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Often It Is Who You Know versus What You Know

WHEN YOU WERE GROWING UP, were you ever roped into doing fund-raisers under the guise that it was entrepreneurial? Maybe you sold Girl Scout cookies or candy bars for your basketball team. Or perhaps you were tapped to peddle wrapping paper for the student council or pizzas to help build a new school library. It seemed like every organization had some fund-raising product for us to peddle.

The fund-raising groups tried to sweeten the deal by offering prizes. Whoever sold the most of the given product got something coveted by kids like a new bike or an AM/FM radio (today I guess it would be an iPod, but, hey, that was what they gave when I was a kid).

If you considered yourself entrepreneurial, you were probably excited to flex your selling muscles. You traipsed all over the neighborhood selling your fund-raising wares, sure you were going to sell the most and get a new bike.

After a couple of weeks of working every relative and neighbor you knew (and several you didn’t), you had sold an impressive several hundred boxes of said product—cookies, frozen pizzas, candy bars, sheets of wrapping paper—whatever. Your win was as good as gold.

Then, you got to school and found out that Susie sold five times the amount you did, not because she was a great salesperson with an entrepreneurial spirit, but because she had a wealthy family and her dad was the managing partner at a several-hundred-person law firm and forced each of his underlings to buy twenty boxes of cookies. The dad basically bought the win, the bragging rights, and the bike (which Susie didn’t even need because she already had two).

Business is often like that. It is sometimes not what you know, but who you know.

If you don’t know Jack, Bo, or anyone else that matters, you may very well be screwed, or at least start with a major disadvantage. The first place that you lose out is in trying to fund your business. If you are an entrepreneur that needs capital, not knowing people with capital is going to make it very difficult for you to get your hands on some.

Investors often invest in a business because they know you or because their friends are doing it. So, if nobody who knows you has the ability to throw some funding your way, there aren’t going to be a bunch of others following their lead. This reality becomes a frustrating aspect of starting a business.

If you have a more ambitious business plan, you will be seeking professional capital. Without the endorsement of someone who has connections, you will not likely make it through the sea of business plans that the investors receive each year. They, too, invest in management, and one of their first screens is to see if anyone they trust and respect can vouch for the entrepreneur (or entrepreneurs) involved. That screening process, coupled with the sheer number of inquiries that they receive each year, puts you at an immediate disadvantage in trying to obtain significant financing.

Who Do You Know?

The connections (or lack of connections) issue continues to rear its ugly head as you progress in establishing your business. You can often get better deals with everyone from suppliers to professional services firms with a solid introduction. Plus, you want to have some reference checks before you partner with a stranger as an important vendor or legal consultant. Not knowing anyone can cause you to pay more for products and services, receive unfavorable business terms, or make it hard to negotiate a deal at all.

Securing customers is predicated on who you know. If you are in the services business or in another business-to-business industry, landing new customers is often dependent upon getting referrals. I have been on both sides of this. I have received many clients through referrals. I have also lost many engagements because the potential client had a board member with a buddy to whom he wanted to give the business.

My personal worst example of this happened with a company I was courting for a couple of years. I had provided advice and guidance to the company to help prepare them for raising growth capital down the road. As part of the company’s preparation for its capital-raising process, it wanted to beef up its board of directors. The management team had a few people in mind, and one of them was a former colleague of mine who was an expert in this particular industry, and who I respected and had previously worked with very closely. I made a personal introduction and provided a formal recommendation to the company to add this person to its board.

My colleague was given a position on the board, and a few months later, when the company was about to engage me and my firm to raise capital for them, this former colleague, who I had recommended formally for his current position with the company, sold me out. He talked the company out of hiring me and my firm in favor of another investment banking firm where his best friend worked.

So, even though I had put forth a ton of effort, built a relationship with this company for more than a year, and knew (and even recommended) the director, I lost the deal (and a $750,000 fee) because someone else was better friends with the director.

Connections: When More Is More

The “who you know” thing comes into play all the time. They didn’t come up with the “old boys’ club” phrase out of thin air. Even if you are in a consumer-oriented business, getting retailers to sell your product, or getting people to recommend your business in the beginning is much more difficult if you don’t have a lot of connections, or aren’t that keen on using them.

It is the early stages of the business that are the hardest. It is much more difficult to get to the first million in sales than it is to get to the second. It is the first several years and early stages where most businesses struggle and ultimately fail. So, this is the critical time for you to depend on others for assistance.

I know it sucks and creates an unfair disadvantage for the little guy, but it is reality. So, think about what kinds of connections you will need in terms of capital, vendors, professional service providers, customers, and in other aspects of your business. If you don’t have any, you may want to make some more friends—preferably wealthy, well-connected ones—before you think about leaving behind your day job.

EXERCISE 7

TARGET FOCUS—TIMING:

Evaluating Your Network

1. Make a list of everyone you know that you think could help you with an aspect of your new business.
2. Put each person into one of three teams:
   • The “A” team being those who would do anything for you.
   • The “B” team being those whom you have a good relationship with but aren’t necessarily in your inner circle.
   • The “C” team being those you shook hands with a few times.
3. Next to each name write down each functional area of your business that person could help you with, such as:
   • Raising capital
   • Introductions to potential customers
   • Introductions to vendors
   • Technical skills
   • Introductions to relevant service providers or performing services as a service provider
   • Any other specific areas where you may need help (be sure to list the specific area)
4. Put a star next to anyone you would feel uncomfortable approaching for assistance today.
5. Add to your list any areas/functions where you don’t have any contacts and circle those.
6. If you have a number of stars, assess whether having more time (three months, six months, a year) would help you improve the relationships with any “starred” individuals so that you would feel comfortable asking that person for assistance.
7. If you have a number of circles, these represent holes in your current network. If you had more time, where could you work to supplement your network and fill in those gaps? Would you be able to seek out and build relationships with people to help you with the “circled” areas?

Evaluate whether having extra time to build these additional relationships would make a difference in improving the potential for the success of your business, particularly as you evaluate your Entrepreneur Equation at the end of the book.