When you run in business circles for long enough, you're bound to hear the term “S.W.O.T.”, which stands for Strengths, Weaknesses, Opportunities, and Threats. A S.W.O.T. analysis is usually performed as an audit by or for internal leaders possibly with the aid of outside advisors. The objective is to critically examine the integrity of the business to inform strategy conversations and decision making that will impact its future.
While each dimension of a S.W.O.T. analysis deserves your attention, “threats” commands special attention for a few key reasons:
- Mismanaging threats can single-handedly break a business regardless of its strengths and opportunities.
- Threats almost always have more potential energy to impact your business as compared to weaknesses.
- In particular, internal threats to a business's leadership team, culture, and operations can emerge early, quickly, and suddenly and with severe consequences.
It's arguably overkill to perform a full S.W.O.T. audit before a business is up, running, and generating data worth examining. That's why this chapter zeros in on just threats as those are integral to the foundation of any business because they're attributes of your model, culture, leadership, staff, funding, among other things.
Specifically, this chapter explores seven common internal threats that can vex founders and entrepreneurs of all stripes. I have faced all of these myself, sometimes more than once and sometimes on an ongoing basis—which goes to show that threat management is never a one-time exercise. The identification, mitigation (at minimum), and eradication (at best) of threats is a perennial job function of entrepreneurs and leaders. Use this opportunity at the dawn of your business to develop this skill set if you haven't already.
You'll notice that all of these threats revolve around behaviors. That's not coincidental. Threats take shape and become real when people make mistakes. It's therefore useful to understand that behavior patterns are both the cause and solution to threats. If a threat exists, and especially if one is getting worse, then the underlying behaviors need to be identified, analyzed, and changed. Otherwise, the threat will persist, possibly metastasize, and risk ruinous effects.
With that grounding, let's begin our study of risky behaviors that threaten a business:
1. Ignoring the time, attention, and empathy that makes for healthy partnerships
Relationship integrity among partners is paramount to the performance of any business. When a founding team invests serious effort into its chemistry—a combination of values, intentions, incentives, responsibilities, and skills—then its prospects for a healthy, productive, and long-lasting partnership are high.
Those prospects are like the stock market—always ebbing and flowing based on conditions that change in real time. Business partnerships that ride those waves with casual awareness and attitudes risk careening out of control and sinking their prospects. And it doesn't take much for that destabilization to begin. Any number of behaviors can begin to tip the scales out of balance. Here are but a few:
- Disregard for partner check-in meetings.
- Lack of feedback and accountability reviews on individual responsibilities.
- Dependency upon another partner to perform one’s own responsibilities.
- Inability to hear, process, and respond to bad news either at all or in a mature manner.
- Reluctance to express vulnerability.
- Defensiveness when times get tough (e.g. a period of tight cash flow).
- Egotistical perspective on the importance of one partner's role versus another.
The above behaviors are, sadly, not uncommon when the pressures of a business begin to mount. Perhaps oddly, they're equally likely to surface when successes begin to accumulate. It's human nature to retreat into corners when times get hard as well as to desire individual recognition when times are good. If these instincts are left unchecked due to the disappearance or absence of purposeful investments (of time, attention, and empathy) into the relationship, then the relationship is primed for decay.
2. Believing that good marketing can make up for a bad business model and plan
As we touched on in the opening chapter, “your blog is not your business” is old internet wisdom that remains true. Whether it's a blog, podcast, or other audience-centric channel, the marketing piece alone—while dazzling—is merely window dressing for the business itself. Even a YouTube channel with one million subscribers is worthless as a business asset if there is a non-existent or non-functional model underneath it.
Don't construe this threat as hating on marketing. Marketing is a core business function and getting good at it is a worthy use of time and resources. The threat, instead, is more nuanced—namely, if you perfect your marketing without preparing your business to harness the attention that it generates in a manner that produces a viable profit, then your business is unbalanced with shaky-at-best prospects likely with a short life expectancy.
When revenues and profits aren't where they should be, many entrepreneurs double or triple down on marketing. (This includes paid advertising like Facebook campaigns.) That's almost always a mistake because if it works (by generating more brand awareness) it merely compounds your problem of being unable to profitably harness that attention. Instead, the better choice would be to streamline your already effective marketing operations to open up both time and capital that can then be reallocated to addressing the underlying business issues.
3. Disregarding the importance business agreements and contracts
Contracts—you may hate them, but you risk ruin if you rush them or run from them. So please, don't, even if you see all of your entrepreneurial friends doing it. The liabilities that can result from half-baked or non-existent contracts aren't anywhere close to offsetting the upside that you may think exists by choosing to defer your time and energy near-exclusively into the “fun” aspects of entrepreneurial life—such as ideation, networking, and marketing.
Frankly, being casual with contracts doesn't pay. And the threats are plain: loss of financial advantage, exposure to costly liabilities and damages, forfeiture or difficulty claiming ownership of valuable intellectual property and other forms of business assets. Behave in the opposite way—get serious with your contracts to protect your financial interests, minimize your exposure to liabilities, safeguard your proprietary assets, and more.
The exact contracts that you'll need to prioritize for your business will vary based on its type, model, and industry. Some common ones that may be candidates for you include your operating agreement, service partner contracts, master service agreements for clients and customers, terms of service, and employment agreements for your employees.
Do you need to become an expert in legalese? Heck no. Do you need to write contracts yourself? Absolutely not. Should you sign a contract that you haven't read or don't fully understand? Never. Get professionals to help you. Don't be bashful about asking questions you may think are silly. And don't cut corners. Serious entrepreneurs treat all manners of contracts with the utmost respect, which includes respecting the process it takes to create, negotiate, and finalize them.
4. Allowing friendships to cloud your judgment and decision-making
I dislike the phrase, “It's not personal; it's just business,” though it does speak to an important conundrum most entrepreneurs face: How do you balance friendships with performance in the workplace?
The key assumption here is that entrepreneurs lean on their personal networks to staff roles in their startup companies. Every entrepreneur I know does this to some degree. It's not unwise; in fact, tapping into personal networks is an advantage to move at the pace that a new business requires to get organized and running. Moreover, there is a lot of intangible value that comes along with involving friends including established trust, communication patterns, enthusiasm for the vision, willingness to put in extra effort when it's necessary, etc.
Challenges arise and risk becoming threats when friends are involved in low-performance situations, and there are plenty of hypotheticals:
- What if a friend drops the ball on producing a product, or some other thing, to your quality standards?
- What if a friend whom you entrusted with the company's big holiday marketing campaign delivers sub-par results?
- What if a client becomes extremely upset and chooses to terminate a project because the friend leading that project is mismanaging the work?
- What if the friend making sales doesn't fully vet the parameters involved with a new project resulting in an undersold contract with impossible expectations?
- What if the strategy development you've delegated to a friend comes back unfocused or inconsiderate of resourcing constraints?
It's never a good move to avoid confronting those challenges just because you have personal feelings for those involved. Those challenges require resolutions, and resolving them is your job. It's demanding work, and it's gutting when it involves a friend. But when someone within your business—partner, employee, or contractor—is underperforming or behaving in a manner that is detrimental to your company's ability to meet its commitments, deliver value, and operate successfully, then corrective actions are necessary. That should start with feedback. And it could end in dismissal or an exit of some kind. Never be heartless, just don't allow your heart to corrupt your mind.
Am I guilty of committing this mistake? You bet. Whenever I do, I re-learn the lesson that the hardships experienced confronting and resolving performance and behavior matters when they arise pale in comparison to the hardships that result when such problems fester.
5. Operating a growing business with an unstructured budget
Budgets are the first and, sometimes, last line of defense against unhealthy spending patterns in your business. The patterns usually develop from minor expenses like buying your whole team lunch for all the extra effort they've put in recently. Other examples include small upgrades on flights, upgrading to a more powerful software platform, the next tier of internet service, and higher quality business cards. All of these expense types are valid. And stand alone instances of them are not that risky. It's how much these expenses scale, and how fast, that matters. For instance: Buying your team lunch once a month is probably fine. Buying your team lunch daily is probably foolish.
There's also the threat of developing self-destructive spending habits on things like overly lavish dinners with clients or prospects, attendance at multiple high-end events per year, and constant hardware upgrades just to have the coolest tech possible. If your business has the revenue and cash flow to support such activities, then perhaps those high-end expenditures are justified. But in many cases, especially in the early days of a company that may be largely bootstrapped, they're not. And yet, entrepreneurs regularly overspend in these areas and put great financial strain on their businesses as a result. Why? One reason is pure vanity. Presenting a professional image for your business is important, but believing that you must spend money like it's no object to create that image is not a strategy, it's a trap to avoid.
Budgets alone cannot cure these habits, but they do provide guardrails that you can measure against. To start, work on budgets for your variable costs (e.g. discretionary spending)—such things as meals, entertainment, trips. These sorts of expenses are the ones in danger of getting out of control the fastest. Next, organize your fixed costs (e.g. mission-critical spending)—which may include such things as your payroll system, office space, utilities, and project management system. These costs are usually recurring in nature and should represent things that are vital to being able to operate your business.
I could write I whole guide on just budgeting (and maybe I will in the future). For now, beware of this threat and begin to mitigate it with some baseline structure around those variable and fixed costs. Hint: if you worked through the cost structure of your business model that we discussed in chapter 1, then you're ahead of the game on budgets and likely in a very solid spot already.
6. Surrounding yourself with “yes” people who do not challenge your thinking
US President Abraham Lincoln famously surrounded himself with a “team of rivals” in his Cabinet, the people closest to him in his administration who informed his thinking and decision making. To make the best decisions possible toward healing some of America's deepest divides and bloodiest wounds, Lincoln purposely created a context—the composition of his Cabinet—where he would be forced to listen to those who didn't always share his ideas or reasoning.
Most entrepreneurs and leaders I know are familiar with this story of Lincoln. And yet, the majority of them do not actively court ideas and reasoning contrary to their own. That's not a crime, though it does present a significant disadvantage when it comes to starting and growing a business. Companies operate on the basis of assumptions, early stage companies in particular. As we touched on in chapter 1, successful companies test those theories core to their business model to either validate or invalidate their ideas. Thus, without the willingness to invite and receive feedback that may invalidate a core idea, an entrepreneur risks creating a “false positive” in their head that their idea is genius when in fact it's not.
Consequences of false positives present notable threats to startups. Here are a few:
- Time and resources wasted on a new product, service, or experience that the market doesn't want.
- The inability to seize an opportunity within the market that could have become a positive differentiator and advantage.
- Disenfranchisement of team members or advisors who perceive a faulty course of action that appears detrimental to the business.
Remedies to such isolated thinking and decision making can take different forms. To start with, consider an informal board of advisors comprising professionals you know and trust enough to tell it straight. Find folks from diverse backgrounds with different specialties. Incentivize them in some manner to stay engaged on your business and not BS you when tough matters need to be discussed.
7. Being insensitive to your staff's innate selves and skill sets
Startup companies are often chaotic ventures at first. Many entrepreneurs love those free-wheeling times where nearly anything goes so long as it sorta-kinda-maybe moves the business forward. That level of chaos, however, isn't always perceived the same way by members of your team, especially those who are non-founders/partners.
Why the discrepancy between entrepreneurs and their staff? Two common reasons: (1) hardwiring, and (2) skill set.
First, whether you've hired someone on salary or on contract, those individuals likely aren't wired like you're wired. In other words, they probably aren’t entrepreneurs. That means that the excitement you feel from the chaos of rapid ideation and experimentation may come across as stressful madness to them. Generally speaking, people appreciate and prefer very clear parameters of what's expected of them. The whims of a startup company often run the risk of violating those innate needs and expectations—by a little or by a lot.
Second, the individuals you've enrolled in the vision for your startup likely gravitate toward one skill set area versus others. Jake may be a really great writer who you've employed to work on your company's content marketing. Sarah may excel at organization whom you've contracted to manage your projects. Keeping those staff members in their relative lanes of expertise is important to their sanity and productivity, even though you—the entrepreneur—may regularly fly in and out of different functional areas lending strategy, guidance, and production support to all.
Burning out your team is the cumulative threat you face as an entrepreneur employing or contracting others who may not operate as you do. It's a big threat because a functioning team is essential to establish traction, generate revenue, and reach a point of sustainability that you can then build upon to grow your business. If you behave ignorantly or insensitively to such forces, you risk sabotaging your business from the inside.
At large, remember that behavior patterns are both the cause and cure of many threats to your business. Do a full S.W.O.T. analysis when the time is right for your team and business. Before that moment arrives, lean on these seven common threats as a preliminary health check. Do add to them if other threats are known to you. And work diligently to mitigate and manage those that present themselves even if they feel small. The startup phase of companies is a wonderful honeymoon period, but it can be short and harsh realities can set in quickly if you let them.
Once you do get things in gear while hopefully avoiding some of these common threats, you should spend some time concentrating on your operating systems. The right tools can make a world of difference while the wrong ones can be frustrating handicaps. In the next chapter, we'll take a peek at the essential tools we use at SPI to run our business in the hopes that our experience can help inform your selection of empowering tools.