re still a risk.
Many lenders or investors will say things like, “It sounds like a great business opportunity! But I don’t know you, so I’m not comfortable investing in your idea.”
If I could turn this hard lesson around into some useful life advice for a person starting a business, it would be this: spend some time building your reputation. Prove that you can be a competent user of other people’s capital. Because if you don’t invest the effort in reputation-building to prove you’re a person who can provide a healthy return on investment, you will have a hard time finding investors.
How can you build your reputation in practical terms?
You know you should build your reputation, but it’s entirely different to venture out into the world and do it. You have what seems like an unsolvable dilemma: you gain a reputation from successfully running a business, but you can’t secure financing to prove you can successfully run a business without an established reputation.
The solution is to think creatively and step outside of the box a little.
You may not yet have your own business, but you do have several resources that you can use as a public representation of how you operate. One important way you can control that public-facing representation of yourself is to pay careful attention to your social media channels.
If your social media profiles are filled with images of you partying the night away, for example, it’s easy to understand why a bank will be hesitant about giving you a large business loan.
Cleaning up your social media channels is something you should do—before you graduate from school. However, it’s not just your social media channels that reflect on you. There’s an old adage that you’re known by the company you keep. If your social media contacts are tagging you in questionable posts, their antics reflect back on you by virtue of your online friendship.
Carefully cull your social media contacts to eliminate connections that might be detrimental to your reputation and build new connections that foster a positive view of your responsibility and business experience. Follow or connect with peers in your industry who run their own businesses. This will establish you as part of that crowd. In return, you gain valuable knowledge and learn from their experiences.
Cleaning up your social media channels is only a skin-deep solution. To actually build a strong, positive reputation as a responsible spender and a reliable leader, you’ll need to live those principles in your daily life.
Values such as keeping your promises, honoring your word, practicing honesty and integrity, and being transparent and open are the factors that can’t be faked by simply deleting some questionable social media photos and following a business owner in your industry. They’re also the values that determine every choice you make—and the results you gain—in your pursuit of beginning your business. So no matter where you are in life—whether just out of college and in an entry-level position in a large company, mid-career making your way to the top, or an entrepreneur starting with nothing more than an idea—always be honest, have integrity, honor your word and keep your promises.
Building a positive reputation from the ground up may seem intimidating, but if you stay the course and exemplify the very best qualities investors would want in a business owner, you’ll get there much more efficiently.
And, when things get rough (and they will), a positive attitude and a willingness to adapt are two additional ways that you can show investors that you’re worth the risk.