The 16 Lessons I Learned From Selling My First Company
Naked is a company I co-founded in 2009. Since that time, I’ve helped raise millions of dollars for the company through multiple rounds of financing; sold our products in stores like Nordstrom, Bloomingdales, the Hudson’s Bay Company and Saks Fifth Avenue; uplisted on to the Nasdaq; and ultimately divested it through a merger to a $100 million lingerie company out of Australia.
Sounds amazing, right? In many respects, it was; however, as in many cases with entrepreneurs and their businesses, it’s not exactly all it seems like on the highlight reel.
Each of our journies as entrepreneurs, although when in the trenches of starting a company seem to be uniquely our own hardships, are actually shared by most that have come before us and most that will follow. Further, there is no certificate or diploma that qualifies you for everything you’ll face during the process of starting, growing and then selling a company. It can only be learned through the doing!
Naked was no Facebook, Twitter, or Lululemon. But for what it’s worth, I want to be real with you and share my own experiences and lessons learned as an entrepreneur who has been through the full cycle of building a company from absolutely nothing to eventually divesting that company to a much larger fish.
I’m going to share what to expect during those milestone transactions, and events that shape young companies as they grow, and the best practices to remember during those times.
Starting With Why I Started My Business
The specifics of how I started Naked will be exposed in a book I hope to be released in 2020. What I want to share with you here is the “why” of starting a business.
For me, the initial reasons were simple: I wanted to work for myself, I wanted to create something that people loved, and yes, I wanted to make a lot of money.
The specific “why” behind Naked, my first company, was more about the feeling I wanted to invoke for our customers: A feeling of “being comfortable in your own skin.” The medium we used to connect our message with our customers was a beautiful, minimalist pair of underwear.
Of course, as Naked was a typical cash-starved start-up, our “why” likely lived more in my head than it was ever properly executed. Nonetheless, it became the reason I was excited to wake up in the morning. Knowing just how comfortable our products were, and how happy they made our customers feel, created an indescribable feeling of satisfaction for our team.
Eventually our “why” evolved into a sense community with our small team of dedicated employees. Wanting to provide the best environment for them — a way to earn a living, feel a part of something exciting, and grow as individuals and professionals — became another major part of my sense of purpose.
Holding on to the “why” is critically important for start-ups; it is an edge that helps makes your company what it is and keeps you focused on being something customers can identify with.
Outside Pressures That Can Affect Your “Why”
Even in the earliest days, it’s all too easy to get distracted from knowing who you are as a company, what you do and why you’re doing it.
Pressure to change can come from the following areas:
Customers who sort of identify with your brand but request changes to your products, or suggest other products you should make. I’m a strong believer in receiving feedback; what the customer wants matters. But, you need to ensure the filter in which you take that feedback and apply it (or not) is through truly understanding the customer that is loyal and akin to your brand. Trying to please everyone is a financial drain and a distraction.
Store Partners: If you’re in the wholesale business, no doubt your retail partners, especially if they’re department stores, will often have strong opinions about what you should and shouldn’t do. Their incredible customer intel is based on what works for them. Be strategic in what advice you implement and what opportunities you allocate your precious resources to; large department stores are quick to spend your money to suit their own interests. Often, partnering with a retailer can be a win-win, but other times, you end up compromising key aspects of your identity to try and capture customers that aren’t necessarily suited to your brand.
Investors: An investor, or potential investor, may offer plenty of ideas about how to operate your business. If this comes up, it’s natural to feel a sense of guilt — like you should spend “their” money on their ideas — but remember, if they respected you enough to invest in you and your business, they’ll respect you for sticking to your plan. Don’t blatantly ignore the opportunity, listen, learn and assess carefully. Don’t let other people’s suggestions become a distraction.
What I Learned About Ownership and Investors
As Naked was my first real company, I didn’t care how much of the company I owned at the end of the day as long as:
A) it was a financial success for our investors; and
B) I learned a helluva lot along the way — and made great connections. I’d left University (which I later came to regret) to start Naked; so I considered it my 10-year MBA of sorts.
By the time I merged Naked with a larger entity, I had owned less than 1% of the company. I do not regret it, but I would not do it that way again.
Founders need to own meaningful equity in their ideas, even if their ideas require large amounts of venture capital.
In most cases and sectors, pegging a valuation to an idea that has little to no traction is challenging, and venture capitalists have every right to put a high value on their cash.
But, assuming you’ve done proper due diligence on the opportunity, executed the early stages of your product and tested its market viability, then don’t devalue yourself either. Yes, I know you’re desperate for cash, but investors are hungry for great ideas as well. The remedy to your early-stage valuation challenge is simply to bootstrap it on your own using personal funds and “love money” (contributions from family and friends) for a long as you can. Hold a second job if that’s what it takes.
In those early days, try to make it with as little money as possible and work your business to a place where you can show real potential value before taking on real growth capital. In addition, try to find investors who truly understand your business sector. Investors who understand your sector will understand the value you’re trying to provide them. For example, if you’re starting a restaurant, an investor who primarily invests in Mining or Technology may not have the appropriate references or experiences to understand your specific investment opportunity.
Further, speaking with investors in your industry will better help you truly understand the value of your business. I’ve found these types of meetings beneficial; I learn more about what investors are looking for and things I can improve upon in my pitch and my business — even if they end up not investing.
There is almost nothing more exciting in a start-up than receiving that first big investment. But it will be all that much sweeter if you don’t dilute yourself out of your company in the first 18 months; there will likely be more capital raises to come.
Every Lesson I Learned From Running then Selling My First Company
#1 Always Act in The Best Interest of Your Shareholders
Once you’ve decided to take on growth capital, you now have a fiduciary and ethical duty to your shareholders. It seems self-explanatory, I know, but you owe it to them to be transparent, not just about the good things, but the challenges as well. With all the stressors, the responsibilities that come with running a company, and the leads you’re chasing to grow it, it’s easy to forget about your shareholders. Just remember, they appreciate knowing what is going on, to the extent that is appropriate — for better or worse.
When the company faces tough times financially and isn’t executing on its plan is where this gets tricky. You may require a dilutive financing at shitty valuations; your investors will rightfully be pissed off. Ultimately, you need to use your best judgment here to act in the best interests of the company. Dillutive finanacing to “save” the company are always helpful, but better than the alternative (bankrupcy) and if you focus on execution, you can re-build the lost value over time.
#2 How to Manage Your Board
With the first investment you take on, you’ll more than likely be assigning your first board seats as well. Having directors involved in a company in the early stages can be incredibly helpful but, as a start-up, you need to ensure your time is spent on growing the business and being nimble and efficient in your decision-making. Keep the board seats limited and your meeting times and frequency as limited as is mandated by your corporate governance. Unless you’ve taken on millions of growth capital and have hundreds of shareholders, you don’t need seven directors sitting around a table listening to themselves talk. You do need doers and someone to keep you in check. Nominate directors who understand start-ups, have industry expertise and are flexible to step down if it’s necessary to accommodate new directors as the business grows and changes.
#3 Mentorship is Key
Seek mentorship throughout your start-up. You don’t know everything and you’re going to have plenty of hard decisions to make, and while directors and investors can also make great mentors, it’s good practice to have people you trust to provide objective advice to support your decision-making.
Remember, mentors, don’t have to be like life coaches or available to you at your beck and call (although that’s certainly nice to have). Mentors can also just be people you’ve determined appropriate for seeking counsel from time to time.
#4 Hire for the Short Term
One of the most challenging aspects of starting a business is hiring to scale. There are two aspects to this:
Avoid hiring people who are bigger than the organization. Shareholders often love this; they’ll think damn, they hired someone who used to run a 50-million-dollar business, surely that means this business will go from 5 million in sales to 50 million. It doesn’t work that way (at least in my experience). The business can’t grow to meet the executive. Hire for 18-month internals and see where you’re at after that. Ultimately, as much as shareholders like big-name executives on the team, they prefer results more, and when you get them, they won’t care how you got there.
When you hire for the short term, this may mean that the company outgrows the employees. See “Loyal Employees Below”
#5 Grow Slow and Smart and Ignore the Competition
You will want to grow fast. You think your investors want you to grow fast. It will keep you up at night and, as an entrepreneur, it’s that innate drive to “hustle” and want to conquer the world now that is part of your inner power. But, unless your sector allows for ridiculous valuations and endless capital, and your investors are prepared to fund all the mistakes you’ll make growing fast, then the better strategy is to grow smart. Once you’ve grown smart, you’re more equipped to grow fast!
Secondly, ignore the competition and worry only about yourself. Your investors, retail partners, and customers will be apt to remind you about what your competitors are doing; this is where you’ll need to keep aligned with your “why,” ignore the noise and stay focused. As soon you start to react to your competitors, to try and “keep up” or “mimic” them, it’s the beginning of the end for your unique business, and your true fans and customers will know it!
#6 Celebrate Moments and Milestones
One of my biggest regrets with Naked was that I was so focused on the next thing I rarely took moments to truly pause and celebrate the wins along the way. Building a company isn’t a destination, it’s a journey. Be in it. Be present and take it as it comes because the sale of your business isn’t always the big shiny finale you’ve dreamed of. In my experience, when it’s all over, the stories you share are not like “Hey, remember when I sold the company?” It will be the little wins and heroic efforts and feats your team pulled off against all odds that made all the difference.
#7 Remember That it is F#%king Hard
There are plenty of books to read as an entrepreneur. There are marketing books and start-up books (find my book list here) but the only one I’ve read that really tells just how fucking hard it is (the pain, agony, struggle and sacrifice that comes with entrepreneurship) is Ben Horowitz’s The Hard Things About Hard Things. In his words:
“The hard thing isn’t setting a big hair audacious goal. The hard thing is laying people off when you miss the goal. The hard thing isn’t hiring great people. The hard thing is when those “great people” develop a sense of entitlement and start demanding unreasonable things. The hard thing isn’t dreaming big. The hard thing is waking up in the middle of the night in a cold sweat when the dream turns into a nightmare.”
He goes on … so read the book.
#8 Build For the Long Term
My business partner recently sent me the Aritzia Annual Report for 2018 to read. They have a fresh, current feeling to their brand, yet they have been around for over 30 years! CEO Brian Hill claims in his Shareholder Letter that they will never be accused of rushing, and as such, are focused on a measured, North American only, store-growth plan. As a result of this, they have adapted to changes in the retail environment, that have been the demise of too many similar companies, and instead continued an impressive growth trajectory. If you’re passionate about your “why,” focused on your customer base, and learning how to utilize changing technologies and consumer demands to augment your strategy, you give your company the best shot at being built to last.
#9 Keep Learning and Keep Creative
As your company grows naturally, your time will be spread thin. It’s all too easy to spend all your waking hours on the phone or in meetings with shareholders, future investors, clients, staff, or making critical decisions and putting out fires. This won’t go away, so it’s important to ensure you’re scheduling the time to think, time to learn, and time to rest and maintain your health. No doubt there will be sleepless nights and hectic weeks (if not months) at a time where you’ll be run off your feet. But you are also the master of your own schedule. Build in time after calls to think about what’s been discussed and plan the appropriate next step. Take time to refocus and center yourself. Set aside entire days for creative and strategy work. Build in time for exercise and meditation. Build in time for full days, and weeks, where you unplug and make time for friends and family. It’s important to keep those relationships strong as that’s your support network. These habits will keep you operating, creating, and leading at the best possible level.
#10 Fit to Lead – The Founder’s Dilemma
Founders are often not experts at their trade — it’s their passion. If they’re not industry experts its their determination and belief in what they’ve started are what makes them qualified to lead their company. As the company grows, even if it is performing well, lack of expertise can lead to Directors and Shareholders requesting you bring in a new CEO. This is the founder’s dilemma, and although many founders would like to be the Bill Gates or Mark Zuckerberg of their company, more often than not, this isn’t the case.
In my own company, after we’d landed a number of department store partnerships and gone public, I felt my shareholders deserved a more accomplished leader and set out to find a new CEO.
I was incredibly grateful when I found a truly amazing person, well-situated in the industry, who was as determined and passionate about the business as I was. After she took over the job, I had a much harder time with the transition than I expected, even though I thought I had been mentally prepared to hand over the reins. (See Imposter Syndrome below)
The emotional side of a founder believes that he or she is only one with the passion, hustle and creative strategy to lead their companies. There is no question that in certain situations this remains true, and it is the founder who should continue to lead; if they’re not fully qualified, they can be properly mentored so they grow into the position. That said, don’t fall victim to the belief that you’re the only one who can do it; there are plenty of super-talented CEOs who can take your baby and help grow it into a thriving organization.
#11 Imposter Syndrome
When Naked relocated to New York and our new CEO and world-class executive management team started, I was instantly starstruck. Wanting to be respectful of the accomplishments my new colleagues and partners had, I often fell victim to feeling like an imposter in my own company; I felt like I no longer belonged. This is common for entrepreneurs, and if you continue working in some capacity, you may feel the same at some point. Further, as I was no longer the ultimate decision-maker, I had to catch myself from feeling frustrated about how I may have done something differently.
If you’re like me and are fortunate enough to continue on with your company after new management comes on board, be open to all that you can learn and remember the key here is to just keep doing the work. Keep sharing your ideas. Keep focused on your “why.” And for those tough moments, find mentorship.
#12 Loyal and Hard-Working People Make Companies and Are Your Biggest Asset
It’s not just your Intellectual Property or your Trademark that is your start-up’s biggest edge. Nope. In start-ups, talented, loyal employees who take ownership of their job and believe in the greater vision of the company, are invaluable to success … or, better put, survival. They are the lifeblood and roots of your operation. When companies finally cross the chasm, so to speak, raise money and start to bring on new talented team members, it’s critically important that these integral first employees find roles in the new company. Although they may not have the degree on their resumes as other potential new hires, and their contributions may have been made greater because of their willingness and eagerness to be helpful across all facets of the company, you still want these people here. Why? Because, to them, your company isn’t a job — it’s a part of them. They went through the initial hellfire, they have valuable institutional knowledge of your business, your customers, and your WHY. The difficult part here is that you may need to either demote them or reposition them in order to have the people most qualified for the job — in that job. If they don’t like the demotion or reposition, they’ll quit. If not, find ways to mentor and train these team members so they can grow as your organization grows.
#13 Know When To Exit
Knowing when to leave your start-up is the single hardest question a founder must ask himself or herself. Have you fallen out of love with the business you started? Is your “why” still there? If not, can you bring it back? Do you have enough equity to still feel the proper incentive to continue? Has the stress of the business and its wear and tear on your personal life made you resent what you do? Has the business reached a point where you genuinely believe someone else is better suited to lead?
Or, is the business successful and it’s time to quit while you’re ahead?
If you’re thinking any of these thoughts then A) seek the counsel of your mentors, and B) take the appropriate time to really think about your decision. This may include time in nature away from the business, a reading vacation, or just focused meditation — whatever suits you best.
This is a decision for the mind and the heart. Fully think through all the possible consequences and, ultimately, follow your heart. It’s a feeling that will drive “the right choice.” You followed your heart into the business and you need to follow your heart out of it.
Once you “feel” it’s time to leave, you will only cause a drain to your business if you stay too long. It’s better to plan your exit and discuss with your Partners and Directors on how to best do that in so it doesn’t adversely affect the business or your shareholders.
#14 Deals Can Take Time – Manage Your Expectations and Emotions
When the time comes to do larger capital raises, mergers, or acquisitions, be prepared to “hurry up and wait.” Every financial raise I’ve ever done, every merger or reorganization I’ve every completed, never happened on either the timeline I wanted or that which was agreed to by all parties involved. It’s just the way it goes. Due diligence takes time. Terms can be challenging to align on. How things turn out can involve lots of people’s lives and livelihoods. When deals take a long time to happen, deal fatigue sets in. These game-changing transaction can be emotional roller coaster rides for those deeply passionate about seeing them close. During these company changing transactions, it’s important to manage your expectations, stay focused on your business (don’t take your eye off the ball) and be prepared for the worst — which means be prepared to walk away if things aren’t going the way you believe they should.
Remember your deal bankers (if you have them) don’t have much at stake. Lawyers bill hourly and don’t really give a shit if the deal drags on, so cap their fee to keep them motivated to get it done in a timely fashion. Auditors work at their own pace as they have to sign off on everyone’s financials. All this equals time and money, so be as buttoned-up as you can on your Due Diligence Data Room including current financial statements, IP & Trademark documents, vendor & license agreements, employment contracts, corporate shares, and shareholder agreements, etc. The more prepared you are, the quicker your transaction will go.
#15 Don’t Get Caught Up Thinking About All The Money Other People Are Making
This is where I’m really going to give you the harsh reality of many deals you hear about. Some people really do strike it rich when they make a transaction with their company; but, as I said at the beginning of this blog, it’s not always what it seems, and there’s no point in making yourself feel shitty about what you’re getting (or not getting) by focussing on what you think other people got.
The company that I founded did a merger with a $100m company. During the transaction, my own shares — of which I’d never sold a single one since the company was started — were locked up for a lengthy period of time post-merger. There was no cash paid from the larger merger partner to me or any of our shareholders. And post-merger, my percentage of the company dipped well below one. That said, this isn’t a poor me, boo hoo moment. This deal was made because our Executive and Board felt it was in the best interests of our shareholders. It would make them holders in a much bigger company with, what was deemed to be, a winning strategy. Further, the deal would provide a much better platform to scale our existing company on, and as such, hopefully, achieve great value for their investment. To say my business was a financial success would be a lie. Although I’m proud of many things I accomplished, people I befriended, and what I learned, the business wasn’t a win. At least not yet — but we’re still working it every day. The point is that if you just read the headline of our press release “Naked Merges with $100m Bendon,” you’d think I struck it rich and should be moving to Ibiza to live on a yacht. Not quite!
#16 Letting Go — Grieve Your Business
Your business is like your baby. You’ve likely spent more of your awake time on your business than anything else in your life. If you’ve ever lost anything you loved, you know what it feels like to grieve. It’s the same with the business, the role you used to have and lost, the relationships you made that were specific to that business, all of it — gone.
I know that may sound crazy, but remember, as founder, your business feels woven into your identity, to how people see you and how you see yourself. Even if it’s your choice to leave, you’ll have to do the mental and emotional work associated with grieving and letting go to ensure that you can properly move on and prosper with other business ventures.
This will take time and consistent effort.
What You Need To Know About Starting Over
Having had a successful business, you may think your next one will be easy. Hell, you’ve learned and suffered so much that that only seems fair. But starting over can be almost as hard as the first business.
Many of my investors in Naked were not able to invest in my newest idea because:
A) they were still heavily invested in Naked — even if I wasn’t involved to the same extent anymore; or
B) the business didn’t appeal to them in the same way Naked did, or
C) they had made other investments and the timing just wasn’t right.
So back to bootstrapping it — which isn’t such a bad thing.
Even if you could get all the money in the world for your next start-up, it doesn’t necessarily mean you should take it all right away. Start with the exact same lean operating mentality you had the first time. Start with the people who will go above and beyond for you.
Check your ego at the door when you start over. Be prepared to work your ass off all over again. Be prepared to fail again. Just try not to fail the same way you did the first go around — hopefully, you learned from your mistakes!
Whether it’s your first, second, or one-hundredth business, success is not a right of passage. If it were, everyone would take the risk, right? You’re entitled to your work ethic, and the passion and brain power you put into it. That’s it. It’s going to be a great big crazy, and amazing journey all over again!
“ Behind mountains are more mountains. One does not overcome obstacles only to end up in the land of no obstacles. No matter how successful we are or will be, we’re going to find things that stand in our path.”
– The Obstacle is The Way