Jeffrey Dow Jones

Lessons from the Crisis: an Entrepreneurial Success Story

It’s time for another installment of our Monday guest posts. Last week we heard from Jon Giganti in a very popular post titled ‘9 Rules for Building Meaningful Relationships’. Our Facebook using friends really “liked” Jon’s post. In all seriousness, it is a great read. Click here to check it out again in case you missed it.

This week we have one of my favorite writers joining us! Jeffrey Dow Jones (yes, that is his real name), as you will read, isn’t your everyday author.  I subscribe to the Draco newsletter and it is really entertaining, interesting and compelling. Jeffrey is a managing director at Jones & Company and is co-founder of Draco Capital Management.  He jointly oversees the management of roughly $100 million in assets and he publishes a free weekly investment newsletter at TheDraconian.com. In addition to their newsletter, Draco just released a neat iPhone app.  Check it out here.  

Thanks for taking the time to write this Jeffery. I think it’s fantastic. Readers, you’ll enjoy it! Without further hesitation, click below to read

Lessons from the Crisis: an Entrepreneurial Success Story.

Alex has been kind enough to allow me to write a post for his blog which I have been a fan of for quite some time.  Like many of you, I lack the breadth of Alex’s experience, but also like many of you, I have particularly deep experience in my own little corner of the business world.  This is an entrepreneurial blog so I hope you guys don’t mind a brief entrepreneurial story.

I suppose I’ve already spoiled the punch line: it is a success story.  Financially, it’s been a nice success for us and our investors and there seems to be no boundaries on where we can go from here.  But whatever.  You entrepreneurs out there know that financial success is only part of the equation and it isn’t even the most important and rewarding part.

I’ve found that it’s the emotional satisfaction that drives many entrepreneurs, the psychological pleasures that come with building an idea from concept to reality and teaching a fledgling business how to stand and walk on its own two feet.  It’s an experience unlike any other.  Yes, there are costs and risks, and no, it isn’t for everyone.  Most people are more comfortable working inside frameworks erected by others, and there is nothing wrong with this.

But the entrepreneur thirsts for more.   Obviously, she has practical issues to juggle, things like startup costs and financing, operational budgets, and, of course, the exit, whatever form that may take.  But these are all mere pieces of a greater whole.

It is about the manifestation of ideas.

I won’t bother citing all the data that show zero correlation between income and happiness beyond a certain modest threshold, nor will I bore you with all the research that shows that confidence and self-esteem are much more tightly linked to our ability to overcome challenges, even ones that are simple and routine.  I don’t have to do this because every single one of you that has started a business that grew into at least a moderate success will probably agree that “Yeah, the money was nice, but WOW did I feel great about what I accomplished!”

It can be quite thrilling.

Our firm manages a family of hedge funds.  This means we can’t legally talk about the most interesting bits of our business – like how we invest our money and our performance track record – unless you’re a qualified high net worth individual.  Fortunately, that’s not really relevant for this story, which I think is sufficiently broad in nature that you should find parallels with your own business regardless of how different its operations may be.

What I can tell you about hedge funds, and investment management in general, is that a firm’s revenue is driven chiefly by the amount of assets they have under management.  Our firm, launched by a pair of entrepreneurial brothers in 1984, grew from a modest $500,000 under management to over $400 million in 2005.  But then came the financial crisis, a storm that wrecked far more than just banks and investment houses.  It probably did a number on your business too.  It certainly did to ours.  Our flagship fund dropped to around $70 million in assets.

Allow me to be blunt: an 80% reduction in assets will put nearly any fund manager out of business.  I personally witnessed countless others wash up on the rocks with far less severe drops in their revenue base.

How on earth did we survive?  Beyond that, how on earth did we emerge an even better business?

As a small firm, we were able to act quickly and flexibly.  The importance of this cannot be understated.  Without the heavy chains of corporate bureaucracy, we could immediately wrap our arms around the problem and engineer a solution.

We deftly carved out all of the operational fat, leaving only the muscle.  We reduced overhead.  We eliminated basically every expense that didn’t contribute directly to the bottom line and many expenses that did contribute but only modestly so.  We let people go.  We made all the tough decisions that you did in your own businesses.  We cut our salaries way back, which meant adjusting the spending in our personal lives.  We did all of that and were surprised to discover we even had room to spare.  Not that we’d want to, but if pressed we could still run this business profitably on half the assets we currently have.

Fortunately, we entered the storm both living our lives and operating our business substantially below their respective means.  We never overextended ourselves.  Not personally, not professionally.  Big bonus in a big year?  Instead of blowing it all on hollow status symbols or poorly thought-out avenues of expansion, we saved and reinvested much of it.  We rallied around our core values and focused on what we did best; what made us successful in the first place.  It took us straight back to our roots, two idealistic brothers in 1984.

I’m sure you’ve all met the entrepreneur who gets drunk on his own success.  Don’t be them.  For starters, nobody likes that guy, and within his arrogance and extravagance the seeds of his eventual undoing are sown.  I’m sure you’ve probably even seen it happen to someone you know.

I think the secrets to our survival were humility and caution, and when necessary, a tolerance for metered austerity.  As you can see, nothing fancy, but incredibly powerful.

This was only part of our reaction.  Survival instinct is one half of running a successful business – an important and necessary condition in any operation.  But not sufficient.

Running a business is equally about looking ahead to the future.

And so, in the fourth quarter of 2008, the darkest and most terrifying days of the crisis, when both Wall Street and Main Street were still frantically struggling to assess what kind of damage was being wrought, we launched an entirely new fund and an entirely separate business to house it.  This business would complement our existing one and would open up many new diverse lines of operations in the future.  Like everybody else, we could have focused all of our energy on damage control or paused to take a breather as things settled down.  But the opportunity was too great to pass up.

You see, as panicked investors called day after day, withdrawing their money by the tens of millions, we were given a marvelous gift.  Here was a chance to really listen, to get quite possibly the most accurate, honest read on what really mattered to investors.   It may even have been a once-in-a-lifetime chance.  We were granted a window deep inside their psyche.

Sure, they wanted to make money on their investment but what they really wanted was not to lose it.  We didn’t fare anywhere near as badly as the market, but in times of crisis nobody cares about relative non-performance.  Investors still wanted an alternative approach to traditional stocks and real estate.  They wanted to be able to access their money quickly should they need to.  They liked simplicity and wanted to understand what it was their investment was doing.  And most importantly of all, they wanted to do business with people they knew and trusted.

We built everything we heard from our investors and partners into our existing lines of business and used it to launch new ones.

We launched a fund for ourselves to invest in and then simply started talking to others about what it was we were doing.  There was no pressured selling, no aggressive marketing – a relief, since none of us were comfortable with that sort of thing anyway.  We just talked with our family and friends around town about what we were doing and we were blown away by the demand.

By the first few months of 2009, when the big banks were still sorting through the rubble, our new fund rapidly grew from zero to $30 million.  We had to stop talking to people about it!

Was it all just good luck?  Possibly.  It seems like we’ve had nothing but good luck for 25 years.  Can one be lucky for 25 years straight?  I don’t know.  Like most of you I’d rather rely on good old-fashioned hard work, making sure that we’re prepared for the opportunities should they arise.

One thing I do know for sure is that entrepreneurialism is grand a testament to the joys of being small, nimble, and capable.  In this world, things need to happen now and they can happen now.  You don’t have to run it by the branch manager who doesn’t need to run it by the district manager who doesn’t need to take it up to the executive approval group.  It doesn’t require a two-thirds vote by Congress.

As an entrepreneur, you can make it happen.  You have to; you have all the power.  And with that weighty responsibility comes the satisfaction you get from bearing witness to the direct, visceral translation of action into result.  Nowhere is that more clear than when it comes to launching your own business.  You think something, you do something, you see the results.  Good or bad.

A mere fraction of the size, our firm isn’t as profitable today as it once was.  But it’s a much better business.  I look around here and on everyone’s face is a knowing smile that says we came out of this crisis ahead.

I suppose the lesson of this story is twofold.  One should maintain fidelity to the core values of an entrepreneur.  Even in crisis, never lose the forward-looking, enthusiastic spirit.  Build things that you want to buy yourself and share the quality of your ideas with others.

But do so with a sense of caution.  In business, the key to long-term success is balance.  Ultimately we’re all in it for the long run, whether our goal is to start this business to sell it and start another, or to grow this first business ‘till the very end.  You guys know from experience that it requires balance to accomplish either of those long-term goals.

If you can marry that balance of vision and caution at the altar of flexibility, you will have built a long-lasting framework for success.  Assuming your ideas are sound, all you need is to populate that framework with the right individuals, ideally ones that round out your deficiencies.  If you can do all that, the sky is the limit and there is no crisis you can’t endure.

I am reminded of what Andrew Carnegie said.  “Take away my people and leave the factories, and soon there will be grass growing on the factory floors.  But take away my factories and leave my people, and soon we will have bigger and better factories”

You can take away 80% of my asset base.  You can take my office, my computers, and my websites.  But the one thing you absolutely cannot have is my people.  We’re small.  We have just six core individuals and we hold on to each other tightly.  Leave me them and take all the rest and we will do it even better next time.

It is our unavoidable destiny to succeed, fail, and succeed again.  This is life.  This is business.  In the long run, the winners are those of us who learn the most from our failures and use those lessons to manufacture new success.

As an entrepreneur, you already knew that.

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About Jeffrey Dow Jones

  • Jeffrey,

    Even though I’m retired the down turn of the economy has effected me. Not in my retirement funds but with family that has needed assistance. Especially those with young families. In spite of this hardship, this same family has survived and started a business to help to bring in extra income.

    This is adventure, I’ve been able to teach the importance of saving and thinking every business move out very thoroughly before committing.

    I applaud you and your company for the integrity you choose to use, even in tough times. Maybe one reason you have been successful is the way you treat those around you. You are dead on when you say “It is our unavoidable destiny to succeed, fail, and succeed again. This is life. This is business. In the long run, the winners are those of us who learn the most from our failures and use those lessons to manufacture new success.”

    Here’s to your continued success.

    • Thanks for the thoughtful comment!

      It’s probably the most important lesson for an entrepreneur to learn, that it’s OK to try and fail. Throughout history these types of environments, as difficult as they may be to endure, have led to major innovation. I think the entrepreneur feels a special kind of necessity in these environments.

  • This is a great writeup. Thank you for sharing.

    And yes, here’s to your continued success. You are living proof of the idea that you make more money respecting your customers than by treating them like suckers.

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