The Choices That Led Small Business Owners to Wealth
February 12, 2016
Source: The New York Times
“I’ve never made a bad decision,” said William Greenblatt, chairman of SterlingBackcheck, which does employment screening. “I’ve just had bad results.”
That confidence enabled Mr. Greenblatt, 58, to take the company, which he founded to administer lie-detector tests in 1975, when he was still a college student looking for extra money, to a global business with 3,900 employees.
“We’re going to do $500 million in revenue this year,” he said. “That’s a lot of work when you’re doing things at $8, $10, $12 a pop. It’s an enormous operation.”
Small-business owners are generally focused on the day to day, if not the minute by minute, to keep their enterprises moving forward.
But they still have to make decisions to professionalize the business, put systems in place and have a plan that allows them to do longer-term planning. Those decisions can make the difference between being a small-business owner and a business executive with significant wealth.
Of course, which of those decisions matter most is generally clear only in hindsight.
“There is no bright-line test when a company gets to a certain size or age to do these things,” said Kevin M. Harris, head of the family business group at Northern Trust. “It is based on where the company wants to go.”
Determining which decisions were the ones that made the difference is sometimes not an easy task, and the stories that are retold are often the ones that turned out well. Yet it is worth considering what can go wrong.
Entrepreneurs who failed to find success were often resistant to change, said David Reimer, chief executive of Merryck & Company, which uses former chief executives as coaches.
“The reason tends to boil down to self-awareness,” he said. “A lot of C.E.O.s and entrepreneurs develop a Teflon coating in order to cope. That’s not a bad thing. The bad thing is when there is no longer a distinction between your Teflon coating and who you are, and you can’t take on any other input.”
So from the vantage point of hindsight, what were crucial decisions for a selection of business people whose wealth was tied to the businesses they started or inherited?
The decisions were generally of an operational nature, rather than part of a great innovation, these business owners said: a way of propelling their company forward and their net worth up.
Hiring and Paying Up
Boot-strapping, the term given to starting a business with an idea, passion and little else, is as much a necessity as a badge of honor for many entrepreneurs. And part of that do-everything ethos is a desire to run the business cheaply, with an awareness that lack of cash has killed many small businesses.
Fourteen years ago, when Tom Bernthal got the idea for a market research firm that is today Kelton Global, he and his partner, Gareth Schweitzer, expected to crisscross the country from their base in Los Angeles. “All of a sudden we realized what we had as a business was our people, and it was all we had to sell,” Mr. Bernthal said. “So we went out there and started being willing to pay for this really top-notch talent.”
The firm now has 70 employees, he said. In addition to increasing the founders’ overhead, that decision in 2010 to make those hires freed Mr. Bernthal, 42, and Mr. Schweitzer to focus on the higher-level projects that would expand the business.
“If you don’t hire those types of people, the client always wants you,” he said, joking that this insight came after his 14th overnight flight for a meeting in three months.
For Mr. Greenblatt, the growth of his background-checking company had been steady but slow. He credited the company’s faster growth to hiring a president in 1999 to help him expand. To afford it, he was prepared to halve his own pay.
“I never had to take that cut because he was so good,” he said. “That’s when I realized every single person you hire has to be amazing.”
But such leaps can be daunting because they lock the entrepreneur into a higher payroll, which in many new economy businesses is the largest cost.
Charles R. Barrett, president and managing direct of FZ Media Design, a digital marketing company outside Philadelphia, said he faced such a prospect in 2009. He had been doing projects for various small companies and relying mostly on freelance designers when extra work came in. But after doing a small job for CareerBuilder.com, he was given the opportunity to do a lot more work for the jobs site.
“It was that first ‘put up or shut up’ moment,” he said. “I just saw tremendous opportunity there. The door was open. How could I kick this door down? I needed bodies.”
He took the chance and began building a full-time team, which is now eight people. It paid off. More and more jobs came in from CareerBuilder.com, including the recent introduction of the worldwide jobs portal for Hilton Hotels. He has also been able to step back and focus on the larger strategy.
“I’m really proud of the life it’s afforded me,” Mr. Barrett, 48, said. “We have a nice house that I’ve rebuilt and a beach house in New Jersey that my wife loves. I bought a new Mustang and a 1967 Mustang coupe that I’ve completely rebuilt. You carry the stress load of everything, but it also gives you the freedom to reap the reward.”
Mike Cagney, 45, a co-founder of Social Finance Inc., also known as SoF, an online lender focused on student loan refinancing, personal loans and mortgages, said he wanted to make the company’s customer service the best it could be.
When he looked into setting up a call center in Sonoma County, Calif., an hour north of San Francisco, the going wage for such work was $12 an hour. “I looked at that and said there is no way I can pay $12 an hour,” he said. “No one can live on $12 an hour.”
He considered the decision an investment. “You can’t have the front line of your business talking to your members worrying about making rent that month,” he said. “I said we needed to pay people a living wage. I committed to paying $20 an hour, and some members of my board said, ‘Why are you doing this?’ ”
The result has been low turnover rates for workers and high satisfaction scores from customers. The company, which started four years ago with $80 million in financing, recently raised $1 billion and is now valued at $4 billion. It has been profitable for two years.
Larry Perkins, 38, applied three times for a job at Alvarez & Marsal, a top corporate restructuring firm, before he was hired in its Los Angeles office in 2006.
“That was a huge achievement in my life to get the job there,” he said. But 15 days into his dream job, he said, “I was on a jog and I said, ‘What am I doing here?’ ”
It wasn’t the restructuring business, which he loved, that bothered him, but the job itself. So in 2007, at 29, he decided to start his own firm. Three years later, his company was bought by another restructuring firm. A year into that arrangement, he was miserable all over again.
“I got into a position that is not my favorite one,” he said. “I was working for someone, trying to do all the right things, but at the end of it I didn’t feel like I was building the thing I wanted to build.”
So with five core members, he bought the firm back, a long, messy process that cost him most of the money he made on the initial sale. Since becoming independent again in 2013, the firm has grown to 20 people and business has increased sixfold, he said.
“The challenges I had as a small firm were the same problems I had at a big firm,” he said. “A big chunk of the problem I was having was with the guy in the mirror.”
Mr. Cagney said he had a similar revelation about his leadership skills. In his first venture, a wealth management technology firm he started in 2000, he thought he was a great chief executive.
“No one left the company, which I took as an endorsement of my management style,” he said. “I didn’t realize there weren’t any other jobs out there. Then my board sat me down and said, ‘You’re the worst C.E.O. ever.’ ”
To his credit, he listened and came to agree with the board. So when he started SoFi, he brought in a former colleague 10 years his senior to handle management and other technical roles. “It was a great thing to do because I wouldn’t have to worry about that stuff,” he said. “I could worry about other parts of the business.”
No account of wealth accumulation can ignore tales of risk-taking. But these entrepreneurs who built wealth did what could be called responsible risk-taking.
For Paul Darley, 53, it was a mathematical problem: The business could not support the people in the next generation of his family if they joined the company at the same rate as his generation. So after nearly 100 years of focusing on the firefighting business, he decided that W.S. Darley & Company should expand into military contracting.
“The driver was making the company big enough to support the next generation,” he said. “I didn’t know anything about the defense business when we went into it, so we had to surround ourselves with good people.”
It worked, though not without fits and starts. But he said he listened to advisers and was willing to modify his strategy.
Blaine Vess, who 16 years ago founded StudyMode, a college note-sharing site, in his dorm room, ran it as a hobby business until 2005, he said. Then, five years after starting the company, he switched it from an advertising model to a subscription model.
He was worried that it would lose customers, but almost at once its revenue spiked, going from $60,000 a year in 2004 to more than $1 million a year in 2007, with just Mr. Vess and his co-founder involved. A third partner they took on in 2008 pushed them to expand internationally. Last year, they hired a chief operating officer.
“We could have kept running this thing the way we were running it even a year ago and get it to higher levels by asking more questions,” Mr. Vess, 34, said. “But getting someone in who’s been through it before and getting comfortable that this person is doing an awesome job and better than I could do, this has been great.”
For those risks, the company has pushed its annual revenue to more than $20 million today.