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We ask successful entrepreneurs about the toughest lessons they've learned when starting a company. Their answers reveal that no matter how good your idea, ignoring the basics will be costly.

As an entrepreneur, what's the hardest lesson you'll learn? Most likely it won't be about something exciting like technology, venture capital or import-export issues.

It will be about something more basic.

The hard lessons come from not paying attention to non-sexy items, such as having solid contracts with suppliers, doing credit checks on customers or performing due diligence on potential employees, say business owners. These are the issues that can play havoc with your bank balance and bring a start-up to its knees. By ignoring them, you're guaranteed to have problem employees and no recourse against customers who don't pay or suppliers who don't deliver.

"Due diligence is as much a part of doing business as anything," says Seattle business owner Richard Rhodes, who founded his first company, Rhodes Masonry Inc., in 1984. "I've learned some hard lessons by assuming that people were who they said they were. You don't have to look very deeply in a person's past to find the red flags."

To learn some of the most difficult lessons in business, StartupJournal.com asked Mr. Rhodes and four other entrepreneurs to recall key essentials they discovered the hard way when starting their companies. Their toughest lessons weren't about delivering quality products and services or pleasing customers. Instead, they involved business basics, such as not taking steps to ensure they got paid or to keep troublesome employees from being hired.

Mr. Rhodes sold a second masonry firm he started in San Francisco with a partner in 1997 and then founded a third company, Rhodes, Ragen & Smith Inc. This firm buys villages and streets in Asia that might otherwise be destroyed, moves the structures to factories and recreates components such as paving stones and other antique finds using original fabrication processes. These items then find their way into homes and buildings in the U.S. The company employs 30 U.S. staffers, 14 executives overseas and 500 in factories and expects to gross $7.8 million in 2001.

Through a series of painful incidents over the years, Mr. Rhodes says he learned the hard way to be less trusting of customers, prospective employees and even potential partners and to do research on them before entering into relationships. "I've met so many people where I've said, 'Oh, they seem nice, let's do business'," he says. "If you find a red flag, you're kidding yourself if you think it's going to be different with you. If there's a pattern, guess what--you're next in the pattern."

Mr. Rhodes says he went into business with a partner without researching his credit, only to find when they applied for company credit cards and were refused that the partner had declared bankruptcy twice previously. More recently, the company provided $60,000 worth of work for an executive at a Fortune 500 high-tech company who was building a million-dollar home. The customer didn't pay the bill and is declaring bankruptcy. Mr. Rhodes says a credit check on the customer would have prevented the loss. "I would have seen this pattern [of not paying] is his whole deal," says Mr. Rhodes. "Now that he's in bankruptcy, I'm in line with the rest of the creditors."

To help you lessen the pain that hard lessons can cause, here are some basic rules our panel of entrepreneurs discovered they needed to follow to keep their businesses running smoothly:

Don't count on a sale until you have the money.

Customers may nibble at a new idea or product and just when they seem ready to bite, drop off the hook. This causes problems for entrepreneurs who make purchases or hire staff, thinking the deal will come through. Counting on business that never materializes often afflicts newcomers dealing with big companies that have many options.

"When you're a little guy on the outside, you're inconsequential to the big guys with feeding frenzies, no matter how good your idea is," says entrepreneur Woody Thompson, producer of Pop-Up Video on VH-1. "You can go away tomorrow and have no impact on the big mother ships."

After forming a New York television and video production company called Spin the Bottle in 1995, Mr. Thompson says he and his partner went on at least a dozen "celebratory binges," buying clothes, taking vacations and looking at new homes, in anticipation of deals that didn't materialize. In one such instance, the partners pitched an idea for a reality game show that a major network and production company seemed ready to buy. The company asked the partners to take the idea through several stages of development during a three-month period. Just when it seemed ready to commit, the executive who had championed the idea got fired and the deal fell through.

"They called us up and said it was done, and we hadn't received a penny for our work," says Mr. Thompson. Not spending money until he has it is "a lesson that haunts me to this day. There are so many unforeseen circumstances where deals fall through," he says.

The partners thought up Pop-Up Video and sold it to VH-1 shortly afterward. The show is in its fourth year of production, now under the umbrella of Eyeboogie Inc., a company Mr. Thompson started after he and his partner separated in 2000. It employs about 15 and will gross between $3 million and $5 million this year as the Pop-Up concept extends to other media and shows, including "Who Wants to Be a Millionaire?" and reruns of "The Brady Bunch."

Hire well and fire quickly.

Aspiring entrepreneurs who lack hiring experience may give the interview and reference process short shrift. That's a mistake, especially if you're starting a service business that sells employees' talent and attitude. "In a service and creative business, they don't hire you for the equipment," says Keith Alper, founder and chief executive officer of Creative Producers Group Inc., a corporate communications company in St. Louis. "The wrong employee can come in and give your company cancer."

Mr. Alper and a partner started their company in 1980 when they were 18 years old, and incorporated it in 1985. It began when both were working on Six Flags' stage and technical crew and the company asked them to create an employee slide show. As other clients came on board, CPG grew to 55 employees, who create a range of multimedia and large-scale productions for large and small companies. Revenues this year should approach $10 million.

In contrast to some employers in the current labor market, CPG uses a slow and intricate hiring process designed to spot candidates with good attitudes. Resume submissions are narrowed to the 10 best candidates, who are asked to a group interview. The company spends about an hour and a half with the group, identifying the top three choices. These candidates then return up to six times for meetings on- and off-site. References are checked, and the firm does due diligence on each candidate, talking to former clients "so we get a 360-degree picture of the person," says Mr. Alper. If the company still isn't sure, it sends candidates to an independent consultant for his opinion.

To help complete a project in 1998, a producer referred by a current CPG employee was hired without going through the normal screening procedures. The producer's attitude was so negative that co-workers' morale began to suffer and clients complained about working with her, Mr. Alper says. Despite endless counseling and one-on-one coaching from a supervisor, the producer left by mutual agreement after six months. "Fortunately, we caught it before business was affected," he says. That's another hard lesson Mr. Alper's learned: axing problem employees quickly. "You can't turn around people who don't have the right attitude, so we just get rid of them," he says.

Get credit applications from customers.

Ruchit Shah, chief executive officer of ClickZen.com Inc., an Internet advertising-services firm, says he and his partner Richard Hecker were so naive about business when they started their company in April 2000 that they didn't request a credit application from their first client, a joint venture between a major retailer and a Web publisher. They expected the new company to pay them because its partners were well-known, but the venture reneged on a bill for $15,000.

The company "took advantage of the fact that we didn't know anything," says Mr. Shah. Not getting the credit application was "our mistake," he admits. "We would have had all their bank information and could have taken that to a lawyer and sued."

Given their ages--Mr. Shah is 17 and Mr. Hecker is 16--the partners can hardly be faulted for their mistakes. They started their firm after the Brooklyn-based Mr. Hecker became a member of Mr. Shah's stock-picking site and they began e-mailing each other. After several business ideas didn't pan out, they struck gold by bringing Web publishers and advertisers together and charging smaller commissions than competitor agencies. ClickZen.com kept overhead low by paying its mostly home-based employees on a commission basis. The firm should gross between $10 and $12 million this year.

Other hard lessons the teens learned? Have a good lawyer and collection agent to go after slow payers. "These agents may take 30% to 50% of what you're owed, but I'd rather have 70% or 50% of the bill than nothing," says Mr. Shah, whose office (and high school) is in Charlotte, N.C.

Third-party services like ClickZen.com also must ensure that suppliers give customers what they promise. One publisher didn't deliver the visitors to its site it promised, leaving ClickZen with a distraught advertiser who won't advertise with the company again. "If we work with a publisher who says it can deliver a certain number of impressions and it doesn't, we look bad," he says.

Have solid contracts with suppliers.

Entrepreneurs may go through a honeymoon period with suppliers that blinds them to the hard reality of doing business later on. They might be so excited about their ventures--and so convinced of a supplier's ability--that they don't protect themselves adequately. Without an agreement spelling out exact terms of your relationship, a vendor may not meet your standards, says Laura McCann, founder and owner of Zweave Inc., a New York-based applications service provider for the fashion industry.

"When you're excited about having a relationship started, you don't always send the message that you have high standards and tough expectations," she says.

Ms. McCann founded Zweave in 2000 after selling a fashion-buying and manufacturing firm she started in 1992. An early step was to hire a consulting firm to produce a multimedia presentation and Web site for the company. The contract specified that the consulting company received equity in Zweave for completing some deliverables. However, when the final product arrived, Ms. McCann wasn't satisfied and didn't accept it. The consultants, who now own equity, invoiced Zweave nonetheless, causing tension between the two firms. "It's very uncomfortable for us," says Ms. McCann. "You want to have contracts where there are no misunderstandings."

Review a contract line for line with the other party before making a commitment, she advises. "In going through a contract, you see a lot of behaviors in people you might not ordinarily see," says Ms. McCann. "I've made bad decisions because I didn't ask tough questions or have the right documents to protect me at the end."

Don't make yourself indispensable.

Like many entrepreneurs, Mr. Rhodes set up his first business so that all the business decisions flowed through him. For a decade, he did everything, from putting up walls to contract management to accounting. He worked 12 hours a day, seven days a week in this so-called "spin" cycle. Mr. Rhodes calls this the "platform-for-a-genius" model, which caused him to micromanage his business and become a bottleneck. His life was wildly out of balance and he had no time for "restorative" activities with family and friends.

Mr. Rhodes became moody and irritable because his life seemed so out of control. "The myth of owning your own business is that you're in charge of your time," he says. "What that really means is you can work any 100 hours of the week you want. You can go in late and stay late, or go in early and stay late."

When Mr. Rhodes joined the Seattle chapter of the Young Entrepreneurs Association, he met owners with the same amount of talent who were working fewer hours and making more money than him. He started loosening the reins and hiring key executives. The company now has a strong team he meets with daily and then allows to run the business. "Now I work much fewer hours and I have a real life," he says.

From StartupJournal.com
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