217 - The #1 Rookie Entrepreneur Mistake That Can Bankrupt You in 8 Months with Nik Hulewsky

0:00I got two friends who wanted to get into entrepreneurship. We'll call one of them Brandon and we'll call one of them Nick. Brandon did his research. He launched a business and within four months, he was doing$100 ,000 a month. Nick did the same thing. Did a little bit of research, launched a business, and eight months later, he was bankrupt. He was out of the game. Why? I've spent years buying, selling, launching businesses. I've failed a ton. I've also succeeded some. And Nick, that's weird, it's my name, made the same mistake that I see many first-time rookie entrepreneurs make. And the mistake, he evaluated it like a 20-year veteran when he'd never run anything.

0:39And today I'm gonna talk to you about how to score a business like a rookie so you don't buy yourself or start yourself a business that turns into a nightmare.

0:53Okay, so my friend Nick, he launches this business and he does like all the analysis, right? All the analysis that you're supposed to do, like when you're in your MBA program, does it have a moat? Does it have sticky customers? Do they have pricing power? All these things. And he launches and within eight months, everything's gone. This was a restaurant business. And all of a sudden he's dealing with the constant staffing turnover, razor thin margins, like the health department is there. It's a huge mess. The problem that he made that I see many first-time entrepreneurs make, is that he was evaluating the business assuming that he had the experience.

1:24When these guys who are getting their MBAs are looking at businesses and they're looking at it on paper or in a spreadsheet, it's like, oh, this should work because of blah, blah, blah. But the truth is they don't know these businesses yet. And that's a huge factor that they never consider during their evaluation. So here are some quick examples, I guess, that you can kind of think about? Just hire good managers, right? Oh, I'm going to buy a business and I'm going to hire a good manager. Have you ever hired anyone before? You ever managed anyone before? Or my personal favorite, I'm going to create some passive income streams when you've never actually operated the business.

1:57Do you know how hard it is to create something where it's to the place where it's like passively spitting off cash? You've either got to be independently wealthy or you've built something to the point where you can step out. Or many of them, they focus on like, I'm going to focus on systems, not operations. But the truth is like, you're the only system that works in this business, right? Here's the brutal truth for first time entrepreneurs and rookies. In your first business, you are the business. Your willingness to outwork everybody else is really your competitive advantage. You don't have more money.

2:27You don't have more experience. You don't have more relationships necessarily. The only thing that you can differentiate on is your willingness to just get out and get after it every single day. And so you can't hire your way out of that inexperience. You can't systemize things or systematize things that you don't understand. You have to operate first. And what I see many first time entrepreneurs doing is this like evaluation of businesses based on theoretically what it should be. And they never add into the mix the actual differentiator in these first businesses, which is you. Do I have the skill set or do I have the experience or can I do X, Y, Z things in order for this to be successful?

3:08So you need as a rookie, as a first time entrepreneur, you need to be evaluating these businesses and assuming you will be doing everything at least at first, then you can graduate, right? Once you have more money or once you have more experience, then you can talk about like, Oh, what's, what's my differentiator? What's my competitive advantage. But right now for many people who are trying to get into entrepreneurship and I'm getting more and more questions for it, you need to assume that you're going to do everything. And that is not bad for your first business. Like, can we just dispel that right now?

3:35Can we stop talking about, oh, I'd want to get in the business and hire somebody else. Cause I don't want to be like working in the business. I want to be working on the business. Like, no dude, you're not there yet. Why do you assume that you're in a position to be working quote unquote on the business when you've never worked in the business? That is a gradual process. You can't just skip the line and get to the point where you're working on the business. You need to actually evaluate the business first. So I have this like evaluation framework that I usually use. It's eight points. And I typically use it for people who have experience and they're trying to get into a business, usually buying a business.

4:09But since I'm getting more and more questions about how do I just get into entrepreneurship generally, I thought I'd break this down for first time rookie entrepreneurs, if you will. And there are four rookie realities that I've kind of broken this out into and I've added each one of those eight evaluating criteria into. So I'm going to pull this up really quickly. Okay. So what you're looking at here is the four rookie realities. And these are the questions that every potential entrepreneur or entrepreneur has to answer before they actually get into the game. So reality number one is, can I personally handle the daily operations of the business?

4:46truth is you're going to be doing everything in that. I like to break it down to operational complexity and people complexity, because those are two different things. Operational complexity, systems, fulfillment, et cetera. People complexity is how many people does it take for me to actually do this job? Reality number two, can I personally get customers? Any new business without revenue coming in is dead. It doesn't matter how smart you are. It doesn't matter how cool your systems are. If you can't get business, you're dead. I had to learn this the hard way. I'm a operator by nature. I had never started a business from scratch.

5:17And the minute that I realized that first-time founders focus on product, second-time founders focus on distribution, everything switched for me. Because the ability to sell your product is more important, not just my opinion, many investors' opinion, than the product itself. So can you personally get customers? And within that customer acquisition, we're going to talk about, and the revenue model. Number three, can you personally survive the learning curve. Every business has what's called the J curve. If you buy a business, what happens is you buy the business and the business dips and then there's a trough and then it comes back out of it and it shapes in this J, right?

5:55And usually you talk about that in the terms of working capital or cash in the business. But it's the same thing when you start a business from scratch. There's a learning curve. There's a J curve where you start out good, optimistic, and then you just kind of realize, holy crap, I don't know anything. I'm a freaking idiot and everything takes a step back and then you come out of it, right? There's a J curve. So in order to survive the J curve, in order to survive that learning curve, you've got to have a business that has good margins and enough cash on hand to actually play the game. And the last reality, can I personally grow this without breaking?

6:27So we're going to look at how do you evaluate macro tailwinds and how do you evaluate scalability of these systems individually? So as you can see, those are the eight criteria that I typically look through and they have waiting next to them. That's what those numbers are. We'll talk about this later. But I love thinking of it in these four sort of reality checks for first time entrepreneurs because they're just four easy buckets, right? Could I personally do fulfillment? Can I go out and get business? Am I able to survive this long enough as I'm learning it? And can I grow it once I've actually learned it?

7:01Okay. So reality number one, can I personally handle the daily operations? The number one rookie mistake, this is it. The number one rookie killer, I should say, it isn't market risk. It's thinking you can delegate your way out of operations in day one. That is a myth. This whole thing of, well, I'm just going to buy a business and hire an operator, or I'm going to start a business because I have a guy who can do the operations. Do you understand how ludicrous that sounds? You're going to go and risk your capital, and in many instances, your entire net worth on a business that you've potentially never run before and hire that out to somebody else, like you don't realize you're betting everything on that person.

7:41It's not doable and it's not smart. You've got to really understand when you're evaluating a business opportunity, whether you're starting up a epoxy garage business or you're buying a business, how complex are the daily tasks that I personally have to master, right? Back to the restaurant story. He was dealing with like 47 different vendors, health codes, inventory, he was personally managing like 16 hour days and scheduling. Like it's an operationally complex business that you're throwing on top of being a first time entrepreneur. And you contrast that with something, let's call it pressure washing.

8:16Really all you need to master like three things, driving around, spraying the ground and billing people. That's it. It's not complex, right? So if you're a rookie, if you're a first time entrepreneur and you're looking at these two business opportunities, Which one of them could you personally handle all of the operations from fulfillment to getting customers to billing and collections, all of those things? And if you can't personally execute every critical task well, then you're not ready. Complexity kills rookies because you have to do it all. You can't outsource that stuff to somebody. You don't get to a place you can outsource until you're doing a couple hundred thousand dollars in revenue.

8:52And you really can't manage what you don't understand. And so this idea of, oh, I'm just going to, I'll buy a business and I'll figure it out. And just by offloading it to different people, it doesn't work. It doesn't work. And you can believe me or not believe me. I promise you, if you go out and do it, call me in six months and say, oh, you were right. I mean, I just had that happen so many times. So that's the first factor when it comes to whether or not you can handle the daily operations is operational complexity. The second piece is people complexity, right? You need to understand how many people do you personally have to manage before this makes money?

9:24Again, back to the restaurant. In order for me to go and fulfill and sell food to people, I've got to have cooks. I've got to have servers. I've got to have bus boys. You've got to have a team in place before you can make money. Again, back to the pressure washing company. I can go make money by myself. I need one person. I need a person. I need a truck. I need a rig. And I can go. That's it. It's very simple. So think of it like this, a solo handyman, right? Your personal skills, your work ethic, that's the entire value proposition for that business. You don't need something that's like, oh, I have a competitive advantage because I have a proprietary software.

10:02No, your competitive advantage is I have skills and I will freaking work harder than anybody else. So every employee that you bring on kind of dilutes your competitive advantage as the hardest working person in that business, if you don't already understand that business, right? So think about this for a second, a lawn care business versus a restaurant. Which one do you think lets you be the competitive advantage? It's pretty obvious, the lawn care business. And I'm not somebody who's just all in for starting businesses from scratch. However, I am somebody who's all in to this idea of that first business, you got to understand it, period, full stop, end of story.

10:44And if you have no experience whatsoever, and go and pick something that allows you to handle everything and to be the competitive advantage because you're just going to be outworking everybody else. Right. Okay. Reality number two, can I personally get customers? Oh my gosh. I'm going to tell you a story real quick. So I worked for this publicly traded company, the enzyme group, fantastic company. And the way that they operated, they were a healthcare company. They had many different locations around the country. When I started there, they were like a$15 million segment at this whole monthly hospice company of the overall business.

11:15and they ended up growing into like a$200 million segment. And they've since gone public. They're like a billion dollar public company. So I was one of the first employees and they threw me into this acquisition. I had no experience and I get in there and I freaking crush it. I freaking killed it. Right. I mean, cause I was smart. I was the smartest guy in the room. It was easy. I'm 28 and I'm the freaking wonder kid. Everybody loves me. Wow. Thank you. So successful. How did you turn that acquisition from losing$400 ,000 last year to making$600 ,000 this year. That's a million dollars swing. I mean, my wife loved me.

11:48My friends loved me. Men wanted to be me. What's that phrase? Oh, no, no. Sorry. Every woman wanted to be with me. Men wanted to be me. And I drank my own Kool-Aid and I hopped around. I ended up leaving that location and I went to Texas, defined in Texas. And then there was an opportunity to go to California because they were buying this home health agency and everything on paper looked great. They're buying this home health agency. There are other skilled nursing facilities in the area who could refer business to them. And it was like, great, vertical integration. I'll go handle it. Here's the problem.

12:20My first stint, remember that one that I crushed it at where I turned it from losing 600 ,000 to making 400 or losing 400, making 600. It was in a market where that home health and hospice was a part of a monopoly. It's called a CON state, certificate of needs day. So they only allowed like four or five competitors. So when I went in there to turn this business around, it wasn't that I was awesome. It was that the previous owner just was billing really terribly. So they were actually not losing$600 ,000 before I took it over. They were writing off like$800 ,000 a year because their collections sucked.

12:58That's a big difference. Collection sucking versus the, you know, it's like cash versus accrual accounting. They weren't collecting, but they were doing the business. So I got in there and I just like fixed those processes. Boom. We're making way more money. It's great. And then I got full of myself and, you know, pride comes before the fall. I ended up moving. I find this opportunity in Southern California. This is a small agency, not a lot of people in a massive market. And what I needed to do in order for it to be successful was to go and grow the business. But I didn't quite recognize that.

13:30Right. So I get in there, I started operating the business and I go from I'm like, oh, Nick, you're one of the four horsemen of this business. Oh, man, you're going to cry. When we go public, you're going to make so much money. It's going to be amazing. To, oh, man, we need to fire Nick. I got fired because I sucked so bad. To this day, it's one of the two probably worst acquisitions that that company has ever done because I was an idiot. I didn't realize and understand that going out and getting business was the most important thing that I possessed. I thought I could skate by on my operational skills.

14:05And so I hunkered down and I played in the spreadsheets and I found every efficiency I could possibly find, but I got fired because I didn't turn it around. I didn't know what I needed to focus on. So video is cool, but I have what scientists call a face for radio. And so what's even cooler is long form audio via my podcast and my newsletter, nickonomicspod.com. Go there for free. Subscribe to my newsletter. It's one email per week. Super tactical. And then go to my audio podcast. I do three to five episodes a week, depending on how curious I am. and it's stuff like this. It's all free, no sleazy sales pitches, nickonomxpod.com.

14:36So for you, the number two reality as you're getting into business is, can you personally get customers? You can't afford a marketing team right now. You don't have sales staff. Your personal hustle gets customers, right? And so the question is, can I personally execute the customer acquisition? Not just fund it, could you personally execute it, right? This is why I love local services businesses, because you have two things in your favor. Number one, I don't know if you've seen this, Meta released their earnings last week or the week before. They freaking crushed it, crushed it, because Facebook ads, Meta ads are insanely, not just profitable, but insanely easy to use and effective for small businesses.

15:23I can target anybody. If I put a dollar in, usually I'll get$3 out, right? So the reason I bring that up is because for service businesses, home services businesses, meta ads is amazing. I could spend a dollar on there and generate$3 in business. The second reason I like it is because, dude, if meta is not working, I can go knock doors. And guess what? If I have a pressure washer or I'm a window cleaner or I'm a pest control guy, there's a very clear before and after. I could do the fulfillment right then and right there. So just go knock doors. It kind of de-risks the how do I go out and find customers.

15:58So if customer acquisition requires skills that you can't personally develop quickly, then you're going to starve. I know that sounds like weird, but it just is what it is. The second factor that I look at within that question, so the first one is like, can I go out and acquire customers? The second one is revenue models. Will customers pay me consistently while I personally learn and improve? So let's give an example of a wedding planner. it's all reputation based right if i go out and i get a customer and i suck i'm not going to get any more business after that so i'd like i don't have a revenue stream because it's project based i don't have a revenue stream to float me until i get it figured out but if i have an hbac company and i'm doing maintenance and it's it's monthly maintenance and i've got recurring revenue or reoccurring revenue well then i've got some cushion i've got some revenue in there to kind of fund me until i can figure stuff out right so recurring revenue forgives just a ton of personal mistakes while you're getting better.

16:53A perfect example of this would be a friend of mine. His name is Casey McDonald. He owns a pest control company. He went out, he started learning how to knock doors and sell, and he launched a pest control business. And within the first, I want to say first year, he's doing a million dollars a year in revenue. He's on base to do 2 million in this next year, and it's highly profitable, right? But the margins are really high and he's got recurring revenue. So almost immediately, he's building this book of business that is allowing him to make some mistakes because you're going to make a lot of mistakes.

17:25So when it comes to the revenue model, you want to find a revenue model that has enough cushion in there for you to make mistakes over time. Reality number three, like I was talking about, can I personally survive the learning curve? So the two pieces that I like to look at in this are margins and the cost to play. So like basically the cost to get in the game. for margins. Think of it like this. Your personal mistakes are going to come directly out of your bank account because you're funding it, right? And if they're going to be coming personally out of your bank account, then you need a cushion.

17:56Like you need big enough margins to be able to absorb your mistakes. Just like kind of we were talking about in the previous point. If you've launched a business and you've got 5 % margins, you do not have wiggle room to screw up. You just don't. If you launch a business and a digital agency and you've got 50 % margins, You've got some room to screw up. Like, okay, I have some money there. So I land like one or two customers. Cool. Now I have some money in the bank where if something happens, I can tap into that and use it. The coolest way that I like to think of it is fat margins are rookie insurance.

18:26So they let you learn while you're, you know, while still eating. It's not like one mistake kills you. High margins cover a multitude of cents. The second piece, this cost of play factor. this is like how much does it cost for me to get in the game right so can i personally afford to be wrong and still keep going here's two examples one a manufacturing company you got to put maybe five hundred thousand dollars in right you got to buy a ton of capital because there's a ton of capital expenditures big machines big equipment inventory etc you mess up in that business your 500 grand is gone, right?

19:06Back to Casey, my friend Casey, he's getting into pest control. There's no huge capital investment up front. If he gets eight months down the road, sure, there's a large opportunity cost, his time cost, but he didn't sink$500 ,000 into getting that business up and running. So I like services businesses where your personal tools or your truck or your time or your investment are really only the things that you may lose as opposed to first-time entrepreneurs getting into capital-heavy businesses or businesses with high startup costs because not only are you getting into the business for the first time and you're going to be dealing with all those things, but now you've got a huge amount of risk associated with that.

19:42And that just adds to the mental complexity. It adds to the family dynamic. It adds to the stress that comes with running your own business. So from a rookie standpoint, the way you should think about it is like your first business should amplify your personal work ethic, but like bet your entire future on, right? This last one, reality number four, can I personally grow this without breaking? What do I mean by this? You're going to get to a place where reality number one, can I personally handle the operations? Done, check, sounds good. Can I personally go out and acquire customers? Yep, I'm getting customers, great.

20:20Number three, can I survive the learning curve? Cool, I survived the learning curve, great. Like you're past all of those. And then you're at this place where it's, I mean, it kind of sounds like an oxymoron, but it's, it's like a cruel joke that the universe plays on you because you're building something that only works when you personally do everything. But now you're to the place where you've got to not be the only one personally doing everything. Right? So looking ahead, is this a business that I can nail and scale and then systematize? And this is broken down into kind of two, the two factors that I have on here, Macro trends being one of them.

20:55When I say macro trends, you may or may not know what that means. The larger environment. Micro is going to be the smaller environment. Micro triggered, but it's going to be, you know, the larger United States. How's the economy? What does the Fed look like? Et cetera. I freaking love businesses with macro tailwinds. I worked in healthcare for a long time. You can make a lot of mistakes working in healthcare because you've got this massive macro tailwind pushing behind you. Think of it like this. if I started a business in a given market in the United States, what is the average annual growth rate in the United States?

21:282 % a year, let's call it. Then on average, every business in that market will grow at 2 % a year. So I can expect my business to grow at 2 % a year. That's not a ton of growth. There's not a ton of wiggle room in there. I'm probably just average competing against everybody else. What if I started a healthcare business? Do you know what healthcare businesses are freaking growing at? 7, 8, 9, 10, in some cases, 20 % a year. given the specialty and industry. But healthcare businesses are double, triple, quadruple what average GDP growth is. So think about that. Again, back to what we were talking about, you've got fat margins to play with.

22:04You can make a lot of mistakes. I've got this tailwind pushing me. And in the United States, we've got a ton of aging population. The baby boomers are all retiring. There's a lot of scariness that comes with that because you got to figure out like Medicare and Medicaid and social security and how we're going to care for all these people. But there's also a lot of opportunity because who's going to care for these people? How do we get in there? So the macro environment, I think, is really important. And you need to look at whatever business you're looking at. Is the market helping your personal efforts or is it fighting them?

22:34If you're a bookstore in 2010, it doesn't matter how good your personal customer service is or how passionate you are. You're playing against Amazon. You're going to lose. Period. End of story. If you're a home health care business today, that market is amplifying your business, right? Like you're going to work hard, but you're also going to have this multiplier effect of the macro environment pushing behind you. So again, when you are the competitive advantage, you need the market pulling for you, not fighting against you. Do not, you know, there's like, there's a couple, there's one saying it's like, don't fight the Fed.