RICH PICKINGS: Seven sins of youth
Time may be on their side, but the wisdom of experience is not – one reason the young turks of the business community too often fall into the same traps.
Such was the case last week with Daniel Tzvetkoff, a 25-year-old IT entrepreneur whose empire BT Projects was placed in liquidation with debts of around $61 million.
While there is some doubt as to Tzvetkoff’s sleeping arrangements – some reports have him back at his parents’ Brisbane home, while he has also been sighted at his apartment on the Gold Coast – there can be little doubt that his fortune is all but gone.
Less than nine months ago, BRW magazine valued Tzvetkoff and his business partner Sam Sciacca at $120 million, thanks mainly to their electronic payment company Intabill. Now the money is gone and in a cruel twist Sciacca is suing Tvetkoff, alleging he failed to keep accurate financial records. Tvetkoff has denied the claims and promised to respond to the legal action.
Tvetkoff is the latest in a long line of young entrepreneurs that have been brought undone by this financial crisis, including Eddy Groves, Matthew Perrin, pub entrepreneur Mark Alexander-Eber and power tool maker Peter Hosking.
Were they unlucky, inexperienced or unprepared? To find out, let’s have a look at the seven sins of young entrepreneurs.
This is the root of most business collapses and so it has been for many of the companies controlled by young entrepreneurs. Eddy Groves took on more than $1 billion of debt as he built ABC Learning Centres through a string of acquisitions and Perrin also ran up large debts as he sought to build his Chinese supermarket chain. When the economy turned and these entrepreneurs needed to restructure, the size of their debts limited their options.
This lesson has been well learned by some young entrepreneurs. Domenic Carosa was the founder of digital marketing company Destra, which went into receivership late last year, about five months after Carosa stepped down as chief executive. One of Destra’s big problems was that its rapid expansion was funded through debt, but Carosa says his new venture is being funded entirely through equity.
Too much, too fast
It’s true – speed kills. Mark Alexander-Erber, who was better known as ‘Pubboy’, expanded his hotel empire rapidly in the early part of this decade, building a network of 12 pubs in Sydney and regional New South Wales. In 2007, he said he wanted to triple his company’s revenue from $20 million to $60 million before floating the business. But just 12 months later, the Pubboy empire was in tatters – Alexander-Erber just tried to grow too quickly, using debt to finance most of his growth.
Groves is another victim of this problem. While he built a strong and largely profitable business in Australia, his decision to expand into the United States and Britain was a big part of the reason ABC eventually collapsed.
While the good times rolled, Tzvetkoff was renowned for his lavish lifestyle. He owned a number of luxury cars (including a black Lamborghini with the license plate BALLER), he reportedly liked to get around on private jets and last year he shelled out $27 million for a mansion on the most exclusive strip on the Gold Coast, Hedges Avenue. It’s nice to celebrate your success with nice things, but never let bling get in the way of business.
It’s easy to understand why many young entrepreneurs like Groves borrowed against their shareholdings with companies like Opes Prime and Lift Capital – unlocking wealth held in shares is difficult unless you sell stock, and that tends to be viewed dimly by other investors. But big margin loans have proven to be deadly in a bear market – banks are nervous and short sellers are hunting for targets.
Getting out of your comfort zone
Matthew Perrin has always been a serial entrepreneur. He started out as a lawyer, ran surfwear company Billabong and later invested in a surfboard maker and a computer security company. But his foray into the world of China’s supermarket sector was a step too far. From all reports this is a complex and rapidly changing marketplace and Perrin does not appear to have a lot of experience in this industry – that’s a dangerous combination.
Investments in side businesses can also cause problems. Tzvetkoff invested in a nightclub and a luxury cruise boat business that is now in receivership.
The allegations levelled against Daniel Tzvetkoff by former business partner Sam Siacca include claims that he failed to keep accurate financial records, implied creditors had been paid when they had not and paid profit distributions while "knowing that the financial records of the company were inaccurate and that the monies distributed were not in fact profits". Tzvetkoff denies these claims, but the legal action highlights the importance that investors, lenders, customers, suppliers and business partners place on getting the numbers right at all times. Eddy Groves also copped a barrage of criticism when ABC revealed in mid-2008 that it would restate parts of its accounts for the previous year.
Business collapses happen, particularly in a downturn. But the collapse of a company need not lead to the complete destruction of an entrepreneur’s fortune. Matthew Perrin’s slide into bankruptcy (something many other entrepreneurs of collapsed companies have managed to avoid) was largely due to his use of personal guarantees in a number of deals. While entrepreneurs can’t always avoid giving guarantees, they must remember the importance of asset protection strategies.