“There were three things I would have done differently,” Jake told me as we were driving to the trail on a recent backpacking trip. “First, I would have moved most of my staff offshore; US employees are too expensive. Second, I would have niched down. Third, I wouldn’t have leased out that expensive space. Am I wrong? What do you think?”
We were discussing the business situation of another friend of ours, Ehsan, who we were meeting at the trailhead.
Three years ago, Ehsan had purchased a digital marketing agency. He’d hired additional staff and signed a ten-year lease for a new office space downtown at the rate of $20,000 a month. He’d put $250,000 into escrow as part of an agreement with the bank to back the landlord’s investment remodeling it into a fancy office space.
Initially, the business was growing and he was making a tidy profit. But the last year he’d been hammered with setbacks:
- A key manager abruptly left. In the aftermath, Ehsan discovered that the manager was harming the business- ultimately costing him one of his best clients.
- The bank didn’t want to release his money in escrow after the build-out was completed and put him in a cash-flow crunch.
- And the software market that formed the bulk of his revenue vanished with the collapse of Silicon Valley Bank.
“I don’t know,” I told Jake as I thought about Ehsan’s situation. “I agree with your points, but for an agency of his size, his strategy might be different than for a smaller agency. Ehsan pursues larger deals. His clients might expect fancy office space and a US staff. That might tell them that his company is a low-risk, established, agency for them to purchase from. Additionally, Ehsan is excellent at building systems and teams that are all in the same physical space. And while his company isn’t tightly positioned to one market, he does have a heavy focus on serving software companies.”
Jake’s perspective was sound… to a point. There’s a reason why Nike, Intel, and Google have huge corporate campuses full of expensive US based workers. There’s a reason why IBM isn’t positioned tightly to serving only manufacturers.
Ehsan isn’t a corporate juggernaut though. At a sub $10m agency, perhaps he should be offshoring workers with a remote team that is tightly niched on one market. Maybe Jake is right?
When we caught up with Ehsan he gave us an update on his business situation.
“We were making an excellent profit last year,” he said. “Now, I’ve fired over a third of our staff and we’re breaking our lease… But things are stabilizing and I’m optimistic about the future.”
It’s easy to look at a situation like this and see the merit of Jake’s three points. However, Ehsan was highly profitable. His model was working.
He took a significant risk with the new lease and he got caught when the market turned. But if the market hadn’t turned his plans would still be on track and he’d still be in a good spot. Very likely he would have grown his business.
In another world, Jake’s tightly niched company could see their market tank and he’d be laying off employees and wishing he had a less focused customer base like Ehsan.
I asked Ehsan, “What’s your lesson from all this?”
“Fire staff sooner,” he said. “I was really worried about what it would do to our culture and so I pushed off the decision. However, people adapted quicker than I thought and our team is healthy.”
There is no business that is risk free. If risk hasn’t caught you, if you haven’t been hit hard with a setback, you haven’t been an entrepreneur long.
This is a game where the players are marked with scars and broken noses. That an entrepreneur is still on the field, reveals their ability to learn, adapt, and come back fitter. I doubt Ehsan signs another $20k lease and the next time he sees the market turn, he’ll react even quicker to the ever-evolving game of business.